Avoid unexpected surprises when selling through European distributors and agents

Appointing a distributor or an agent is a logical step for US companies expanding their business to the EU. Even though it is not a requirement to have a local representative, distributors and agents are often useful because they have local knowledge of the relevant markets and are also used to local business practices. Besides, appointing an agent or distributor will in most cases be less expensive than hiring an employee.

Although having a local agent or distributor has many advantages, it is also important to be aware of the European legal landscape as these relationships have led to many unexpected surprises for US companies.

The main difference between a distributor and an agent is that a distributor promotes and sells your products directly to end customers on his own account while agents are appointed to negotiate and/or conclude contracts on your behalf. From a legal perspective it is important to be aware that agents are protected under the European Agency Directive (EC/86/653) and are entitled to a compensation or an indemnity payment upon the termination of their contract by the principal. The compensation and indemnity payments are severance payments to which the agent is entitled if the agent brought you new customers or has significantly increased your business with existing customers.

There is no comparable European directive applicable to distributor agreements and in most European member states distribution agreements are governed by the general principles of contract law. To make it even more complicated: the laws on distribution agreements differ from country to country, distributors can also be protected under national laws and in some countries distributors are protected in a way similar to agents.

Some issues that US companies often encounter in practice are the following:

1) There is no written agreement in place. Although, it is not legally required to have a written agreement in place as distribution and agency agreements can also be concluded orally, we do recommend to contract on the basis of a written agreement. For example: if the agent’s commission has not been agreed in writing, the agent will be entitled to a commission that is customary in the industry.

2) The title of the agreement is not decisive. Even if parties decided to call their agreement a “distribution agreement”, it could still qualify as an agency agreement (subject to the Agency Directive) if the distributor is acting as an agent in practice. In other words: the actual role of your representative will be important in assessing which regime applies.

3) Avoiding payment of a compensation by appointing a distributor. Many US businesses decide to operate through a distribution network to avoid the compensation of agents upon termination of their. However, be aware: some EU member states (for example Spain and Germany) have compensation rights for distributors on termination that are similar to those set out in the Directive in relation to agents.

4) Choice for US law will not help. Be aware: parties cannot ‘contract out’ of the Agency Directive and in most cases (super) mandatory law applies. Even if an agency agreement would be governed by Californian law and stipulates that an agent is not entitled to a compensation, the Agency Directive will still protect the European agent upon termination. As a result, the agent would still be entitled to a compensation or an indemnity even though the agreement stipulates otherwise.

5) Distribution and competition laws. Make sure that you are not in breach of EU competition law which prohibits anti-competitive activity and abuse of a dominant market position. Be especially careful with drafting provisions on exclusivity and restrictions because these provisions can often be caught by European competition law which may lead to substantial fines and distribution agreements being null and void.

To avoid these issues, please do contact our experts if you are drafting or terminating your European agency or distribution agreements.