Distribution law in Germany

German law on Agency Agreements is set out in the German Commercial Code, which, in section 84 and following, in particular implements the requirements of EU law on Commercial Agents.

Are there any formal requirements on concluding Agency Agreements?

Under German law, an Agency Agreement can be entered into both verbally or in writing. There are no special formal requirements to be considered, meaning an Agency Agreement entered into verbally is valid. For evidentiary purposes, we recommend setting out the Agency Agreement in writing.

In any case, upon request from either party, the other party is obliged to cooperate in formalising in writing the content of an Agency Agreement already entered into verbally.

Are there any specific information obligations on concluding Agency Agreements?

Statutory law does not provide for any specific information obligations regarding Agency Agreements.

Under German law, a general obligation exists to correctly answer questions and to provide certain crucial information without special request prior to entering into an agreement (doctrine of culpa in contrahendo). This doctrine, however, following from German case law, plays a somewhat limited role in the field of Agency Agreements.

Are there any specific pitfalls which need to be borne in mind when concluding Agency Agreements?

German law differentiates – also in business-to-business situations – between individually agreed agreements and standard terms and conditions.

Regarding standard terms and conditions, there are strict rules on the validity of contractual clauses. Regarding individually agreed contracts, generally, the concept of freedom of contracts applies. However, this freedom of contracts in the field of Agency Agreements is limited as many statutory rules are mandatory and cannot be deviated from contractually (neither in standard terms and conditions nor in individually agreed contracts).

In any case, it is very important to bear in mind the strict rules on standard terms and conditions when drafting Agency Agreements under German law in order to avoid contractual provisions being invalid.

Standard terms and conditions are deemed to exist if (1) the contractual terms are imposed by one party on the respective other party without being subject to negotiation and (2) the imposing party intends to use the contractual terms in several cases (i.e. at least three times). This means that in particular standard Agency Agreements used by Principals are often likely subject to German law on standard terms and conditions.

Are the parties free to agree on the scope of the Commercial Agency?

The Principal and the Commercial Agent are free to agree on the scope of the Commercial Agency. In particular, the parties may decide on instructing the Commercial Agent (1) country-wide or for a certain geographic region, (2) for all or only for certain products or services (hereinafter only: "products") of Principal, (3) for all or only certain customers of the Principal.

German statutory law provides for a non-compete obligation of the Commercial Agent during the contractual term (as for a post-contractual non-compete obligation, see below).

German law generally allows a contractual limitation on the Commercial Agent's right to accept Commercial Agencies for third parties. The Commercial Agent may even be contractually obliged to solely represent the Principal.

The EU regulation on vertical restraints (Commission Regulation No 330/2010) only plays a limited role in the field of Agency Agreements (whereas in the field of Distribution Agreements it plays a significant role, see below). However, whether these restrictions could apply to the Agency Agreement in the individual case should be assessed at the beginning of a cooperation as this could have significant legal implications.

What are the primary obligations of the Commercial Agent and the Principal?

As a general principle, the Commercial Agent has the following primary obligations based on statutory law:

• to acquire business for the Principal;
• to provide the Principal with the opportunity to enter into contracts with customers or even conclude such contracts itself in the name of the Principal;
• to provide the Principal with relevant information regarding the market, (potential) customers and requirements concerning the products;
• to diligently safeguard the interests of the Principal in all business respects;
• to maintain confidentiality; and
• to adhere to the statutory non-compete obligations during the contractual term.

As a general principle, the Principal has the following primary obligations based on statutory law:

• to support the Commercial Agent with respect to the Principal's business (for example in providing brochures, price lists etc.); and
• to pay commission to Commercial Agent (see below).

We strongly recommend detailing the respective obligations of the Commercial Agent and the Principal in the Agency Agreement. Although statutory rules in this regard exist, it is important to avoid a legal situation which the parties did not intend. When drafting the obligations in the Agency Agreement, the vast amount of case law should be taken into account in order to avoid the risk of setting out invalid contractual provisions (in particular when drafting standard Agency Agreements as German law provides for strict rules in this regard, see above).

How is the Commercial Agent paid?

Generally, the Commercial Agent is entitled to commission for business transactions between the Principal and customers within the scope of the Commercial Agent's instruction.

During the contractual term, in the absence of a contractual agreement to the contrary, the Commercial Agent can claim commission if:

• the business transaction has been concluded as a result of the Commercial Agent's activity; i.e. the business was acquired by the Commercial Agent (joint causation between Commercial Agent's actions and other causes is sufficient);
• the business transaction has been concluded with customers that were assigned to the Commercial Agent (in such case even for business transactions concluded without the Commercial Agent's involvement); or
• the business transaction has been concluded within a territory that was assigned to the Commercial Agent (in such case, even for transactions concluded without the Commercial Agent's involvement).

