Distribution Agreements in Germany

Lack of specific statutory provisions

Although the German Civil Code (Bürgerliches Gesetzbuch, BGB) and German Commercial Code (Handelsgesetzbuch, HGB) regulate several kinds of commercial agreements (such as agency agreements, lease agreements, purchase agreements), distribution agreements are not subject to any particular statutory provisions in Germany. According to German law, a distribution agreement may broadly be described as a framework agreement by which a distributor undertakes, as an independent entrepreneur, to sell goods and render services. The distinctive element of a distribution agreement is that the distributor agrees to purchase goods, at a discounted rate, from its principal/manufacturer, and then sells the goods under the distributor’s own name and its own account on a regular basis to its customers, usually in a defined territory, gaining a profit from the margin between purchase and resale price.
As the distribution agreement is not explicitly governed by statutory law, it is sometimes difficult to determine which specific legal provisions are applicable. Therefore, this determination must be carried out on a case-to-case basis. In principle, the general rules prescribed by the German Civil Code with respect to contracts (especially contracts for the performance of a continuing obligation) apply. The given circumstances may also lead to the analogous application of several statutory provisions governing agency agreements (Sections 84 et seq. HGB). Generally, agency law applies by analogy if the distributor is integrated into the principal’s sales organization, thus covering, with respect to its contractual duties, a position within the sales force of the principal similar to that of a commercial agent. A crucial aspect to consider is whether the distributor is obliged - as the agent is- (by explicit contractual provisions or factually) to forward customer data to the principal during, or upon termination, of the commercial relationship. For further details on the ‘integration into the principal’s sales organization’ please refer to the below explanations under Chapter 6.

Taking into account the principles set out above, in order to avoid unpleasant surprises and disadvantages it is critical that detailed and accurate distribution agreements are drafted.

Competition Law

Distribution agreements have to conform to Competition Law. Section 101 of the Treaty on the Functioning of the European Union (TFEU), and the Commission Regulation No 330/2010 (Vertical Block Exemption Regulation) are the main legislative provisions of European Competition Policy.
Section 1 of the German Act against Restraints on Competition (Gesetz gegen Wettbewerbsbeschränkungen, GWB) is identical to Section 101 (1) TFEU, and Section 2 (2) GWB is identical to Section 101 (3) TFEU. The Vertical Block Exemption Regulation is integrated into German Law by Section 2 (2) GWB.

Generally, under Section 101 (1) TFEU, all agreements between companies that may affect trade between countries within the European Economic Area (EEA), and which have as their object or effect the restriction, the prevention or distortion of competition within the EEA, are prohibited. This rule applies to horizontal agreements (agreements between competitors), as well as vertical agreements (agreements between enterprises acting at different levels of the distribution or production chain, for example a distribution agreement).

However, the prohibition under Section 101 (1) TFEU only applies in case of an appreciable restriction in competition or trade. Pursuant to the European Commission`s Notice on Agreements of Minor Importance of 25 June 2014 (De Minimis Notice), vertical agreements where neither party holds a market share of more than 15% (market share threshold) do not constitute an appreciable restriction, provided that the prevention, restriction or distortion of competition within the internal market is not the object of the agreement .

The prohibition contained in Section 101 (1) TFEU may be exempted under Block Exemption Regulations issued by the EU Commission. The most important Block Exemption Regulations is the Vertical Block Exemption Regulation (VBER), which provides a safe harbour for most vertical agreements (like distribution agreements) between parties with a market share not exceeding 30% (Section 3 VBER). However, the exemption of prohibition does not apply to non-compete obligations according to Section 5 (1) VBER, or to a vertical agreement as a whole, if such vertical agreement contains a so-called hard-core restriction according to Section 4 VBER.

Section 4 VBER provides five hard-core restrictions:

• the restriction of the buyer's ability to determine its sales price;
• the restriction of the territory into which, or of the customers to whom, a buyer party to the agreement may sell the contract goods or services;
• the restriction of active or passive sales to end users by members of a selective distribution system operating at the retail level of trade;
• the restriction of cross-supplies between distributors within a selective distribution system; and
• the restriction, agreed between a supplier of components and a buyer who incorporates those components, of the supplier’s ability to sell the components as spare parts to end-users, repairers, or other service providers, not entrusted by the buyer with the repair or servicing of its goods.

