Distribution via Commercial Agents and Authorised Dealers

The law on commercial agents is codified in large parts of Europe, meaning that the rights of the commercial agent vis-à-vis the principal are protected by many mandatory provisions. In contrast, there are no provisions regulating the protection of authorized dealers (distributors), which raises the question of the extent to which the rules for the protection of commercial agents are also applicable to (exclusive) authorized dealers. Therefore, the individual forms of cooperation mentioned and the legal consequences resulting therefrom shall first be presented in more detail.

1. Commercial Agent

The commercial agent is an independent professional who is commissioned to negotiate business for another company or to conclude contracts in its name (e.g., sale of products and goods to the customer in the name of an entrepreneur). The agent acts in the name and for the account of the principal and receives commission payments from the principal for their activity. Unlike the dealer, the commercial agent does not purchase the products but acts as an intermediary between the company and the customer.

If such a business relationship is practiced between the principal and the sales partner (in Germany or Greece), a commercial agency contractual relationship exists at the same time—regardless of whether a written or only an oral contract exists: the commercial agent has the same rights vis-à-vis the principal in any case. Only the proof of the agreements made is more difficult for both parties without a written contract. In case of doubt, courts in such cases tend to rule in favor of the commercial agent, so that the written fixation of the agreements made is always advisable.

1.1.1 Applicable Law

To determine the applicable law, a distinction must be made between the relationship of the commercial agent to the principal on the one hand and the sales contract negotiated between the principal and the customer on the other. The latter, if the commercial agent is used for sales abroad (e.g., Greece), constitutes an international sales contract, so that the International Sales Law (CISG = Convention of the International Sale of Goods) applies here—provided that the states concerned have signed the convention.

The CISG contains provisions on sales law that apply if the parties to a sales contract come from different contracting states. Since it therefore does not apply to service contracts such as the commercial agency contract, and since there are no international conventions on the substantive law of commercial agents, national law applies here.

The provisions on the commercial agency contract were harmonized by European Union Directive 86/653 of 18 December 1986 and have since been transposed into national law in all member states. In Greece, the Directive was incorporated by Presidential Decree (P.D.) 219-1991, which contains detailed provisions on the rights and obligations of the parties and, in particular, on the protection of the commercial agent.

The determination of the law applicable to contractual obligations was initially governed by the EC Convention (Rome Convention) signed in Rome in 1980 by the contracting states (including Greece). In Germany, this convention had been transposed into national law in Articles 27 et seq. of the Introductory Act to the Civil Code (EGBGB).

In the meantime, for the communitization of private international law, the Rome Convention has been replaced by Regulation (EC) No 593/2008 on the law applicable to contractual obligations (Rome I), which entered into force on 17 December 2009. The regulations previously in force, inter alia, from Articles 27 et seq. of the Introductory Act to the Civil Code, were superseded as national law by the Rome I Regulation and repealed by the Law on the Adaptation of Private International Law Provisions to Regulation (EC) No 593/2008 for the purpose of legal clarity.

The Rome I Regulation generally applies to contractual obligations in civil and commercial matters that have a connection to the law of different states, even if it is the law of a non-contracting state. It applies to contracts concluded from 17 December 2009 onwards (Art. 28 Rome I Reg.). The parties have the option of determining the applicable national law through a choice of law clause.

If there is no choice of law clause in the contract, the law applicable to the contract is generally determined by the provisions regulated in Article 4 (1) and (2) of the Rome I Regulation. If the applicable law cannot be determined according to paragraph 1 or 2 of Article 4 of the Rome I Regulation, the contract is subject to the law of the state with which it has the closest connection, pursuant to Article 4 (3) of the Rome I Regulation. Distribution contracts are subject, according to Article 4 (1) (f) of the Rome I Regulation, to the law of the state in which the distributor has their habitual residence.

1.1.2 Jurisdiction

Regardless of the question of the law applicable to the obligation, the question arises as to which courts the contracting parties wish or must resort to in the event of a dispute. This can be contractually agreed upon through a so-called jurisdiction clause. This clause specifies which courts are competent in the event of disputes. Unless the parties have agreed otherwise, these courts have exclusive jurisdiction.