For business transactions which are concluded after the contractual term has ended, in the absence of a contractual agreement to the contrary, the Commercial Agent can claim commission if:

• the business transaction is mainly attributable to the Commercial Agent's efforts during the contractual term and if the business transaction was entered into within a reasonable period after the end of the contractual term; or
• the customer's offer to enter into a contract with the Principal was received by the Commercial Agent or the Principal prior to the Agency Agreement's end.

Most statutory rules on the Commercial Agent's remuneration are not mandatory. We recommend stipulating in the Agency Agreement the exact way the Commercial Agent's commission will be calculated in order to avoid statutory law leading to a result which the Principal and/or the Commercial Agent did not intend.

Term of the Agency Agreement

There are no statutory rules on the term of Agency Agreements. The parties are thus, as a general principle, free to agree on details of the contractual term, for example by agreeing on a fixed term or an indefinite term or a combination of both.

If the parties agree on a fixed term and, after the expiry of the fixed term, continue to perform the Agency Agreement, the Agency Agreement is considered to have been tacitly renewed for an indefinite term.

Termination of the Agency Agreement

If the Agency Agreement has been entered into for a fixed term, as a general principle, the Agency Agreement may only be terminated extraordinarily for good cause during this fixed term. During a fixed contractual term, no termination for convenience is admissible. German case law has not established a clear-cut rule upon which the duration of a fixed term may be considered as an invalid constraint on the parties' freedom. As a rule of thumb, to be on the safe side, all fixed terms which exceed five years should be thoroughly assessed.

If the Agency Agreement has been entered into for an indefinite term, it may be terminated extraordinarily for good cause or for convenience by complying with certain minimum notice periods. German statutory law sets out the following minimum notice periods (depending on the actual duration of the Agency Agreement in question):

• during the first contractual year, a minimum notice period of one month with effect to the end of any month must be complied with;
• during the second contractual year, a minimum notice period of two months with effect to the end of any month must be complied with;
• during the third, fourth and fifth contractual years, a minimum notice period of three months with effect to the end of any month must be complied with; and
• after the fifth contractual year has expired (i.e. from the sixth contractual year onwards), a minimum notice period of sixth months with effect to the end of any month must be complied with.

The notice periods must not be shortened. The notice periods may be extended by contractual agreement, provided, however, the notice period for the Commercial Agent is at least of the same length as the notice period of the Principal.

German statutory law does not provide for a written form requirement with respect to the termination notice. For evidentiary purposes, we recommend setting out such requirement in the Agency Agreement and observing it in any event.

The indemnification claim as main consequence of the Agency Agreement's termination

The main consequence of the Agency Agreement's termination under German law is that – unless there are certain precluding circumstances – it triggers the Commercial Agent's right to financial compensation in the form of an indemnification claim (this means that out of the two possible consequences EU law on Commercial Agents allows Member States to adopt – i.e. indemnification claim model or compensation claim model – Germany opted for the indemnification claim model).

The Commercial Agent is, upon the Agency Agreement's end, entitled to an indemnification claim, if:

• during the contractual term, the Commercial Agent has acquired business with new customers or significantly increased business with existing customers of the Principal and the Principal continues to derive substantial bene-fits from such business; and
• payment of indemnity is equitable having regard to all the circumstances of the individual case and, in particular, the commission lost by the Commercial Agent.

The calculation of the indemnification claim according to the above principle is subject to a vast amount of case law which must be taken into account. In any event, however, the amount of the Commercial Agent's indemnity is capped: it shall not exceed one year's remuneration of the Commercial Agent based on the average of the preceding five contractual years (or the actual term, if the relationship lasted for less than five years). The cap may be used as an estimate figure for Principals to assess the financial risk of terminating the Agency Agreement.

The indemnification claim is precluded, if:

• the Agency Agreement was terminated by the Principal for good cause which was attributable to the Commercial Agent;
• the Agency Agreement was terminated by the Commercial Agent (unless the termination is justified by circumstances attributable to the Principal or the continuation of the Agency Agreement is unreasonable to the Commercial Agent due to his/her age or an illness);
• a third party succeeds the Commercial Agent and after the Agency Agreement's end all three parties (i.e. Principal, Commercial Agent and the third party) enter into an agreement setting out the succession; or
• the indemnification claim was not assessed against the Principal at the latest within one year from the Agency Agreement's end.

The rules on the Commercial Agent's indemnification claim are mandatory and may not be contractually excluded. However, there are certain ways to at least influence the risk of an indemnification claim and its amount which makes it worth including provisions in this regard in the Agency Agreement.