It is, however, important to note, that the Vertical Block Exemption Regulation carves out several restrictions as exemptions to the hard-core restrictions.

Parties to agreements in violation of the prohibition contained in Section 101 (1) TFEU risk severe fines – of up to 10% of each of the parties’ group annual worldwide turnover in the preceding business year – issued by the authorities (the European Commission and the German Federal Cartel Office). However, Competition Law can also be enforced by private action aiming to rectify the harm caused by the infringement and, where there is a risk of recurrence, to desist from further infringements, remove the infringement of antitrust law or achieve damages (Sections 33 et seq. GWB).

From a civil law perspective, agreements that violate the prohibition under Section 101 (1) TFEU are, according to Section 134 BGB, null and void. This nullity applies to the contractual provisions that are incompatible with the prohibition. The effect of such nullity on the other provisions of the agreement depends on whether the parties would have rejected a partially null transaction as a whole, or would have allowed the rest to stand (Section 139 BGB). If the contract - as usual - provides for a severability clause, the German Federal Court of Justice has held that the party that considers the contract as a whole to be invalid has a duty to present and provide evidence.

Formal requirements

Distribution agreements are not subject to any formal requirements under German law. A distribution agreement may be concluded orally or in writing and, in the absence of an explicit oral or written agreement, may even be implied from the parties’ conduct. For evidentiary purposes however, it is of course recommended to set up and sign a written distribution agreement.

Registration requirements

There is no obligation or option to register a distribution agreement with an official authority. However, the distributor is generally obligated to notify its business to the competent local authorities in Germany.

A distributor may be a natural or a legal person. Registration with the local Commercial Register is mandatory if the distributor’s business meets certain volume thresholds, or the form of legal entity chosen by the distributor requires registration under statutory law. This is, for example, the case if the distributor is doing business through a German limited liability company (GmbH).

Contractual conditions of particular importance

Some contractual conditions of particular importance of a distribution agreement – besides those discussed in detail in chapters 3 et seq. below – are:

• non-compete obligations.  A non-compete obligation is defined by Section 1 (d) VBER as any direct or indirect obligation, that causes the buyer (distributor) to not manufacture, purchase, sell, or resell goods or services that compete with the contract goods or services, and also puts an obligation on the buyer (distributor) to source 80% or more of its total purchases of the goods or services from the supplier (principal).
  Pursuant to Section 5 (1) VBER, the following non-compete obligations qualify as excluded restrictions, and are therefore prohibited:
• any direct or indirect non-compete obligation for a duration exceeding five years, or an indefinite term. A non-compete obligation that is tacitly renewable beyond a period of five years is deemed to be for an indefinite duration;
• any direct or indirect non-compete obligation after the termination of the agreement; and
• any direct or indirect obligation causing the members of a selective distribution system to not sell the brands of particular competing suppliers.

Therefore, if one party’s market share exceeds 15%, but none exceeds 30%, a non-compete obligation during the contractual term is valid if limited to a maximum of five years. Where products are resold by the buyer (distributor) on a premises owned by the supplier or leased by the supplier (principal) from third parties not connected with the buyer (distributor), the maximum five-year period shall, according to Section 5 (2) VBER, not apply. In this case, the non-compete obligation can last for the period of occupancy of the premises by the buyer (distributor).

After termination of the agreement, a non-compete obligation where one party’s market share exceeds 15%, but none exceeds 30%, is valid according to Section 5 (3) VBER if it is (i) limited to the premises and land from which the buyer (distributor) has operated during the contract period, (ii) indispensable to protect the know-how of the supplier (principal) transferred to the buyer (distributor), and (iii) limited to a period of one year after termination of the agreement, necessary to protect know-how transferred to the distributor, and if limited to competing products, the concrete distributor’s premises, and a one-year term.

