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Using a German Distributor? Beware of Choice of Law Clause!

What UK Suppliers should know about German Commercial Law

You are a UK based supplier using a German-based distribution agent (Handelsvertreter) within Germany? So far, so good. However, in case you have accepted German law to be applicable or if you have chosen to remain silent on the issue of applicable law: Are you aware of what will happen upon termination of the distribution agreement?

German law differs significantly from UK law when it comes to distributors and agents. The main difference being that it is does not differentiate between an “agent” and a “distributor” – unlike in the UK.

Within Germany, a distribution agent will, no doubt, at the beginning of a contractual relationship work incredibly hard to build up relationships between the supplier and customers. Usually, this will last several years, until the supplier has established a large customer base in that country. When this happens, the usual course of events is for the supplier to terminate the agreement with the agent and liaise directly with customers. What happens to the agent and what does this mean for you? Unlike UK law, under German law, if and when an agent agreement is terminated, the agent is entitled to substantial compensation.

Therefore, it you either have chosen the route of a distribution agreement or an agency agreement, you must be aware of section 89b German Commercial Code! Under this section, which implements Council Directive (EEC) No. 86/653 on Commercial Agents (Directive), the agent is entitled to claim compensation from the supplier after the termination of the agency agreement so long as the agent can prove that the principal will substantially benefit from the business relationships that were established by the agent and that the agent will lose commission as a result of the termination.

So if the supplier keeps delivering goods to customers that have been found by the agent, the agent must be paid for this.

On the other hand, under UK law, there is a major difference between an “Agent” and a “Distributor”. Yes, if you are deemed an “Agent”, and if your contract is terminated, then possibly compensation will be due. However, if you are not, and are a “distributor”, then in most cases compensation will not be due, unless it can be proved that the distribution agreement was a sham.

Therefore, in order to decide whether compensation is due under UK law, one needs to ascertain whether the agreement was that of an agency or a distributor. Essentially, an agent is appointed by the principal to negotiate and possibly conclude contracts with customers on the principal’s behalf. He is paid commission on the sales he makes, usually on a percentage basis. The only contract for sale of the products is made between the principal and the customer. The agent does not deal with customer directly – that is left to the principal.

On the other hand, a distributor can be a person/company who buys goods on his/its own account from the supplier or exporter and resells them to customers in his/its own territory. He/it is essentially an independent contractor. Unlike an agent, he/it does not act as a channel of communication between the supplier and the customer and will usually have no authority to create a contract between the supplier and the customer. Instead, he/it acts as the contracting party.

In the UK, Council Directive (EEC) No. 86/653 on Commercial Agents (Directive) (and, accordingly, the UK Commercial Agents (Council Directive) Regulations 1993 (SI 1993/3053) (the Regulations)), does not apply to distribution agreements. Therefore, within the UK, there is no requirement to pay compensation to a distributor on termination of the distribution agreement.

Care should be taken when negotiating contracts and choice of jurisdiction clauses from both the part of the Supplier and that of the agent and/or distributor. As there is a big difference in the UK, the choice of law applicable to the agent agreement is extremely important when you are initially negotiating contracts, as it will be a huge deciding factor of whether you are entitled to compensation or not.

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The law office Graf & Partners was established in 2003 and has many years of experience with British-German and US-German legal matters. If you wish us to advise or represent you please contact German solicitor Bernhard Schmeilzl, LL.M. (Leicester) at +49 941 785 30 53 or English solicitor Elissa Jelowicki in Munich at +49 (0) 89 / 45 23 55 747. Or simply write an e-mail to elissa(at)grafpartner.com.