May Foreign Distributors claim a Compensation for Termination of their Agreement?

Under German law, authorized dealers (often also referred to as distributors) have a mandatory right to claim compensation upon termination of a distribution agreement if they ‘are integrated into the sales organization of the manufacturer’. If customer data are transferred, this right is mandatory and cannot be excluded. This also applies if the authorized dealer works abroad and if the parties have agreed to the application of German law.

Background

The German Federal Court of Justice (Bundesgerichtshof – “BGH”) recently decided in a ruling on the following case: The plaintiff was a Swedish company. It represented a German company as an authorized dealer in Sweden and other countries, but not in Germany. It transferred customer data to the German company and fulfilled tasks similar to those of a commercial agent (public relations, sales promotion, business calls, etc.). The authorized dealership agreement stipulated the applicability of German law. It was also agreed that upon termination of the agreement, no indemnities or compensation could be claimed. After the agreement was cancelled by the German manufacturer, the plaintiff submitted a claim for compensation in analogy to Section 89b of the German Commercial Code (Handelsgesetzbuch – “HGB”).

The court of first instance dismissed the case on the grounds that the right to claim compensation is only mandatory for commercial agents or for authorized dealers acting in Germany. The contractual exclusion of this claim was found to be legal.

The judgment of the BGH dated 25/02/2016, case reference: VII ZR 102/15

The BGH disagreed. Even if a contractual exclusion is considered feasible in the legal literature, the BGH found this unapplicable in this case. According to the court, Section 92c HGB regulates that, for commercial agents only, compensation cannot be contractually excluded in advance for work performed within the EU and EEA. For decades, case law has applied the regulation of Section 89b HGB analogously to authorized dealers who perform tasks as a commercial agent and who transfer customer data to the manufacturer. This analogous application also extends to Section 92c HGB. Ultimately, the risk is the same for an authorized dealer as for a commercial agent irrespective of whether he works in Germany or in another EU or EEA country.

Comment

The ruling of the BGH is well-founded and comprehensible. The right of authorized dealers to claim compensation after termination of their agreement is a long-standing problem in legal practice because many national laws provide for a mandatory compensation (in any case, under certain circumstances). If the parties do not choose any applicable law, the law applies for the land in which the dealer is acting. In Germany, the decisive factor for a right to claim compensation is whether customer data are transferred. If this is not the case and no obligation exists thereto, the right to claim compensation can be excluded by individual agreement under German law.

Otherwise, it is recommendable in cross-border authorized dealership agreements to choose a law that does not recognize any right to compensation. That would even have been possible under Swedish law in the present case. For authorized dealers acting abroad, an assessment should always be made of which further risks exist under the national laws. Some countries allow the authorized dealer to claim compensation for his investments; others countries restrict the rights of the manufacturer to terminate the dealership agreements, especially in the case of exclusive dealerships. In particular in countries which are economically important for the manufacturer, such a legal assessment should be made, considering the manufacturers place themselves at the authorized dealer’s mercy ‘for better or for worse’.