• return of products. Upon termination of the agreement, a distributor may request that the principal buy back the contract products it has in stock. In order to avoid discussions in this regard, the distribution agreement should address this aspect specifically, clearly specifying whether the principal is obligated to repurchase some or all of the products from the distributor, and whether deductions are made from the original purchase price.
• recall of products.   There is no explicit statutory law with respect to the recall of (probably) defective products. Therefore, the distribution agreement should clearly define the circumstances where a recall of products is required, and which party is responsible for the recall and its costs.
• resale prices.   The restriction of the distributor's ability to determine its sale price is a hard-core restriction according to Section 4 (a) Verticals Regulation and therefore prohibited under Section 101 (1) TFEU.
  Recommending a resale price, or setting a maximum resale price is exempt from such prohibition if the parties’ market shares do not exceed 30 per cent, and only if it does not result in a minimum or fixed sale price because of pressure or incentives from one party.
• change of control. A transfer of ownership in a distributor’s company cannot be hindered by any provision included in the distribution agreement. However, a distributor can agree not to transfer ownership, and, in case of breach, the principal shall be entitled to damages. In addition, the parties can choose to agree on a right of termination in case of change of control.
  

The parties are generally free to agree on an exclusive or a non-exclusive distribution relationship. In order to avoid any doubts or misunderstandings, it is highly recommended that the scope of the distributor’s rights of distribution be explicitly set out in detail in the distribution agreement.

In case a distributor is appointed as an exclusive distributor, the agreement should specify whether such an exclusive appointment prevents the principal from selling the contract products within the contract territory through another distributor or agent, or whether the principal is also limited from selling the contract products directly to customers in the territory.

As explained in Chapter 1.2 above, a restriction of the territory in which the distributor may sell the contract goods or services, and a restriction of the customers to whom the distributor may sell the contract goods or services, is considered a hard-core restriction under Section 4 VBER, and is therefore prohibited.

However, according to Section 4 VBER the following restrictions are allowed-

• the restriction of active sales into the exclusive territory or to an exclusive customer group reserved for the supplier, or allocated by the supplier to another buyer, where such a restriction does not limit sales by the customers of the buyer. However, sales in response to unsolicited requests from individual customers, including general advertising that reaches customers in other exclusive territories or customer groups leading to unsolicited customer orders (passive sales), must always remain possible;
• the restriction of sales to end users by a buyer operating at the wholesale level of trade;
• the restriction of sales by the members of a selective distribution system to unauthorised distributors within the territory that is reserved by the supplier to operate that system; and
• the restriction of the buyer's ability to sell components, supplied for the purposes of incorporation, to customers who would use them to manufacture the same type of goods as those produced by the supplier.

Furthermore, it must be stated that online sale of goods (or services) is generally considered a passive sale if the distributor is not actively marketing its online activity outside its exclusive territory. The principal may restrict e-commerce sales by the distributor – observing, however, the principle that a total ban on the online sale of goods (or services) is not allowed. Restrictions below a total ban are commonplace, especially the prohibition of sales via third parties’ online platforms (especially ‘marketplaces’) in case of selective distribution, and a ban on pure online players by requiring the operation of brick and mortar shops, or setting quality criteria for internet sales (in particular regarding the domain name, the online store’s appearance, the language, the services provided). The compliance to the law of these specific prohibitions shall be evaluated on a case-to-case basis.

Generally, the parties are free to agree upon a clause requiring the distributor to purchase a certain amount of specific contract products from the principal, or to realise a certain turnover with these products during a specific period of time. Such minimum turnover clause is the typical contractual counterbalance for granting exclusivity to the distributor in a given territory and/or for a broad list of products.

The parties should in any case also agree on the sanctions that a principal is entitled to in the event of a breach of the minimum turnover / minimum purchase clause, for example:

• to terminate the distribution agreement
• to cancel the exclusivity granted
• to the distributor
• to reduce the extent of the territory assigned to the distributor
• to reduce the list of products assigned to the distributor
• to claim damages.

A flexibility of the clause and/or sanctions is possible by introducing the following provisions:

• determination of minimum turnover / minimum purchase requires consent of both parties, and in case no consent is reached, the target is established by a third party.
• minimum turnover / minimum purchase shall apply only after a certain period of time has lapsed.
• an increase in the yearly minimum turnover / minimum purchase shall be determined in advance, and apply automatically at the agreed time.
• achieving the target, the distributor shall receive a certain compensation.
• sanctions shall be applied only in case the breach is caused by gross negligence or intent of the distributor.
• the distributor is allowed to present clarifications in order to justify the breach.

