Drafting a sales and agency agreement in a legally sound manner

Commercial agent or authorised dealer: Which type of sales arrangement applies?

The type of distribution relationship determines the applicable law. According to Section 84(1) of the German Commercial Code (HGB), a commercial agent is a self-employed trader who is permanently entrusted with brokering transactions for another business owner or concluding transactions on that business owner’s behalf. A person is considered self-employed if they are essentially free to organise their work and determine their own working hours. The commercial agent therefore acts in the name of and for the account of another party and earns a commission.

The authorised dealer, also known as a proprietary dealer, operates differently. They purchase the goods in their own name and for their own account and resell them at a mark-up. Their contract is not specifically regulated in the German Commercial Code (HGB). This has significant implications, as the protective provisions of commercial agency law do not apply directly to them, but only apply mutatis mutandis under strict conditions. In addition, the law recognises the commission agent (Section 383 HGB) and the franchisee, for whom separate rules apply.

This classification is not merely a matter of form. Anyone who contractually designates a partner as a ‘contractual dealer’ but manages them as if they were an agent bound by instructions risks the courts treating the relationship as a commercial agency, with all the mandatory consequences that entails. Conversely, the mere designation as a commercial agent does not confer any protection if the partner actually bears the commercial sales risk. What is decisive is the actual arrangement in practice, not the label.

Why is the claim for compensation under section 89b of the German Commercial Code (HGB) the key issue in drafting the contract?

If a commercial agency contract comes to an end, the agent may claim compensation. Section 89b(1) of the German Commercial Code (HGB) makes this claim subject to two conditions. The principal must continue to derive significant benefits from the business relationship with new customers acquired by the agent, even after the contract has ended. Furthermore, the payment must be equitable, with particular regard to the commissions foregone by the agent.

The economic crux lies in the customer base. The agent has built it up, whilst the principal continues to benefit from it without paying any further commission. The compensation remunerates this transition.

Until 2009, a version of the law was in force which, from the outset, capped the amount of the claim at the agent’s loss of commission. The European Court of Justice deemed this, in the Semen case (judgement of 26 March 2009, C-348/07) as incompatible with the Commercial Agents Directive 86/653/EEC. The legislature subsequently amended Section 89b of the German Commercial Code (HGB). Since then, lost commission has no longer been a separate ceiling, but rather one factor within the assessment of equity. In terms of drafting, this means that the benefit to the principal arising from the customer base and the agent’s lost commission must be assessed separately, and commission alone no longer limits the amount of the claim.

How much can the compensation amount to, and when does it cease to apply?

There is an upper limit on the entitlement. Section 89b(2) of the German Commercial Code (HGB) caps it at a maximum of one year’s commission, calculated as the average of the last five years of service. Where the contract term is shorter, the average over the duration of the service is decisive. For insurance agents, the limit under Section 89b(5), second sentence, of the German Commercial Code (HGB) is higher, namely three years’ worth of commission. For established agents with a high volume of commission, the compensation can therefore quickly reach six-figure sums.

There are circumstances in which the entitlement is completely forfeited. Section 89b(3) of the German Commercial Code (HGB) sets out three reasons for this. If the agent terminates the contract themselves, the compensation is forfeited – unless the principal’s conduct provided justifiable grounds for this, or it would be unreasonable to expect the agent to continue due to age or illness (Section 89b(3)(1) of the German Commercial Code (HGB)). If the principal terminates the contract for good cause due to culpable conduct on the part of the agent, the entitlement also lapses (Section 89b(3)(2) of the German Commercial Code (HGB)). And it lapses if, by agreement, a third party enters into the contractual relationship in place of the agent, i.e. the agent sells their business (Section 89b(3)(3) of the German Commercial Code (HGB)).

The compensation must be claimed within one year of the termination of the contractual relationship; if this time limit is missed, the claim lapses (Section 89b(4), second sentence, of the German Commercial Code (HGB)).  

Above all, however, pursuant to Section 89b(4), first sentence, of the German Commercial Code (HGB), it cannot be excluded in advance, that is to say, not before the termination of the contractual relationship. This prohibition is far-reaching. Not only is a complete exclusion invalid, but so is any agreement which, in effect, restricts the compensation or makes it subject to additional conditions not provided for by law. The rationale behind this provision is to protect the agent from the risk of entering into disadvantageous agreements due to their economic dependence on the principal. This risk persists for as long as the contractual relationship continues – even if it is approaching its already fixed end date and even if the agreement is reached only a few days before the contract ends (Federal Court of Justice, judgment of 14 July 2016 – VII ZR 297/15). Consequently, agreements waiving compensation are only permissible after termination. A clause that waives compensation as early as the conclusion of the contract is invalid. Our case study on the termination of a distribution contract illustrates how the amount of the claim can be limited in a specific dispute over termination.

Can the entitlement to compensation be governed by contract at all?

As the previous exclusion is no longer an option, the focus shifts to other means of control. Firstly, it is legitimate to take this into account in the commission structure. Whether, and to what extent, the agent is entitled to a share of subsequent business shapes the ongoing remuneration and is subsequently taken into account in the assessment of equity. The manner of termination is equally important. A party who terminates the contract only in accordance with the proper procedure and for reasonable grounds retains the grounds for exclusion under Section 89b(3) of the German Commercial Code (HGB), rather than forfeiting them through their own conduct.