If no exclusive jurisdiction is agreed upon, a contract clause can also determine the place of performance of services. In this way, the courts competent in the event of a dispute are also determined, which is regulated for international transactions according to Article 5 (1), Article 23 of EC Regulation No. 44/2001 of the Council of 22 December 2000 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (EJC Regulation).

1.1.3 Termination

The subject matter of the commercial agency contract is essentially the provision of a service, the purpose of which is generally to facilitate the sale of goods. The contract can be concluded for a fixed or indefinite period and can be terminated by both parties by giving notice to the other party, subject to certain notice periods. The notice periods are extended with the duration of the commercial agency contract.

According to Greek law, pursuant to Art. 8 (3) and (4) of PD 219/1991, a contractual relationship entered into for an indefinite period may be terminated by either party subject to the following periods:

• 1 month from the beginning of the first contract year,

• 2 months from the beginning of the second contract year,

• 3 months from the beginning of the third contract year,

• 4 months from the beginning of the fourth year,

• 5 months from the beginning of the fifth year,

• 6 months after a contract duration of 5 years, i.e., from the beginning of the sixth contract year,

in each case at the end of the calendar month, unless otherwise agreed (Art. 8 (6) of PD 219/1991).

According to German law, the notice periods for a contractual relationship entered into for an indefinite period are governed by § 89 HGB, according to which the following applies:

• In the first year of the contract period, termination can be made with a notice period of one month,

• In the second year, with a notice period of two months,

• In the third to fifth year, with a notice period of three months.

After a contract duration of five years, the contractual relationship can be terminated with a notice period of six months.

For evidence of the delivery of the notice of termination, it should be sent by registered mail with acknowledgment of receipt or delivered by a courier.

1.1.4 Goodwill Indemnity (Ausgleichsanspruch) on Termination

The commercial agent is entitled to a goodwill indemnity claim both under German law (§ 89b HGB) and Greek law (PD 219/1991, Article 9), which is intended to compensate for the advantage the commercial agent has brought to the principal. This is arguably the most important claim under commercial agency law.

The agent should thus be compensated for having acquired new customers for the company, with whom the company will still do business after the termination of the commercial agency contract. This indemnity claim cannot be waived by the parties. Compensation is only granted to the extent that the commercial agent has procured new customers for the principal or significantly increased business with existing customers, and the principal derives a benefit from this with or after the termination of the contract. Furthermore, the compensation must be reasonable, taking into account the overall circumstances.

A future prognosis is prepared, incorporating the latest turnover figures, within the framework of which the sales potential with the new customers acquired by the commercial agent is to be determined. The indemnity amount can be a maximum of the sum of one year’s commission, calculated from the average of the last five years.

However, the claim lapses if the commercial agent terminates the contract themselves without being prompted to do so for health or other reasons, or if they were terminated for good cause. Furthermore, the claim lapses as soon as the commercial agent agrees with the principal to transfer their contractual position to a third party.

1.1.5 Further Legal Claims

Greek courts tend to grant claims for damages in addition to the indemnity claim, based on the principles of general civil law. This is because the cited EU Regulation and the Presidential Decree 219/1991 based on it do not exclude further claims for damages (from tort and according to general civil law principles) in Article 9 § 1c. Insofar as further damage has occurred through the termination of the commercial agency contract beyond the loss of commissions and customers, the commercial agent can assert further claims for damages based on the general principles of the Greek Civil Code.

This can be the case, for example, if reputational damage has occurred, or if the commercial agent was induced by the company to make high investments shortly before the termination of the cooperation, while the commercial agent was legitimately entitled to hope for a long-term cooperation based on the company’s previous behavior.

This also includes some cases of violation of the Law against Unfair Competition, insofar as the termination is intended to force the commercial agent out of the market, or if there is a violation of antitrust law by exploiting a particularly market-dominant position of the principal.