Distribution agreements may be concluded for a fixed or an indefinite period of time. There are differences with regard to the ordinary termination of the agreement. Under certain conditions which are explained in detail in chapter 6, a distributor may be entitled to a clientele indemnity upon ordinary termination of the distribution agreement.

Ordinary termination of fixed-term agreements

Unless otherwise explicitly agreed upon, no ordinary termination is allowed for fixed-term agreements. A distribution agreement for a fixed period of time terminates upon lapse of the time period for which it is concluded, without the need for the parties to provide any notices. The continuation of the agreement can, however, be agreed upon, also retrospectively. Depending on the content of the agreement, a distribution agreement is converted into a contractual relationship for an indefinite period, or a further contract for a definite period of time is concluded. In the latter case, it should be regulated whether the original fixed-term contract is extended by the new duration of the fixed-term contract or whether a second, independent distribution agreement follows. The distributor has no right to have a fixed-term contract extended.

Ordinary termination of agreements for an indefinite period of time

Most distribution agreements for an indefinite period of time contain provisions on the period of notice that applies to termination. While there is no mandatory minimum period prescribed by law, agreements of an indefinite duration with no notice period agreed upon may only be terminated with a reasonable notice period. The courts take into account the statutory law on commercial agents and, therefore, apply a notice period of one month during the first contract year, two months during the second contract year, three months during the third to the fifth contract year, and six months as of the end of the sixth contract year. Unless otherwise agreed by the parties, the end of the notice period must coincide with the end of a calendar month. In some cases, longer notice periods may (exceptionally) be required if, depending on the circumstances of the case, the distributor's dependence on the products of the principal requires increased protection. For example, in the motor vehicle sector, case law predominantly assumes notice periods of one year before the end of the agreement. This should enable the distributor to find another source of income, or to make other arrangements without rushing.

In order to avoid disputes, the parties should contractually determine the notice period.

Unless otherwise agreed by the parties, giving notice of termination is not subject to any formal requirement. Thus, a distribution agreement may be terminated by a formal termination letter, an email as well as oral notice. However, for evidentiary purposes, it is advisable to give a notice of termination in writing, and to have proof of the receipt of the termination notice.

Extraordinary termination of distribution agreements

Both fixed-term and open-ended agreements can be terminated extraordinarily by either party for good cause with immediate effect, thus without observing any notice period. Generally, pursuant to Section 314 BGB, good cause is assumed where, taking into account all the circumstances of the specific case and weighing the interests of both parties, the terminating party cannot reasonably be expected to continue the contractual relationship until the agreed end or until the expiry of a notice period. Relevant criteria for the unreasonableness are, among others, type, severity, and duration of the breach of contract, previous history, pecuniary consequences for the terminated party, also in comparison to ordinary termination, the type and duration of the previous cooperation, and the previous performance of the terminated party. There is a good cause, in favour of the principal if, for example, the distributor intentionally or with gross negligence repeatedly fails to carry out its contractual obligations; or in favour of the distributor if, for instance, the principal repeatedly refuses, arbitrarily and without any reason, to accept orders of the distributor.

For the avoidance of doubt, the parties should contractually indicate the circumstances that qualify for a good cause.

The right to terminate a distribution agreement for good cause cannot be excluded by the parties in the agreement.

According to Section 89b HGB, upon termination of the contractual relationship, a commercial agent has a so-called claim for (clientele) indemnity that cannot be excluded by contract. The background to this is that even after termination of a commercial agency contract, the principal regularly benefits from the customer contacts made in the form of follow-up business, but no longer has to pay commission to the commercial agent. In return, the commercial agent is entitled to compensation from the principal, up to a maximum of an average annual commission for the last five years of the contract. Obviously, a distributor is not a commercial agent since he concludes transactions on his own account and in his own name, and bears the corresponding commercial risk. Unlike a commercial agent, he does not receive any commission, but a distributor discount. The customers recruited are first and foremost the distributor’s own clientele that he himself can continue to make sales with after termination of the distribution agreement. However, under certain circumstances a clientele indemnity can be demanded analogously under Section 89b HGB upon termination of the contract.

