Trading through Commercial Agents and Distributors

Besides direct sale to the end customer, many manufacturers rely on distribution through third parties or companies in the relevant country, since these are more familiar with local conditions and enable more effective, often more cost-efficient, local marketing. The commercial agent and the distributor are commonly encountered forms of such a distribution relationship.
The law governing commercial agents has, in large part, been harmonised across Europe, so that an agent’s rights against the principal are protected by numerous mandatory provisions. By contrast, provisions protecting the distributor are lacking, which raises the question of the extent to which the protective provisions for commercial agents should be applied by analogy to (in particular, exclusive) distributors as well.

1. The commercial agent

A commercial agent is an independent business person instructed to negotiate or conclude transactions on behalf of another company. The agent acts in another’s name and for another’s account and receives a commission from the principal; unlike a distributor, the agent does not purchase the products themselves but rather acts as an intermediary between company and customer. Where such a distribution relationship exists between principal and distribution partner — whether in Germany or in Greece — a commercial agency relationship exists, regardless of whether a written or only an oral contract exists; a written record is nevertheless strongly recommended for evidentiary reasons, since courts tend, in cases of doubt, to decide in the agent’s favour.

1.1 Applicable law

As regards the applicable law, a distinction must be drawn between the relationship between commercial agent and principal, on the one hand, and the contract of sale between principal and customer brokered by the agent, on the other. For the latter — where the agent is engaged for distribution abroad (e.g. in Greece) and the states involved are parties to the relevant convention — the UN Convention on Contracts for the International Sale of Goods (CISG) applies. Because the CISG does not apply to service contracts such as the commercial agency contract, and because no international convention exists on the substantive law of commercial agency, national law governs in that respect.
The provisions on the commercial agency contract were harmonised across the Union by EU Directive 86/653/EEC of 18 December 1986 and transposed into national law. In Greece, this was implemented by Presidential Decree (P.D.) 219/1991, which contains detailed provisions on the rights and duties of the parties and, in particular, on the protection of the commercial agent.
The law applicable to contractual obligations was initially governed by the EEC Convention signed in Rome in 1980 (the Rome Convention), transposed in Germany by Articles 27 et seq. EGBGB. To bring private international law within the Community framework, the Rome Convention was replaced by the Rome I Regulation (EC) No 593/2008, which entered into force on 17 December 2009 and has applied unchanged since then. It covers contractual obligations with a foreign connection in civil and commercial matters — even where the applicable law is that of a non-contracting state — and applies to contracts concluded on or after 17 December 2009 (Article 28 of the Rome I Regulation). The parties may determine the applicable law by a choice-of-law clause; failing such a clause, the applicable law is determined under Article 4(1) and (2) of the Rome I Regulation, or, failing that, by the law of the state with the closest connection (Article 4(3) of the Rome I Regulation). Under Article 4(1)(f) of the Rome I Regulation, distribution contracts are governed by the law of the state in which the distributor has their habitual residence.

1.2 Jurisdiction

Irrespective of the applicable law, the question of which court has jurisdiction in the event of a dispute arises separately, and can be determined by a jurisdiction clause in the contract. Failing such an agreement, jurisdiction may also follow from the agreed place of performance. For international matters within the EU, jurisdiction is today governed by Articles 7(1) and 25 of the Brussels Ia Regulation (EU) No 1215/2012 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters, which has, since 10 January 2015, replaced the earlier Brussels I Regulation (EC) No 44/2001 and, while renumbering the articles, largely continues its rules on jurisdiction in substance.

1.3 Termination of the contract

The commercial agency contract may be concluded for a fixed or an indefinite term and may be terminated by either party subject to notice periods; these periods lengthen with the duration of the contract.
Under Greek law, pursuant to Article 8(3), (4), and (6) of P.D. 219/1991, the following notice periods apply to an indefinite-term relationship: 1 month’s notice from the start of the first contract year, 2 months from the second, 3 months from the third, 4 months from the fourth, 5 months from the fifth, and 6 months after a contract duration of more than 5 years — in each case to the end of a calendar month, unless otherwise agreed.
Under German law, notice periods for an indefinite-term relationship are governed by section 89 HGB: 1 month in the first year, 2 months in the second year, 3 months in the third to fifth years of the contract; after a contract duration of more than 5 years, the notice period is 6 months. For evidentiary purposes, notice should be served by registered letter with return receipt, or by process server.

