The marketing of a product in the European internal market by the manufacturer (entrepreneur or principal) can take place via various channels. Besides direct sales to the end customer, many manufacturers resort to the possibility of marketing through third parties or companies in the respective country. An advantage here is that these contractual partners on site are better acquainted with the local conditions and a more effective local marketing strategy, and can even sell the goods more cost-effectively and efficiently. This form of cooperation is often chosen and modified in detail by foreign companies. Frequently occurring forms of this representation relationship are the so-called commercial agents and authorized dealers (distributors).
Note: This article is also available for download in PDF format under the title The Distribution of Goods via Commercial Agents and Authorized Dealers.
Commercial agency law is codified in large parts of Europe, so that the rights of the commercial agent vis-à-vis the principal are protected by many indispensable provisions. In contrast, there are no provisions regulating the protection of authorized dealers (distributors), which raises the question of the extent to which the provisions for the protection of commercial agents are also applicable to (exclusive) authorized dealers. For this reason, the individual forms of cooperation mentioned and the resulting legal consequences will first be presented in more detail.
1. Commercial Agent
The commercial agent is an independent self-employed person who is commissioned to mediate business for another company or to conclude business in its name (e.g. sale of products and goods in the name of an entrepreneur to the customer). They work in the name and for the account of another and receive commission payments from the entrepreneur 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 entrepreneur and the distribution partner (in Germany or Greece), a commercial agency contract relationship exists at the same time – regardless of whether a written or only an oral contract is present: the commercial agent has the same rights vis-à-vis the entrepreneur in any case. Only the proving of the agreements made is made more difficult for both parties without a contract concluded in writing. In case of doubt, courts in such cases tend to decide in favour of the commercial agent, so that written fixation of the agreements made is advisable in any case.
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 mediated between the principal and the customer on the other. The latter, provided the commercial agent is used for distribution abroad (e.g. Greece), represents an international sales contract, so that international sales law (CISG = Convention of the International Sale of Goods) applies here – however, under the condition that the relevant states have signed the agreement.
The CISG contains provisions on sales law that apply if the parties to a sales contract come from different Convention states. Since it therefore does not apply to service contracts such as the commercial agency contract and there are also no international agreements on substantive commercial agency law, national law intervenes here.
The provisions on the commercial agency contract were harmonized by the European Union Directive 86/653 of December 18, 1986, and have since been implemented into national law in all member states. In Greece, the Directive was taken into account 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 implemented into national law in Articles 27 ff. 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 December 17, 2009. The regulations applicable until then, including those of Articles 27 ff. of the Introductory Act to the Civil Code, were superseded as national law by the Rome I Regulation and repealed by the Act Adapting the Provisions of Private International Law 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 with the law of different states, even if it is the law of a non-contracting state. It applies to contracts concluded from December 17, 2009 (Art. 28 Rome I Regulation). The parties have the possibility here to determine the applicable national law through a choice-of-law clause.
If a choice-of-law clause is missing in the contract, the law applicable to the contract is generally governed by the provisions regulated in Art. 4 Para. 1 and 2 of the Rome I Regulation. If the applicable law cannot be determined according to Paragraph 1 or 2 of Art. 4 of the Rome I Regulation, the contract is subject, according to Art. 4 Para. 3 of the Rome I Regulation, to the law of the state with which it has the closest connection. Distribution contracts are subject, according to Art. 4 Para. 1 lit. 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 deal with in the event of a dispute. This can be agreed contractually 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, the place of performance for services can also be determined in a contract clause. The courts responsible in the event of a dispute are also determined in this way, which is regulated in international transactions according to Article 5 Para. 1, Article 23 of EC Regulation No. 44/2001 of the Council of December 22, 2000 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (Brussels I Regulation).
1.1.3 Contract Termination
The subject of the commercial agency contract is essentially the provision of a service, the purpose of which is broadly to facilitate the sale of goods. The contract can be concluded for a fixed or indefinite period and can be terminated by either party upon notice to the other party, observing certain notice periods. The notice periods are extended with the duration of the commercial agency contract.
According to Greek law, pursuant to Art. 8 Para. 3 and 4 of PD 219/1991, a contractual relationship entered into for an indefinite period can be terminated by both parties, observing the following periods:
- of 1 month from the beginning of the first contract year,
- of 2 months from the beginning of the second contract year,
- of 3 months from the beginning of the third contract year,
- of 4 months from the beginning of the fourth year,
- of 5 months from the beginning of the fifth year,
- of 6 months after a contract duration of 5 years, i.e. from the beginning of the sixth contract year,
in each case to the end of the calendar month, unless otherwise agreed (Art. 8 Para. 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 duration, termination is possible with a notice period of one month,
- in the second year, termination is possible with a notice period of two months,
- in the third to fifth year, termination is possible 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 the purpose of proof of delivery of the notice of termination, this should be sent by registered mail with acknowledgment of receipt or delivered by a messenger.