Other consequences of the Agency Agreement's termination

In the absence of a contractual agreement to the contrary, German law does not stipulate a post-contractual non-compete obligation of the Commercial Agent. German law, however, allows an agreement on such post-contractual non-compete obligation of the Commercial Agent for a period of a maximum of two years calculated from the end of the Agency Agreement. It is important to bear in mind that the Commercial Agent is entitled to a reasonable financial compensation if such post-contractual non-compete obligation has been agreed (unless the Principal in writing waives this obligation prior to the Agency Agreement's end). The amount of the reasonable financial compensation depends on the individual case and is subject to the discretion of the adjudicating court.

Any claim arising from an Agency Agreement – also the indemnification claim – is subject to a three-year limitation period, starting at the end of the year during which the claim arose and the creditor (e.g. the Commercial Agent) gained knowledge (or did not gain knowledge due to its gross negligence) of the debtor and the circumstances creating the obligation. In absence of such knowledge, there is a maximum limitation period of 10 years from the date on which the claim arose. In practice, disputes often arise with respect to the question when a claim actually came about. This has been subject to various court decisions.

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There are no specific statutory rules on Distributors. Subject to certain requirements, German law on Commercial Agents applies by way of analogy (section 84 and following of the German Commercial Code). In addition, German sales law applies (section 433 and following German Civil Code) to the respective purchase contracts for products.

Are there any formal requirements on concluding Distribution Agreements?

Under German law, a Distribution Agreement can be entered into both verbally or in writing. There are no special formal requirements to take into account. For evidentiary purposes, we recommend setting out the Distribution Agreement in writing.

Are there any specific information obligations on concluding Distribution Agreements?

Statutory law does not provide for any specific information obligations regarding Distribution Agreements.

Under German law, a general obligation exists to correctly answer questions and to provide certain crucial information without special request prior to entering into an agreement (doctrine of culpa in contrahendo). This doctrine, however, following from German case law, plays a somewhat limited role in the field of Distribution Agreements.

Are there any specific pitfalls which need to be borne in mind when concluding Distribution Agreements?

German law differentiates – also in business-to-business situations – between individually agreed agreements and standard terms and conditions.

Regarding standard terms and conditions, there are strict rules on the validity of contractual clauses. Regarding individually agreed contracts, generally, the concept of freedom of contracts applies. However, this freedom of contracts in the field of Distribution Agreements is somewhat limited as many statutory rules (which may apply by way of analogy) are mandatory and cannot be deviated from contractually (neither in standard terms and conditions nor in individually agreed contracts).

In any case, it is very important to bear in mind the strict rules on standard terms and conditions when drafting Distribution Agreements under German law in order to avoid contractual provisions being invalid (for example when limiting the Principal's warranty or liability as the selling party).  

Standard terms and conditions are deemed to exist if (1) the contractual terms are imposed by one party to the respective other party without being open to negotiate them and (2) the imposing party intends to use the contractual terms in several cases (at least three times). This means that in particular standard Distribution Agreements used by Principals are often likely to be subject to German law on standard terms and conditions.

Are the parties free to agree on the scope of the Distribution Agreement?

There are statutory limits to the Principal's and the Distributor's freedom to agree on the scope of the Distribution Agreement (mainly based on German and EU Competition law).

In particular when it comes to limiting the geographic region in which the Distributor may (or may not) sell the products and the customers to which it may (or may not) sell them, the EU regulation on vertical restraints (Commission Regulation No 330/2010) plays a significant role: such limitations are admissible only under specific requirements which need to be assessed in the individual case. 

Furthermore, any agreements with respect to the amounts of products the Distributor is obliged to source from the Principal may be subject to German or EU Competition law: contractual provisions which require the Distributor to source 80% or more of its demand in products solely from the Principal, in general, may only be agreed for a period of up to five years.

Non-compete obligations may be agreed, however, as a general rule based on EU Competition law, only for five years (as for post-contractual non-compete obligations, see below). The five-year period may be extended by mutual agreement for five more years.

The Principal is generally not allowed to influence the Distributor's resale price of the products. The Principal may only provide the Distributor with non-binding price recommendations for resale of the products. Principals should take great care when performing any activities which could be construed as an attempt (even an indirect one) to influence the Distributor's freedom to determine the resale price.

What are the primary obligations of the Distributor and the Principal?

As a general principle, it is assumed that the Distributor has the following primary obligations:

• to distribute the products;
• to provide the Principal with relevant information regarding the market, (potential) customers and requirements concerning the products;
• to diligently safeguard the interests of the Principal in all business aspects; and
• to maintain confidentiality.

As a general principle, it is assumed that the Principal has the following primary obligations:

• to apply reasonable efforts to deliver all products ordered by Distributor;
• to support the Distributor with respect to the Principal's business (for example by providing documentation regarding the products, brochures, etc.); and
• to grant the agreed rebate to the Distributor (see below).