(In each case, notice runs to the end of a calendar month, unless otherwise agreed.)

1.4 Indemnity claim on termination of the contract

The commercial agent has a non-waivable indemnity claim under both German law (§ 89b HGB) and Greek law (Article 9 of P.D. 219/1991), intended to compensate for the advantage that remains with the principal from the agent’s efforts in acquiring customers — the practically most significant claim in commercial agency law. It requires that the agent has brought in new customers or significantly expanded existing business relationships, and that the principal continues, after termination, to derive substantial benefits from this; the indemnity must, in addition, be equitable. Its amount is determined by a forward-looking projection based on recent turnover figures and is capped at one year’s average commission, calculated from the average of the preceding five years.
The claim lapses if the agent themselves terminates the contract without being prompted to do so by illness or other grounds attributable to the principal, if the agent is dismissed for good cause, or if the agent transfers their contractual position to a third party by agreement.

1.5 Further claims

Alongside the indemnity claim, Greek courts also tend to grant damages claims under the general principles of civil law, since Article 9 §1c of P.D. 219/1991 does not exclude further-reaching claims (in tort and under general civil law) — for example, for damage to reputation, or where the agent was induced to make substantial investments shortly before the end of the contract despite being legitimately entitled to rely on a long-term collaboration. This also covers cases of unfair competition, for instance where termination is intended to drive the agent from the market, or breaches of competition law through abuse of the principal’s dominant market position.

2. The distributor

Unlike a commercial agent, a distributor purchases the products from the principal and resells them to customers in its own name and for its own account; in certain sectors, it may make use of an existing distribution network of the company. The advantage for the principal is that it receives the purchase price already before resale to the end customer, and has no direct legal relationship with the end customer — insolvency risk and warranty liability rest with the distributor. The distributor is generally contractually obliged to purchase minimum quantities and must regularly make its own investments.

2.1 Analogous application of commercial agency law

The applicable law is likewise determined by the Rome I Regulation (or, for contracts predating 17 December 2009, by the Rome Convention or EGBGB); unlike for commercial agency law, however, no EU-wide or national statutory provisions exist governing the distributor relationship. Case law — in both Greece and Germany — therefore tends towards a selective, analogous application of the provisions on commercial agents to distributor relationships resembling that of an agent. This generally requires that the distributor is, like a commercial agent, economically integrated into the principal’s sales organisation (for example, through the assignment of a sales territory, a minimum purchase obligation, or a non-compete clause) and is obliged to hand over its customer and address database to the principal.

Practical note: because case law in both Greece and Germany tends to grant a distributor an indemnity claim even without an effectively agreed handover obligation, it is advisable to agree contractually, at the very least, an obligation to delete customer data on termination of the contract.

2.2 Termination and legal consequences

Where the requirements for such an analogy are met, the distributor contract must be terminated in compliance with the notice periods applicable to commercial agents. After termination, the distributor may likewise claim indemnity under the same principles — bearing in mind that a distributor generally earns not a commission but a trading margin between purchase and sale price (or bonus payments); here too, the cap of an average year’s commission applies by analogy. Under Greek law, the company may, in addition, be liable in damages if termination is given without an adequate notice period, and may be required to make payments equivalent to the previous year’s trading margin during the notice period; in certain circumstances, the distributor may also claim compensation for non-material damage.

3. Exclusivity – sole distribution rights

Commercial agents and distributors — unlike ordinary resellers — are, in addition, obliged to promote the sale of the relevant product in a specific territory, and regularly claim sole distribution or exclusivity rights, or territorial protection, in return. The term “sole distribution” can, depending on the agreement, mean different things — for example, only the exclusion of the principal’s direct business, the sole right to operate to the exclusion of other agents or distributors, or both — and should therefore be described as precisely as possible in the contract. Where sole agency has been agreed, direct sale by the principal breaches its contractual obligation, with corresponding legal consequences (damages, termination without notice by the agent); the mere assignment of a territory or customer group, by contrast, only extends the scope of business subject to commission and, if breached, gives rise to no further-reaching claims unless an exclusivity right was agreed.