Volonakis Law Firm , lawyers

Partnering English and German Speaking businesses in Greece

Distribution of goods via commercial agents and authorized dealers

Manufacturers (employer or principal) can market a product in the European internal market by various methods. In addition to direct sales to the end customer, many manufacturers market via third persons or companies in the country in question. One advantage of third party marketing is that these local contractual partners are more familiar with the local conditions and know of a more effective local marketing strategy and can even sell the goods more cost-effectively and efficiently. This form of collaboration is often chosen by foreign firms and individual details thereof modified. This type of representation, which commonly occurs, is known as commercial agent and authorized dealer.

1. Commercial agent
2. -1.1.1. Applicable law
3. -1.1.2. Jurisdiction
4. -1.1.3. Termination of contract
5. -1.1.4. Equitable compensation or indemnity on termination of contract
6. -1.1.5. Further claims
   1. authorized dealers
7. -1.2.1. Analogous application of the provisions for commercial agents
8. -1.2.2. Termination of contract and legal consequences

The law of commercial agents is codified in large parts of Europe so that the rights of commercial agents are protected by many irrevocable provisions. There are no provisions to regulate protection of authorized dealers, however, which raises the question of the extent to which the regulations protecting commercial agents also apply to (exclusive) authorized dealers Thereforewe will describe in greater detail the individual forms of collaboration and the ensuing legal consequences.

1. Commercial agent

The commercial agent is an independent business person who is employed to broker business for another company or to conclude transactions in the company’s name (e.g. sale of products and goods to customers in the name of a company). He works in the name and for the account of third parties and receives commission payments from the employer for his work. Unlike the dealer, the commercial agent doesn’t buy in the products, but acts as a broker between the company and the customer.

If such a business relationship exists between the employer and the distribution partner (in Germany or Greece), there is a simultaneous contractual commercial agent relationship. Irrespective of whether a written contract, or just a verbal contract, is at hand, the commercial agent always has the same rights in respect of the employer. Proving the agreements that have been reached is made more difficult for both parties without a contract concluded in writing. Where there is doubt, in such cases the courts tend to decide in favor of the commercial agent, so specifying in writing the agreements reached is always recommended.

1.1.1 Applicable law

In order to determine applicable law, a distinction must be made between the commercial agent’s relationship with the principal on one hand and the contract of sale brokered between the principal and the customer on the other. If the commercial agent is used for distribution abroad (e.g. Greece) then the latter represents an international contract of sale so, subject to the states concerned having signed the Convention, the Convention on the International Sale of Goods – CISG applies.

The CISG contains provisions on sales that apply if the parties to a contract of sale originate from various convention states. National law thus applies because the CISG does not apply to service contracts like the agency agreement and in addition there is no international convention on substantive law of commercial agents.

The provisions on the agency agreement have been harmonised by European Union Directive 86/653 of 18 December 1986 and in the meantime implemented in national law in all Member states. In Greece the Directive has been taken into account by Presidential Decree 219-1991, which contains detailed provisions on the parties’ rights and obligations and in particular on protection of the commercial agent.

The provision of the law to be applied to contractual obligations is governed by the Convention (ECC) signed by the Member states (including Greece) in Rome in 1980. In Germany this Convention has been implemented by Article 27 et seq Introductory Act to the German Civil Code (EGBGB). The Convention applies to contractual obligations in situations that exhibit a connection to the law of various states, even if the law of a state that is not a signatory to the contract is concerned. The parties accordingly have the possibility of determining the national law to be applied with the choice-of-law clause. Both German and Greek law are based on implementation of EU Directive 86/653, which has been implemented in national law in both countries, amongst others. This is why the differences according to parts of Greek case law are not serious – except the additional entitlement to compensation.

According to Article 4 of the ECC, if there is no choice-of-law clause in the contract, the contract is subject to the law of the state with which it has the closest connection, or in which the performance characteristic of the contract type will be rendered. In the case of a commercial agent, this would be the place where he exercises his business activity.

