Distribution Agreements in Germany

There is no set legal act in Germany which governs distribution agreements, but these agreements must abide by both European and German antitrust law. The terms of the contracts negotiated must also follow German contract law requirements when it comes to the terms and conditions within them. Where one party may be deemed to have forced one side into an agreement, or imposed conditions on them, the contractual provisions may be deemed invalid. Distribution agreements should benefit both sides and where this is achieved, a solid working relationship can be expected.

Some of the important standard contractual provisions which must not be forgotten in the negotiation of a distribution agreement are the following:

• Force majeure clause,
• limitation of liability,
• payment procedures and deadlines,
• actions in event of non-payment / non-performance,
• confidentiality agreements.

A lawyer with expertise in contract law should oversee the drafting of such terms in order to ensure that these clauses within the distribution agreement are in accordance with the applicable legal provisions.

When negotiating distribution agreements in Germany, our commercial lawyers can provide their vast experience in contract negotiations to ensure that the agreement fulfills your requirements. Carrying out due diligence of your potential partner is vital when it comes to negotiations on credit terms and determining whether they can be relied upon. Our lawyers will carry out extensive due diligence on your behalf and will provide you with a clear idea of what you can expect.

During these negotiations and in drafting the distribution agreements, here are some key points which should be considered. The value of each of these matters will depend on the individual case.

• Which products: When designing the distribution agreement, it is important for you to specify the exact products the agreement refers to. The distribution network for one product may not be suitable for another and giving your partner the impression that they have an exclusive right to distribute your product when this is not the case is counterproductive.
• Locations / Territories of the Distribution Agreement: In a similar manner it may be important to specify within the distribution agreement that it is limited to a certain area. Your partner may have an extensive network within a certain part of Germany or within Germany itself. If the agreement is intended to be limited to a certain area, make sure it is stated in the agreement and is clearly understood by all sides.
• Agree on Credit Terms: In such distribution agreements, having an agreement in place concerning credit terms is vital. Paying up front each month is not always ideal for the parties involved, however, extending the credit too far can lead to financial shortfalls. Deferred payments can result in long waits should the retailer find themselves in a financial crunch.
• Setting the time limits of the agreement: In many cases, having a time limit for a distribution agreement is a suitable arrangement for both sides. Time limits can ensure that should parties wish to leave the agreement that they are not indefinitely bound to the agreement. This is particularly important in cases where changes have occurred within one of the companies which may have an impact on the agreement, this may be in the form of new ownership or in a case of financial difficulty. Such time limits can also be rolled over if both sides are happy to continue with the arrangement.
• Dispute Resolution Process: When drafting the distribution agreement, it is vital to have a dispute resolution process in place. Not having a dispute resolution process within the agreement can lead to unnecessary and costly court actions. Knowing how to respond and having an agreed upon mechanism which can be triggered in the event of a dispute provides a more stable working environment.
• Intellectual Property concerns: Distribution agreements may place your intellectual property (in the form of your trademarks, logos and other elements) within the hands of another company. How these assets are used by the partner company must therefore be specified and provided for within the contract between the parties. Our lawyers appreciate the value of such assets to a company and can therefore ensure that they are provided with the appropriate protection.
• Terms of termination of the agreement: Exiting a distribution agreement at the right time is as important as the entering of one. As stated above having time limits in place can be of great benefit, as parties can outline their intention to not continue in advance of the time limit expiring ensuring that their partner is aware of the upcoming termination. Such terms of termination can also outline if certain actions are taken, or omissions are made by certain parties, that the agreement can be considered terminated.

The above-listed factors are just some of the elements which distribution agreement negotiations should consider. The factors which are most important to you will depend on your situation and a whole myriad of individual elements. Allow our lawyers to provide you with specific, tailored advice and to negotiate on your behalf. As a full-service law firm with expertise in many legal fields, our lawyers can be relied upon to consider the full picture when negotiating.

How your distribution agreement will be legislated for depends on whether it is a vertical or horizontal agreement. Horizontal agreements are those made between companies operating at what is deemed to be the same level, in other words competing companies. These distribution agreements are not as frequent as vertical agreements, and therefore the key consideration in such agreements is ensuring that they follow competition and antitrust law. In such horizontal agreements there are strong rules relating as to the size of companies which can enter these agreements together as they can only account for a combined 5% of market share. There are also rules relating to the prevention of price fixing.

Our law firm provides clear and considered advice on all manners of issues relating to competition and antitrust law in Germany and can be relied upon should your company find itself in difficulties in such disputes. Allowing our lawyers to plan or analyse your company’s horizontal distribution agreement arrangements will ensure your company is compliant with its legal requirements.

Vertical distribution agreements are made between companies at differing levels of business where they are not deemed equal. Essentially between the distribution company and the product manufacturer. Such agreements are also strongly regulated by antitrust and competition requirements which refer to the market share and how much control is placed in the hands of the companies following the agreement. Such distribution agreements should involve parties who combined have under a 30% market share. There should also be no price fixing or unfair restrictions in place as part of the agreements.

When deciding on a distribution agreement it is vital to make the decision on whether the agreement is an exclusive agreement or a selective agreement. An exclusive distribution agreement is one where the supplier agrees to sell its products to only one distributor for resale in a particular territory. Therefore, the supplier agrees not to distribute the products themselves or through another party. At the same time, there is also a “sole distributor agreement” whereby the supplier can also distribute their own goods but the other party within the contract is the only external distributor of the goods. Such agreements usually refer to specific locations and can therefore not be taken to be an indefinite exclusive agreement. If your exclusive or sole distribution agreement has been breached by the other side or there is dispute over the nature of the agreement, make sure to contact our legal experts for further analysis and advice.

Where parties desire more flexibility in their arrangements, a non-exclusive distribution agreement is a good alternative. Non-exclusive distributorship allows the supplier to both sell to customers and appoint other distributors within the specified territory.

For branded, high-quality products selective distribution agreements is the preferred route of choice. Similar to exclusive distribution agreements these agreements limit the number of authorised distributors. However, the key difference with exclusive distribution agreements is this limitation of the number of authorised dealers is based on factors relating to the nature of the product. The other vital element which differentiates this means of distribution from exclusive distribution is that the restriction on resale refers to sales to non-authorised distributors. Therefore, the buyers are only selected dealers.

Determining the best form of distribution agreement for your company can be determined by careful analysis and due diligence of the potential distributing partners. Our lawyers will carry out such due diligence as well draft the distribution agreement itself.