1.2. Authorized Dealer (Distributor)

Another common form of trade in goods is distribution via authorized dealers (distributors). In contrast to the commercial agent, the authorized dealer buys the products from the principal and then sells them on to the customer in their own name and for their own account. In certain industries, it is nevertheless possible for the dealer to use an existing sales network of the company. The advantage for the principal is, on the one hand, that they already receive the purchase price for the product before it has been sold to the customer. On the other hand, there are no direct legal relationships between the customer and the principal, so that the insolvency risk of the end customer as well as all sales contract transactions fall within the risk area of the authorized dealer. In most cases, the authorized dealer is contractually obliged to purchase minimum quantities from the principal and to introduce them into the foreign market. For this, they will generally have to make investments.

1.2.1. Analogous Application of the Regulations for Commercial Agents

The applicability of national law is also governed here by the provisions of the Rome I Regulation or the Rome Convention (or EGBGB) for contracts concluded before 17 December 2009. However, in contrast to the law on commercial agents, there are neither EU-wide nor national statutory provisions regulating the authorized dealer relationship. Consequently, the case law now tends, due to the comparability of the interests involved, to a selective analogous application of the commercial agency law provisions, at least in relationships similar to commercial agency.

According to judicial case law in both Greece and Germany, the analogous application of the provisions on commercial agents to authorized dealers first requires that it is a contractual relationship similar to commercial agency. For this, it is necessary that the authorized dealer is economically integrated into the sales organization of the principal (e.g., assignment of a specific sales territory, minimum purchase obligation, non-compete clause) like a commercial agent. Furthermore, the authorized dealer must be contractually obliged to hand over the contact and customer addresses obtained during the contract period to the principal, thereby granting the principal access to the regular clientele or customer base.

Since recent case law trends in both Greece and Germany show a tendency to grant authorized dealers an indemnity claim even in the case of a customer base transfer obligation that has not been validly agreed upon, it is advisable to contractually agree at least on an obligation to delete customer data upon termination of the contract.

1.2.2. Contract Termination and Legal Consequences

If the aforementioned conditions for an analogy are met, the authorized dealer contract can be terminated in compliance with the notice periods applicable to commercial agents.

After termination of the contract, the authorized dealer can also claim an indemnity according to the same principles as the commercial agent. However, some special features must be considered when calculating the indemnity claim, as the authorized dealer in most cases does not receive commission payments. Their profit generally results from the margin between the purchase and retail prices, provided they purchase at list prices, or from any bonus payments. However, the upper limit for the indemnity also applies here, namely corresponding to the average annual commission for a commercial agent, e.g., based on the average annual net profit.

According to Greek law, the company may furthermore be obliged to pay damages if the termination of the dealer does not occur with a reasonable notice period. The above statements regarding the commercial agent apply here mutatis mutandis.

Furthermore, during the notice period, the company (principal) must make payments to the dealer amounting to the gross margin of the last year. Gross margin is understood to be the difference between the purchase and selling price, calculated on the basis of the figures from the last year of cooperation. In certain cases, the dealer may also claim compensation for non-pecuniary damage (apozimiosi ithikis vlavis).

1.3. Exclusivity and Sole Distribution Rights

In contrast to conventional retailers, who merely buy goods from the principal and resell them to the customer, authorized dealers and commercial agents are furthermore obliged to promote the sale of the respective product in a specific territory and thus at the same time safeguard the interests of the principal. In return, they usually claim sole distribution or exclusivity rights or territorial protection.

It should be noted that the general term sole distribution can have different meanings and therefore requires concretization to avoid possible claims for damages. Depending on the agreement, sole distribution can mean only the exclusion of direct transactions by the principal, or the exclusive right of the agent to operate to the exclusion of other commercial agents (or authorized dealers), or even both.

The legal consequences also differ accordingly. In the case of sole agency, a direct sale by the principal violates their contractual obligation with all consequences, such as damages or termination without notice by the commercial agent. The assignment of a specific territory or clientele, on the other hand, merely extends the circle of transactions subject to commission and does not justify further claims for damages in the event of a breach—unless it is combined with the right of exclusivity. It is therefore advisable to specifically describe the scope of any exclusivity to be granted in the respective contract.

(Status: January 2013. All information is subject to change and without guarantee.)