1.1.2 Jurisdiction

Irrespective of the question of the law to be applied to the contractual obligation, the question arises as to the courts before which the parties to the contract would wish to, or have to contest their cases in the event of a dispute. This can be contractually agreed by means of what is known as a venue or jurisdictional clause. This clause stipulates which courts have jurisdiction in the event of disputes. Unless the parties have agreed otherwise these courts have sole jurisdiction.

If an exclusive venue has not been agreed, the place of performance can furthermore be determined in a contractual clause. This also determines the courts that have jurisdiction in the event of a dispute, which is regulated pursuant to Article 5, para. 1, Article 23 of European Council Regulation no. EC 44/2001 of 22 December on jurisdiction of the courts and recognition and enforcement of decisions in civil and commercial matters for international transactions.

1.1.3 Termination of contract

The subject matter of the agency agreement is essentially the provision of a service, whose purpose roughly consists of facilitating the sale of goods. The agreement can be concluded for a specified or unspecified term and terminated by either party giving notice of cancellation to the other party, on compliance with specific deadlines for giving notice. The length of the notice period is dependent upon the term of the agency agreement. According to Greek and German law, either party may terminate the contractual relationship on compliance with the following notice periods:

1. month from commencement of the first year of the agreement,
2. months from commencement of the second year of the agreement,
3. months from commencement of the third year of the agreement,
4. months from commencement of the fourth year,
5. months from commencement of the fifth year,
6. months after an agreement has been in place fand or 5 years,
7. as of the end of the calendar month respectively.
8. In order to prove service of the letter of termination, this should be sent by recorded delivery with advice of receipt, or served by messenger.

1.1.4 Equitable compensation or indemnity on termination of contract

According to Greek law (PD 219/1991, Article 9) the commercial agent is due equitable indemnity or compensation intended to compensate the advantage that the commercial agent has brought the principal. This is the most important entitlement under the law of commercial agency.

The commercial agent should be compensated for acquiring new customers for the business, with which the company will continue to do business after the agency agreement has ended. The parties cannot contract out of this entitlement to equitable compensation. The indemnity is only granted if the commercial agent has acquired new customers or considerable increased business with existing customers for the principal and the principal derives an advantage from this upon or after termination of the agreement. The indemnity must moreover be commensurate, taking into account the overall circumstances.

A future forecast is drawn up based on the last sales figures, to establish the sales potential that exists where the new customers acquired by the commercial agent are concerned. The indemnity sum can amount to a maximum of one year’s commission, calculated from the average for the last five years.

The entitlement lapses, however, if the commercial agent terminates the agreement, apart from if he is caused to do so by health or other reasons, or if the agent is dismissed for good cause. The entitlement furthermore lapses as soon as the commercial agent agrees with the principal to assign his contractual position to a third party.

1.1.5 Further claims

In addition to equitable indemnity, the Greek courts tend to also grant compensation according to the general principles of civil law. This is because the above mentioned EU Directive and Article 9 §1c presidential decree 219/1991 based on it do not preclude further compensation (arising from tort and according to general principles of civil law). If further damage beyond the loss of commission and customers is incurred as a result of termination of the agency agreement, the commercial agent can assert further claims for compensation arising from general principles of the Greek Civil Code.

This may be the case if, for example, defamation has occurred, or if the company caused the commercial agent to invest considerable sums just before the cooperation was terminated, whilst the commercial agent should justifiably have been able to expect a long-term collaboration on the basis of the company’s previous conduct.

This also covers some cases of violation of the law on unfair competition, if the termination is intended to crowd the commercial agent out of the market, or even a violation of antitrust law if the employer is exploiting a particularly dominant position in the market.

