How to create the distribution structure at the German market – legal advises for Byelorussian companies from Specialist Attorney in International Commercial Law  Dr. Fabian Breckheimer.

Every foreign supplier who wants to enter the German market to sell its products is faced with the same question: What is the best way to distribute my products in Germany? This article briefly outlines which distribution structures are available for foreign suppliers in Germany and further shows the relevance of a choice of the applicable law and the jurisdiction in distribution agreements and which regulations must be duly considered when supplying products to consumers.

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Distribution structures

Suppliers wishing to sell their products in Germany can choose from a wide range of distribution structures.

As a direct selling method the supplier can certainly use its in-house sale force which allows direct influence on its own employees and an easy margin calculation, but will generally entail considerable labor costs including social security. It also requires a large management commitment to successfully maintain and steer an in-house sales team.

Therefore, numerous suppliers chose to opt for indirect selling methods, i.e. to entrust their sales activities to independent self-employed commercial agents. A commercial agent is self-employed and acts on behalf of the company (usually named the “principal”) by negotiating and soliciting orders in the name and for the account of the principal. Subsequently, the principal sells products and/or services directly to the respective customer. Under this scenario, the principal still bears the distribution risk. On the other hand, it still is in control of the margins. In contrast to employees who need to be payed constantly, the commercial agent receives a success-based commission for every contract procured by it that is successfully concluded and performed by the principal. Agency contracts are governed by German statutory provisions which contain a variety of regulations protecting the commercial agent’s interests. Only within narrow boundaries the parties can deviate from these statutory provisions. Foreign suppliers thus need expert legal advice when concluding agency agreements with German agents.

Apart from that, a foreign supplier can use a German distributor to sell its products. Distributors buy and resell the products on their own account and in their own name. The principal is thus not involved in the resale of the products. Distributors are self-employed and conduct their business as independent importers and resellers, thus bearing the distribution risk. In return, they profit from the margin between the purchase and the resale price they can achieve on the market. Distributors are obliged vis-à-vis the principal to actively distribute and market the principal’s products and to safeguard the principal’s interests. Due to the fact that German law does not expressly regulate the concept of distributorship, parties are well advised to obtain legal advice when drafting a distribution agreement.

Moreover, the commission agent is also a typically used distribution structure in Germany. Commission agents are midway between commercial agents and distributors. The commission agent acts like a commercial agent in respect of the relationship with the supplier but acts in his own name in dealings with third parties with whom direct contractual relations are made. Subsequently the commission agent is immutably the only contracting party in the external relationship while the supplier remains mostly unknown. Usually, a commission agent will have the principal’s products in a consignment stock.

Commission agents are paid a commission by the supplier for each successful sales transaction.

Another conceivable distribution structure is franchising, i.e. a sales and distribution system by means of which goods, services or even technologies are marketed. This system is based on the assignment of licenses of intellectual property rights from the supplier (named the franchisor) to the so-called franchisee for using and distributing the products on its own behalf. The franchisee obtains the right to run a business according to the specifications and corporate design of the franchisor and uses its know-how, economic and technical methods and the business system. In return, the franchisee pays royalties to the franchisor. Franchise contracts are not explicitly regulated by German law and are usually quite complex, e.g. containing elements of licensing, purchase and sale.

Choice of the applicable law for contracts with German parties

With regard to the above depicted distribution structures it is important to know if and how a foreign supplier can determine the applicable law for the respective agreement that it wishes to conclude with a German counterpart.

In principle, the parties of a distribution agreement are free to choose the law that is to apply to their contract. However, mandatory provisions of the local law cannot be avoided by choosing a different law.

Such mandatory provisions are, for example, provisions of German agency law.
Thus, the right to goodwill compensation of a commercial agent operating in the European Union cannot be contractually excluded even if the parties have chosen a foreign law.

Apart from a wisely made choice of the applicable law, the foreign supplier is well advised to determine which dispute resolution method shall apply if there is a conflict with its German counterpart. The foreign supplier can chose among mediation, out-of-court negotiation, arbitration or litigation.

If German state courts shall have jurisdiction over a dispute, foreign suppliers can expect fair treatment in German courts. After all, the German legal system is renowned world-wide for its high standards of integrity and efficiency. Still, arbitration is also good and efficient alternative for disputes between parties from different countries.

B2C business and consumer protection law

In terms of B2C transactions, any foreign supplier must be aware of the high level of consumer protection in Germany (and in the EU).

If a consumer is the final costumer of the distribution structure, applicable consumer protection laws must be observed by the supplier and by its local distributor.
Inter alia, the consumer has a two-year warranty that the product is free from defects at the passing of risk. If a defect should occur, the consumer has the right to demand subsequent performance, which means either remedy of the defect or delivery of a product free of defects. Subordinated to this, the buyer can demand a price reduction or withdrawal from the purchase contract regardless of any fault of the seller or claim damages, provided that the seller has acted with fault.

These consumer protection rights cannot be contractually excluded by the supplier or circumvented by other contractual arrangements.

Under certain circumstances, a consumer cannot only hold the local German distributor liable but also take legal action against the foreign supplier and/or manufacturer.

Dr. Fabian Breckheimer, Attorney-at-law (Germany) / Specialist Attorney in International Commercial Law Tradeo LLP

Before selling products to consumers in Germany, any foreign supplier should consult a specialized lawyer in order to minimize its risks.

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