A common misconception concerns the choice of law. The right to compensation cannot be waived by subjecting the contract to foreign law. In the Ingmar case (judgement of 9 November 2000, C-381/98) that the compensation rules of the Directive apply mandatorily as soon as the agent carries out their activities within the internal market, even if the parties have chosen the law of a third country. Only in the case of agents who, in accordance with the contract, operate outside the EU and the EEA does Section 92c of the German Commercial Code (HGB) permit deviating agreements, including, in such cases, the exclusion of compensation.

Which clauses ensure that a commercial agency agreement is legally sound?

In addition to the compensation clause, other mandatory provisions shape the structure of the contract. For contracts of indefinite duration, the standard notice periods are governed by Section 89 of the German Commercial Code (HGB). These are one month in the first year of the contract, two months in the second, three months in the third to fifth years, and six months from the sixth year onwards, in each case effective at the end of a calendar month. The parties may agree on longer notice periods, but not shorter ones. Furthermore, the notice period applicable to the principal must never be shorter than that applicable to the commercial agent.

Under Section 89a of the German Commercial Code (HGB), both parties are entitled to terminate the contract without notice for good cause, and this right cannot be excluded by contract. A contract should therefore address typical breaches of duty and clearly regulate warning procedures and documentation requirements in such a way that, in the event of a dispute, valid cause can be assessed on a sound basis.

The rights to account statements and inspection under Section 87c of the German Commercial Code (HGB) are of particular practical importance. The commercial agent may request a statement of their commissions, generally on a monthly basis. The accounting period may be extended to a maximum of three months. In addition, they are entitled to an account statement detailing all transactions subject to commission. Particularly following termination, this account statement is often the starting point for quantifying commission claims and, subsequently, the claim for compensation. The underlying data should therefore be kept in a complete and traceable manner throughout the entire term of the contract.

A post-contractual non-compete covenant pursuant to Section 90a of the German Commercial Code (HGB) must be agreed in writing and handed over to the commercial agent in a signed document. It may apply for a maximum of two years and must be limited to the previous territory or client base, as well as the products previously handled. For the duration of the restriction, the employer is liable to pay reasonable compensation for the period of non-competition. In the absence of an express provision regarding compensation, the obligation to pay does not lapse; it arises by operation of law. Anyone wishing to prevent the commercial agent from competing after the contract has ended must therefore factor this financial burden into their planning from the outset.

Finally, to ensure legal certainty, the contractual agreement on self-employment must be genuinely upheld in day-to-day practice. If the commercial agent is managed, both organisationally and personally, in the same way as an employee, there is a risk of consequences under employment and social security law, including the possibility of the arrangement being deemed ‘false self-employment’. Freedom in terms of work, organisation and time management must therefore not merely be set out in the contract.

Is the authorised dealer also entitled to compensation?

Once again, the nature of the relationship is decisive. Section 89b of the German Commercial Code (HGB) does not apply directly to the authorised dealer, as he is not a commercial agent. However, the Federal Court of Justice applies the provision by analogy where two conditions are met (Federal Court of Justice, judgment of 13 June 2007, VIII ZR 352/04). Firstly, the authorised dealer must be integrated into the manufacturer’s sales organisation to such an extent that, in economic terms, they perform the duties of a commercial agent to a significant degree. Secondly, they must be contractually obliged to transfer their customer base to the manufacturer upon termination of the contract, so that the manufacturer can make immediate use of those customer relationships.

For the sales side, the message is clear: the more an authorised dealer agreement binds the partner and obliges them to hand over customer data, the greater the likelihood of a risk of compensation arising, as is the case with commercial agents. Anyone wishing to limit this risk must genuinely allow the authorised dealer entrepreneurial freedom and carefully regulate the handling of customer data.

What are the implications for international distribution and competition law?

Two further factors determine the validity of the arrangement. Internationally, the findings of the Ingmar judgement still apply: the choice of law and place of jurisdiction may be agreed, but they do not override the right to compensation for agents operating within the single market. Even an arbitration clause aimed at applying a law that does not provide for compensation protection may fail due to the mandatory nature of the Directive.

Under competition law, distribution agreements are subject to Article 101 TFEU and Section 1 of the German Act against Restraints of Competition (GWB). The Vertical Block Exemption Regulation (EU) 2022/720, in force since 1 June 2022, exempts vertical agreements provided that both the supplier and the buyer hold no more than 30 per cent of the market share and there is no hardcore restriction. The most important hardcore restriction is price fixing: authorised dealers must not be required to sell at minimum or fixed prices. Only maximum prices and non-binding recommendations are permitted.

A special provision applies to genuine commercial agents. As they do not bear any sales risk themselves, their agency activities are generally exempt from the antitrust prohibition under the commercial agent privilege. The trader may therefore dictate prices and terms to a genuine commercial agent. This is precisely what is prohibited in relation to authorised dealers. From a competition law perspective, too, it is worthwhile to determine the exact type of distribution arrangement.

The path to a legally binding contract

A robust contract is drawn up in a specific sequence. The first step is to honestly assess the nature of the relationship, as this determines which law applies. Next, the mandatory requirements must be taken into account – from notice periods and the right to access account statements to compensation for loss of earnings – to ensure that individual clauses do not later prove to be invalid

. Only then are the negotiable points balanced out: commission, territory, non-compete covenant and the handling of the customer base. Above all else is the calculation of the compensation risk. It cannot be ruled out entirely, but its amount can be estimated and factored into the business plan. Our overview of procurement, supply and distribution law illustrates how we support companies in the field of distribution law.