Our Services Relating to Commercial Agents
At Schlun & Elseven Rechtsanwälte, we provide full support in legal issues concerning commercial agents. Some of our services are:
- Drafting contracts outlining the working relationship between principals and agents,
- Drafting termination contracts in accordance with the desires of the parties,
- Modification of contracts between commercial agents and principals,
- Representation in cases concerning extraordinary termination,
- Advice about the applicability of compensation.
- Full support and representation in legal disputes
Combining our industry-specific insights with our expertise in German contract law, our team can be relied upon to represent you expertly. From the drafting of agreements to reviewing current contracts, our lawyers will ensure that your voice is heard.
Commercial Agents under German Law
The definition of a commercial agent in German law comes from § 84(1) German Commercial Code, which in turn arose from EU law’s Commercial Agent Directive (86/653/EEC). Under this legislation, a commercial agent is defined as a “self-employed intermediary” who can act for their “principal” (contracting partner) in negotiating terms for the transactions made on their behalf. Under this definition, the agent in question has the right to (according to legislation) “arrange their activities freely and to determine their working hours”. This is not the case, to an extensive degree, and the commercial agent in question does not have such freedom; they can be presumed to be the employee of the principal. Should an arrangement be seen in this light, the principal may be obliged to provide the benefits that go with being employed by them.
A commercial agent is different from an employee as they should have some freedom in deciding their working hours and their working activities. The commercial agent is meant to be a self-employed business person working on behalf of the principal. Where the principal attempts to control too much of the agent’s working time and activities, they may inadvertently find themselves in a situation where the agent is recognised as their employee. Should this occur, the principal will be responsible for such factors as the working conditions, payment of social contributions, and the former agent would benefit from the additional protections provided for employees. It is important to get professional legal advice when drafting the contract between the agent and the principal.
The Responsibilities of the Commercial Agent and the Principal
According to German company law, a commercial agent has the responsibility to represent the principal honestly and diligently. In negotiations, the agent should represent their principal in a manner aligned with their best interests. The agent should perform suitable due diligence in their transactions. According to § 86 German Commercial Code, the agent should provide the principal with all necessary information concerning the transactions, act responsibly (“He shall perform his duties with the due care of a prudent merchant”) and provide them with the information about the concluded negotiations as quickly as possible. Furthermore, § 90 German Commercial Code outlines that commercial agents must not divulge the trade secrets of their principal to other persons even after the conclusion of their working relationship.
Beyond these elements, it is vital to ensure that you have good legal representation in drawing up the commercial agency contract. Having appropriate legal guidance will ensure the resolution of the following issues:
- the territory of the commercial agent,
- the remuneration and commission received by the agent,
- the obligations of the principal and the agent.
While working with the principal, the commercial agent is operating on their behalf and thus not representing themselves in such arrangements. During the course of the contractual agreement, the commercial agent is also entitled to commission on the business concluded.
A principal also has responsibilities when it comes to their interactions with the commercial agent. When it comes to carrying out business on their behalf, the principal is obliged to supply the agent with the necessary documentation to complete the tasks. In terms of commission, the principal is responsible for calculating it monthly (three months is the maximum extension allowed on this provision.) The commission is a factor that should be agreed upon in the contract made between the agent and the principal. When it comes to providing commission, the principal has an honesty obligation in their dealings as the agent may check their books if they have reason to believe that they are not receiving the commission they should receive. According to § 87c German Commercial Code, the agent can have an external auditor or accountant examine the books on their behalf.
Terminating a Commercial Agency Agreement
An agreement between agent and principal can be terminated in a few ways. First, should the arrangement between the parties expire without further renewal, the agreement will be terminated. This can arise due to the conclusion of the agreed purpose of the contractual arrangement or the duration of the contract expiring. However, contracts of indefinite duration do not have an agreed-upon deadline or a set goal that can bring the commercial agency agreement to a conclusion. Termination agreements can be mutually beneficial in such cases.
Ideally, a termination agreement will be agreed upon by the two parties. A mutual conclusion to the working relationship can ensure that both parties are accepting of the arrangement. Either side can instigate the termination agreement. Should the agent begin the proceedings, it means they will be waiving their right to their commission, bonuses, etc., under § 87 German Commercial Code. The termination agreement itself should resolve any remaining issues between the parties regarding bonuses, commission payments etc.