1.1.4 Compensation Claim upon Contract Termination
The commercial agent is entitled to a compensation claim, both under German law (§ 89b HGB) and Greek law (PD 219/1991, Article 9), which is intended to compensate for the advantage that the commercial agent has brought to the principal. This is arguably the most significant claim in commercial agency law.
The commercial agent is intended to be compensated for having recruited new customers for the company, with whom the company will continue to do business after the termination of the commercial agency contract. This compensation claim cannot be waived by the parties. The compensation is only granted to the extent that the commercial agent has acquired new customers for the principal or significantly expanded the business with existing customers and the principal derives a benefit therefrom with or after the termination of the contract. Furthermore, the compensation must be reasonable, taking into account the overall circumstances.
Including the latest sales figures, a future forecast is created, within which it is to be determined what sales potential exists with the new customers acquired by the commercial agent. The compensation amount can amount to 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 compelled 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 assign their contractual position to a third party.
1.1.5 Further Legal Claims
The Greek courts tend to grant claims for damages in addition to the compensation 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 beyond the loss of commissions and customers has occurred due to the termination of the commercial agency contract, the commercial agent can assert further claims for damages from the general principles of the Greek Civil Code.
This can be the case, for example, if damage to reputation 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 allowed to hope for long-term cooperation due to the previous behaviour of the company.
This also includes some cases of violation of the law against unfair competition, insofar as the termination is intended to displace the commercial agent from the market or if a violation of antitrust law exists by exploiting a particularly market-dominating position of the entrepreneur.
1.2. Authorized Dealer (Distributor)
Another common form of trade in goods is distribution via authorized dealers. In contrast to the commercial agent, the authorized dealer buys the products from the principal and then resells them to the customer in their own name and for their own account. In certain industries, it is nonetheless possible for the dealer to use an existing distribution 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-law settlements fall within the risk area of the authorized dealer. The authorized dealer is in most cases contractually obliged to purchase minimum quantities from the principal and to introduce them into the foreign market. They will generally have to make investments for this.
1.2.1. Analogous Application of the Provisions 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 before December 17, 2009. However, in contrast to commercial agency law, there are neither EU-wide nor national legal provisions that regulate the authorized dealer relationship. Consequently, the case law now tends towards a selective analogous application of the commercial agency law provisions, at least in relationships similar to commercial agency, due to the comparability of the interests involved.
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 organisation of the entrepreneur (principal) like a commercial agent (e.g. allocation of a specific sales territory, minimum purchase obligation, non-competition clause). Furthermore, the authorized dealer must be contractually obliged to hand over the contact and customer addresses obtained during the contract term to the principal and thus grant them access to the regular customer base or customer clientele.
Since the recent tendencies in case law in both Greece and Germany show a propensity to grant authorized dealers a compensation claim even in the case of a customer base transfer obligation that was not effectively agreed, it is advisable to contractually agree on at least 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 compensation according to the same principles as the commercial agent. However, certain special features must be observed when calculating the compensation claim, as the authorized dealer does not receive commission payments in most cases. Their profit usually results from the margin between the purchase and retail prices, provided they buy at list prices, or from any bonus payments. Here too, however, the upward limit of compensation applies, namely corresponding to the average annual commission for the commercial agent, e.g. based on the average annual net profit.
Under Greek law, the company may also be obliged to pay claims for damages if the termination of the dealer does not occur with compliance to reasonable notice periods. What was said above regarding the commercial agent applies analogously here.
Furthermore, the company (principal) must make payments to the dealer during the notice period amounting to the gross margin of the last year. Gross margin is understood to be the difference between the purchase and sales price, calculated on the basis of the figures from the last year of cooperation. In certain cases, the dealer can also demand compensation for their non-material damage (*apozimiosi ithikis vlavis*).
1.3. Exclusivity – Sole Distribution Right
In contrast to conventional retailers who merely buy goods from the principal and resell them to the customer, authorized dealers and commercial agents are additionally 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 exclusive rights or territorial protection.
It should be noted here that the general term **sole distribution** can have different meanings and therefore needs to be specified to avoid potential claims for damages. Depending on the agreement, sole distribution can mean only the exclusion of direct business of the entrepreneur, or the sole right of activity of the representative excluding other commercial agents (or authorized dealers), or even both.
The legal consequences also differ accordingly. In the case of sole representation, a direct sale by the entrepreneur 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 customer base, on the other hand, merely expands the scope of business subject to commission and does not establish any further claims for damages in the event of a violation – 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.
(As of: January 2013. All information is provided subject to change and without guarantee.)