Conditions for goodwill indemnity

According to the established case law, the distributor is entitled to a claim for (clientele) indemnity from the principal by analogous application of Section 89b HGB, if

• the legal relationship between the distributor and the principal is such that it is not limited to a mere seller-buyer relationship, but the distributor is integrated into the principal's sales organization in a way that he has to perform tasks comparable to those of a commercial agent to a considerable extent (first condition); and
• the distributor is contractually obliged to provide the principal with his customer data, so that the principal can immediately and easily take advantage of the benefits of the customer base upon termination of the contract (second condition).

Both preconditions must be fulfilled cumulatively.

Integration into principal’s sales organization

The distributor is integrated into the sales organization of the principal like a commercial agent if he is required, by the contractual obligations, to act like a commercial agent in the distribution of the principal’s products, and is also subject to other obligations and commitments typical of a commercial agent. This is to be assessed by an overall picture of the distributor’s obligations.
The following characteristics speak in favour of integrating the distributor into the sales organization of the principal – granting of an exclusive distribution right, non-competition clause of the appointed distributor, allocation of a specific market responsibility area, duty to promote sales, minimum purchase obligations of the distributor, targeted sales promotion according to the guidelines of the principal, provision of demonstration products, training of the sales staff, duty to maintain a stock of goods and spare parts, duty to provide customer services besides after sales services for products sold by himself, reporting and notification obligations of the distributor, etc. In particular, the agreement on the control and monitoring powers in favour of the principal is a decisive criterion for the assumption of the distributor’s integration into the principal’s sales organization.

Distributor’s obligation to provide principal with his customer data

The claim for compensation presupposes that the distributor is contractually obliged to provide the principal with his customer data so the latter can immediately and easily make use of the advantages of the customer base upon termination of the agreement. A contractual obligation to transfer the customer data is also necessary if the customer data is in fact known to the principal anyway, if there is a de facto continuity of the customer base after the end of the distribution agreement, or if the customer data is known to the industry. The obligation to provide the customer data does not have to be explicitly stipulated in the agreement, but it must at least result indirectly from the contractual agreements.
With regard to the precondition to transfer the customer data, the General Data Protection Regulation (EU) 2016/679 (GDPR) has to be taken into consideration. The second analogous requirement for the indemnity claim must be understood in light of the GDPR. Therefore, it requires that the distributor take necessary steps (under data protection law) to ensure that customer data is immediately usable for the principal. Therefore, a distributor is obliged to obtain declarations of consent from customers for data processing. When obtaining a declaration of consent, customers have to be informed of the intended purpose of the data processing, the transfer of customer data to the principal, and the use of personal data by the principal.

Application of Section 89b HGB by analogy

If the two aforementioned preconditions are met, Section 89b HGB is applied by analogy. Therefore, a claim for goodwill indemnity further requires that (i) the distribution agreement has been terminated, (ii) the principal derives substantial benefits from the customer base solicited, or substantially intensified, by the distributor even after termination of the distribution agreement, and (iii) the payment of an indemnity is equitable, taking into account all the circumstances of the case, especially the loss in revenue incurred by the distributor due to the termination of the agreement.
The distributor is not entitled to an indemnity claim if the distribution agreement has been terminated for a reason attributable to the distributor. This means that no indemnity is to be paid if the principal has terminated the distribution agreement because of a breach of contractual obligation(s) by the distributor. Furthermore, no indemnity is due if the distributor has terminated the distribution agreement, unless the principal has given reason for such a termination.
The distributor must assert the indemnity claim under Section 89b para. 4 sentence 2 HGB within a period of one year from the termination of the contractual relationship.