In a termination agreement, the notice period is based on the amount of time the contracting partners have worked together. The statutory guidelines (from § 89 German Commercial Code) are the following:
- one month’s notice during the first year,
- two months’ notice during the second year,
- three months’ notice between the third and fifth years,
- six months’ notice after the fifth year.
The parties can extend these notice periods should they agree to it. However, the notice periods cannot be less for the principal than the commercial agent. The notice periods mentioned above cannot be reduced to lower than the statutory minimum.
Termination of a Commercial Agency Agreement and Compensation
In the event of an ordinary termination (provided with notice), the commercial agent can get compensation. Under § 89b German Commercial Code, the conditions by which an agent can be indemnified (compensated) are outlined and are based on the following preconditions:
- The principal continues to derive substantial benefit from business relations with new customers brought in by the commercial agent (after the conclusion of the contractual agreement).
- It is considered equitable to award compensation considering the circumstances of the case. The example provided in law is when “the commission lost by the commercial agent on the business transacted with such customers.” This is measured by using a reasonable forecast at the time of the termination of what the commission should have been in other circumstances.
Both of these factors need to be working side-by-side for the compensation to apply. Here are some other factors to be aware of:
- In the case of (1) above, the customer does not necessarily have to be “new” as, in some cases, a previous customer that had a relationship with the principal may also be considered. This arises where the relationship with the commercial agent has led to a substantial increase in business from this customer. The substantial increase, in this case, should be to the degree where it constitutes a “new customer” in terms of the amount of business conducted between them and the principal.
- When it comes to (2) above, the example provided is only an example of what is meant by the term “equitable having regard to all the circumstances”. Factors such as the reason for the termination can also be taken into account.
Furthermore, the claim to indemnity (compensation) cannot be excluded from the working contract between the agent and the principal. Therefore, compensation should also be sought in the year following the termination of the contract.
However, some factors can damage an agent’s claim to compensation in the event of termination. For example, should the agent themselves have ended the contractual relationship, they will face a difficult time claiming indemnity. However, in cases where the principal has acted in a manner akin to that allowing for extraordinary termination (where the principal has “given cause for such action” – i.e. not paid the agreed-upon commission, tried to cut the commercial agent out of proceedings etc.) then the agent may seek indemnity. Similarly, where the agent has acted in a manner that justifies extraordinary termination, there may not be a compensation claim. Such factors include sharing important information about the principal with third parties, not working in their best interests while working for the principal and not being diligent in their work.
The final factor arises in cases where both sides agree to have a third party take the place of the commercial agent, and thus they carry on the agency agreement. This can only be agreed upon following the conclusion of the termination process.
Terminating a Commercial Agency Agreement without Notice
There are certain occasions when a contractual arrangement can be terminated without notice, and either side can do it. § 89 German Commercial Code outlines that the right cannot be “excluded or limited”. Extraordinary termination (termination without notice) arises when it would not be reasonable to expect the terminating party to continue the contractual relationship to the end of the contract (or notice period), bearing in mind the circumstances of the case. However, when coming from the principal (in particular), it is advisable in some cases to provide warnings before terminating the agreement. Examples of occasions where the party may seek to terminate the arrangement without notice are outlined here:
By the principal:
- where the agent has provided competitors with information about their company,
- if the agent has acted negligently regarding their work,
- where the agent has not supervised their staff adequately.
By the commercial agent:
- where the principal has sought to reduce their commission without agreement or warning,
- if the principal seeks to take customers from the agent directly and thus cut the agent out of future business,
- where the principal is consistently reluctant or unwilling to pay bonuses/commission,
- if the principal tries to reduce the territory of the commercial agent without agreement or amending of the prior contract.
Where the principal has concluded their working relationship with a commercial agent through an extraordinary termination it is likely that there will be no compensation (indemnity) to be paid. This is assuming that the principal has been correct in their approach regarding the extraordinary termination and that the conduct of the commercial agent has led to the extraordinary termination. In events where the extraordinary termination procedure has not been followed correctly can lead to difficulties in the future.
Where a commercial agent has ended the working relationship through an extraordinary termination, they may be able to benefit from compensation. Once again, it depends on the circumstances of the extraordinary termination. In cases where the principal has acted in a manner that has forced the agent to terminate the working relationship due to how they have acted – i.e. through not paying the agreed commission, unilaterally reducing their territorial area, through unilaterally changing the conditions of their working relationship – then it is possible to claim for compensation.