We strongly recommend setting out the respective obligations of the Distributor and the Principal in the Distribution Agreement. As no specific statutory law on Distributors exists, this is important to avoid unpleasant surprises and disadvantages. When setting out the obligations in the Distribution Agreement, the vast amount of case law should be taken into account in order to avoid the risk of setting out invalid contractual provisions (in particular when drafting standard Distribution Agreements as German law provides for strict rules in this regard, see above).

How is the Distributor paid?

As a general principle, the Distributor is not entitled to a specific remuneration for its distribution activities. The remuneration of the Distributor stems from the profit it generates in purchasing the Principal's product with a rebate and selling them to its customers at a higher resale price at its discretion. The parties may, however, following the principle of freedom of contract, agree on additional remunerations such as marketing contributions.

Term of the Distribution Agreement

There are no statutory rules on the term of Distribution Agreements. The parties are thus, as a general principle, free to agree on the contractual term, for example by agreeing on a fixed term or an indefinite term or a combination of both.

If the parties agree on a fixed term and, after the expiry of the fixed term, continue to perform the Distribution Agreement, the Distribution Agreement is considered to have been tacitly renewed for an indefinite term.

Termination of the Distribution Agreement

If the Distribution Agreement has been entered into for a fixed term, as a general principle, the Distribution Agreement may only be terminated extraordinarily for good cause. During a fixed contractual term, no termination for convenience is admissible. German case law has not established a clear-cut rule upon which the duration of a fixed term may be considered as an invalid constraint on the parties' freedom. As a rule of thumb, to be on the safe side, all fixed terms which exceed five years should be thoroughly assessed.

If the Distribution Agreement has been entered into for an indefinite term, it may be terminated extraordinarily for good cause or for convenience by complying with certain minimum notice periods. Most legal commentaries and German case law advocate that the statutory minimum notice periods for Commercial Agents (which depend on the actual term of the Agency Agreement in question, see above, and range between one and six months) should be applied by way of analogy to Distributors, unless in the individual case a longer notice period is required for equitable reasons.

German statutory law does not provide for a written form requirement with respect to the termination notice. For evidentiary purposes, we recommend setting out such requirement in the Distribution Agreement and observing it in any event.

The indemnification claim as main consequence of the Distribution Agreement's termination

As described above, the main consequence of an Agency Agreement's termination under German law is that it may trigger an indemnification claim of the Commercial Agent. German case law applies the right to an indemnification claim to Distributors by analogy, upon fulfilment of the following requirements:

• the Distributor must be integrated into the sales organisation of the Principal and must have obligations similar to a Commercial Agent;
• the Distributor is contractually obliged to submit customer data to the Principal either during the contractual term or at the end of the Distribution Agreement; and
• The above-mentioned requirements for Commercial Agents must also be fulfilled.

Calculation of the amount of the indemnification claim is similar to Commercial Agent's claim, i.e. prognosis of future revenue resulting from customers acquired by Distributor; deduction for reasons of equity.

The indemnification claim for Distributors is capped to one year's remuneration based on the average annual remuneration in the last five contractual years (or the actual term if the relationship lasted for less than five years).

Extensive case law regarding the indemnification claim of the Distributor has developed over the last four decades making it necessary to thoroughly assess the chances and risks of the Principal and Distributor in the individual case to avoid disadvantages.

If the above requirements for the application of the indemnification claim are fulfilled, the indemnification claim of Distributors could be mandatory under certain requirements; in these instances the indemnification claim may not be contractually excluded. However, there are certain ways to at least influence the risk of an indemnification claim and its amount which makes it worth including provisions in this regard in the Distribution Agreement.

Other consequences of the Distribution Agreement's termination

Statutory law does not provide for a post-contractual non-compete clause. EU Competition law, as a general principle, considers a post-contractual non-compete clause for Distributors as invalid and only allows for such under certain exceptional circumstances. If a post-contractual non-compete clause has been validly agreed (complying with EU Competition law), the statutory provisions regarding Commercial Agents may apply by way of analogy and the Distributor may be entitled to a reasonable financial compensation.

The Distributor under certain conditions may request that the Principal purchases back products it has in stock upon the Distribution Agreement's end. To avoid discussions in this regard, the Distribution Agreement should address this matter, while taking into account case law.

Any claim arising from a Distribution Agreement – including the indemnification claim – is subject to a three-year limitation period, starting at the end of the year during which the claim arose and the creditor (i.e. the Distributor or the Principal) gained knowledge or should have gained knowledge of the debtor and the circumstances creating the claim. In absence of such knowledge, there is a maximum limitation period of 10 years from the date on which the claim arose.

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