Lack of specific statutory provisions
Although the German Civil Code (Bürgerliches Gesetzbuch, BGB) and German Commercial Code (Handelsgesetzbuch, HGB) regulate several kinds of commercial agreements (such as agency agreements, lease agreements, purchase agreements), distribution agreements are not subject to any particular statutory provisions in Germany. According to German law, a distribution agreement may broadly be described as a framework agreement by which a distributor undertakes, as an independent entrepreneur, to sell goods and render services. The distinctive element of a distribution agreement is that the distributor agrees to purchase goods, at a discounted rate, from its principal/manufacturer, and then sells the goods under the distributor’s own name and its own account on a regular basis to its customers, usually in a defined territory, gaining a profit from the margin between purchase and resale price.
As the distribution agreement is not explicitly governed by statutory law, it is sometimes difficult to determine which specific legal provisions are applicable. Therefore, this determination must be carried out on a case-to-case basis. In principle, the general rules prescribed by the German Civil Code with respect to contracts (especially contracts for the performance of a continuing obligation) apply. The given circumstances may also lead to the analogous application of several statutory provisions governing agency agreements (Sections 84 et seq. HGB). Generally, agency law applies by analogy if the distributor is integrated into the principal’s sales organization, thus covering, with respect to its contractual duties, a position within the sales force of the principal similar to that of a commercial agent. A crucial aspect to consider is whether the distributor is obliged - as the agent is- (by explicit contractual provisions or factually) to forward customer data to the principal during, or upon termination, of the commercial relationship. For further details on the ‘integration into the principal’s sales organization’ please refer to the below explanations under Chapter 6.
Taking into account the principles set out above, in order to avoid unpleasant surprises and disadvantages it is critical that detailed and accurate distribution agreements are drafted.
Distribution agreements have to conform to Competition Law. Section 101 of the Treaty on the Functioning of the European Union (TFEU), and the Commission Regulation No 330/2010 (Vertical Block Exemption Regulation) are the main legislative provisions of European Competition Policy.
Section 1 of the German Act against Restraints on Competition (Gesetz gegen Wettbewerbsbeschränkungen, GWB) is identical to Section 101 (1) TFEU, and Section 2 (2) GWB is identical to Section 101 (3) TFEU. The Vertical Block Exemption Regulation is integrated into German Law by Section 2 (2) GWB.
Generally, under Section 101 (1) TFEU, all agreements between companies that may affect trade between countries within the European Economic Area (EEA), and which have as their object or effect the restriction, the prevention or distortion of competition within the EEA, are prohibited. This rule applies to horizontal agreements (agreements between competitors), as well as vertical agreements (agreements between enterprises acting at different levels of the distribution or production chain, for example a distribution agreement).
However, the prohibition under Section 101 (1) TFEU only applies in case of an appreciable restriction in competition or trade. Pursuant to the European Commission`s Notice on Agreements of Minor Importance of 25 June 2014 (De Minimis Notice), vertical agreements where neither party holds a market share of more than 15% (market share threshold) do not constitute an appreciable restriction, provided that the prevention, restriction or distortion of competition within the internal market is not the object of the agreement .
The prohibition contained in Section 101 (1) TFEU may be exempted under Block Exemption Regulations issued by the EU Commission. The most important Block Exemption Regulations is the Vertical Block Exemption Regulation (VBER), which provides a safe harbour for most vertical agreements (like distribution agreements) between parties with a market share not exceeding 30% (Section 3 VBER). However, the exemption of prohibition does not apply to non-compete obligations according to Section 5 (1) VBER, or to a vertical agreement as a whole, if such vertical agreement contains a so-called hard-core restriction according to Section 4 VBER.
Section 4 VBER provides five hard-core restrictions:
- the restriction of the buyer's ability to determine its sales price;
- the restriction of the territory into which, or of the customers to whom, a buyer party to the agreement may sell the contract goods or services;
- the restriction of active or passive sales to end users by members of a selective distribution system operating at the retail level of trade;
- the restriction of cross-supplies between distributors within a selective distribution system; and
- the restriction, agreed between a supplier of components and a buyer who incorporates those components, of the supplier’s ability to sell the components as spare parts to end-users, repairers, or other service providers, not entrusted by the buyer with the repair or servicing of its goods.
It is, however, important to note, that the Vertical Block Exemption Regulation carves out several restrictions as exemptions to the hard-core restrictions.
Parties to agreements in violation of the prohibition contained in Section 101 (1) TFEU risk severe fines – of up to 10% of each of the parties’ group annual worldwide turnover in the preceding business year – issued by the authorities (the European Commission and the German Federal Cartel Office). However, Competition Law can also be enforced by private action aiming to rectify the harm caused by the infringement and, where there is a risk of recurrence, to desist from further infringements, remove the infringement of antitrust law or achieve damages (Sections 33 et seq. GWB).
From a civil law perspective, agreements that violate the prohibition under Section 101 (1) TFEU are, according to Section 134 BGB, null and void. This nullity applies to the contractual provisions that are incompatible with the prohibition. The effect of such nullity on the other provisions of the agreement depends on whether the parties would have rejected a partially null transaction as a whole, or would have allowed the rest to stand (Section 139 BGB). If the contract - as usual - provides for a severability clause, the German Federal Court of Justice has held that the party that considers the contract as a whole to be invalid has a duty to present and provide evidence.