1.2. authorized dealers

Another common form of commodity trading is distribution via authorized dealers. Unlike the commercial agent, the authorized dealer buys the products from the principal and then sells them on to the customers in his own name and for his own account. In certain sectors it is equally possible that the dealer will use the business’s existing distribution network. The advantage for the principal on the one hand is that he receives the purchase price for the product even before it has been sold to the customer. On the other there is no direct legal relationship between the customer and the principal, so that the authorized dealer bears the risk of the end customer’s insolvency and all transactions under sales law. In the majority of cases the authorized dealer is contractually obliged to purchase minimum quantities from the principal and import these into the foreign markets. As a rule he will have to make investments in order to do this.

1.2.1. Analogous application of the provisions for commercial agents

In this case too the applicability of national law is governed by the provisions of Regulation 593/2008 and / or the Civil Code. Unlike the law of commercial agents, however, the authorized dealer relationship is not regulated by either EU-wide or national statutory provisions. As a result, at least in relationships similar to that of a commercial agent, case law tends to selective analogous application of the provisions of the law of commercial agents due to comparability of interests.

According to court practice in both Greece and Germany, analogous application of the provisions on commercial agents to authorized dealers firstly presumes that the contractual relationship is like to that of a commercial agent. This requires the authorized dealer to be economically integrated into the principal’s sales organisation like a commercial agent (e.g. allocation to a specific sales territory, minimum purchase commitment, prohibition of competition). Furthermore, the authorized dealer must be contractually bound to surrender to the principal the contacts and customer addresses acquired during the term of the contract and thus grant the principal access to the regular group of customers or customer base.

A minimum recommendation is a contractual agreement that requires customer data to be deleted after contract is terminated, as the current trend in both Greece and Germany is towards granting authorized dealers equitable indemnity, even in the event of an agreed obligation to surrender the customer base that is not effective.

1.2.2. Termination of contract and legal consequences

If the previously mentioned prerequisites for analogous application are met, the authorized dealership agreement can be terminated on compliance with the periods of notice applying to commercial agents.

The authorized dealer can also claim equitable indemnity according to the same principles as the commercial agent when the agreement has been terminated. There are some peculiarities that must be taken into account when calculating the equitable indemnity, according to which in most cases the authorized dealer does not receive any commission payments. His profit generally results from the margin between the purchase and retail price, if he buys at list prices, or from potential bonus payments respectively. In this case too there is an upper limit on the indemnity, according to the commercial agent’s average annual commission, e.g. based on the annual net profit.

According to Greek law the company can furthermore be obliged to pay compensation if the dealer’s dismissal did not comply with appropriate periods of notice. The statements above regarding the commercial agent apply in this case too. The company (principal) must furthermore make payments to the dealer during the period of notice to the value of the gross margin for the last year. Gross margin is understood to be the difference between the purchase and retail price, calculated on the basis of the figures from the last year of collaboration. In certain cases the dealer can furthermore claim compensation for his non-material damage (apozimiosi ithikis vlavis).

1.3. Exclusivity – sole distribution right

Unlike the usual retailers, who merely purchase goods from the principal and sell them on to the customer, authorized dealers and commercial agents are obliged to promote sales of the product in question in a specific territory and simultaneously preserve the principal’s interests. In return they usually claim sole rights of distribution, or exclusivity, or territorial protection.

It should be noted here that the blanket term “sole distribution” can have different meanings and must therefore be specified in order to avoid any claims for damages. Depending on the agreement, sole distribution can merely mean exclusion of the employer’s direct business or the representative’s sole right of operation excluding other commercial agents (or authorized dealers), or even both.

The legal consequences also differ accordingly. In the case of sole representation, the entrepreneur’s direct sales violate its contractual obligations with all the consequences, such as compensation or termination without notice by the commercial agent. Whereas allocation of a specific territory or group of customers merely increases the group of transactions subject to commission and, if infringed, does not give rise to any further claims for damages unless it is combined with the right of exclusivity. It is therefore advisable to define the scope of any exclusivity to be granted, as the need arises, in the respective contract.