Calculation of goodwill indemnity claim

• Adjustments of the discount (the so-called “core discount”).
  The provision of Section 89b HGB is geared towards commissions as remuneration of the commercial agent, and not to distributor discounts received by the distributor. For the calculation of the distributor’s indemnity claim, therefore, the distributor discount must be based on the part of the discount that the distributor has received for services that are typically also provided by a commercial agent. In order to be comparable with the commercial agent’s commission, it is necessary to deduct those parts of the discount that the distributor receives on account of his different position than that of the commercial agent for services that the commercial agent does not normally have to provide (the so-called “core discount”). These include, for example, risk of sale, risk of storage, credit and price fluctuation risk, advertising costs, costs for the employment of sales persons, warranties, costs for inventory management, and delivery.
• Prognosis on distributor’s losses.
  The starting point for the loss prognosis is the core discount that the distributor has received in the last 12 months immediately preceding the end of the agreement – or, if the duration of the agreement is shorter, that very period – from business with new customers and significantly intensified existing customers (in terms of additional sales), provided these customers are regular customers.
  The duration of the forecast period to be used as the basis for the calculation of loss depends on the estimable period of time, after the termination of the agreement, for which follow-up sales can still be expected from the regular customers newly acquired by the distributor.
  Since not all regular customers will place follow-up orders, a churn rate must be taken into account, which must be determined on the basis of customer movements in the past. For the first year, the churn rate has to be deducted once. For the second year, twice the churn rate is to be deducted from the base amount of the last contract year. For the third year, three times the churn rate has to be deducted, and so on. If one then adds up the losses of the distributor for the individual years, one gets the total loss.
  This amount must still be reduced, since the distributor receives a one-off payment which would have been spread over a longer period if the contractual relationship had continued. Finally, adjustments may need to be made for reasons of equity.
• Maximum amount of indemnity.
  The maximum amount of indemnity in accordance with Section 89b para. 2 HGB is the average annual remuneration from the core discount during the last five years (or the shorter contract term). This limitation applies in practice if the distributor has acquired relatively few new customers during the contract term, or has intensified sales with relatively few existing customers.
• How to exclude or avoid a goodwill indemnity?
  A prudent approach must be taken when agreeing to the exclusion of the right to goodwill indemnity: If the distributor operates outside the European Economic Area (EEA), the claim for goodwill indemnity can be excluded at any time, in particular already in the distribution agreement itself. If the distributor operates in the EEA, German law applies. and the two above conditions are met, the contract parties cannot agree on an exclusion of distributor’s claim for goodwill indemnity before termination. However, the parties can agree on an exclusion of the transfer of the customer data, or an obligation of the principal to block, stop using and, if necessary, delete such customer data at termination, or choose another law than German law.
  

No investment protection for the distributor

In principle, there is no investment protection for the distributor under German law. The investments of the distributor can only be taken into account within the framework of a general claim for damages if the principal has failed to perform a contractual obligation or ancillary obligations. However, the exercise of ordinary termination before the investments are amortized does not constitute a breach of duty. This economic risk is typically borne by the distributor. Otherwise, the investment risk would be transferred to the principal, which would be an impermissible restriction on his freedom of disposition. The loss of profit that the distributor could have made with the investments until the end of the amortization period, if the principal had not terminated the contract, is not covered by the investment compensation claim. The loss of profit is an entrepreneurial risk for which the distributor is solely responsible.

Specific law for contracts with standard terms and conditions

It is important to note that the German Civil Code provides specific law for contracts in which standard terms and conditions are used. German jurisdiction interprets the notion ‘standard terms and conditions’ widely. It is sufficient that the term is designed for multiple use or at least looks as if it is designed for multiple use. Section 307 et seq. BGB specifies the principle of good faith and protects the other party in general terms and conditions against an unreasonable disadvantage. The German concept of the review of standard terms and conditions goes beyond what is established under the European Directive 93/13/EEC on unfair terms in consumer contracts. It also applies to a certain extent in B2B cases, and is therefore quite strict. If a contractual clause is considered to be an unreasonable disadvantage to the other party, such clause in a contract is void and replaced by statutory law. The law on general terms and conditions is mandatory and cannot be waived by the parties.

Warranty and guarantee claims

In distribution agreements, the principal/manufacturer regularly obliges the distributor to carry out warranty and guarantee work for the customers. Guarantee work is carried out on the basis of a guarantee given directly by the principal/manufacturer. If the respective contracts do not provide otherwise, the claims under the guarantee contract and warranty claims under the purchase contract stand side by side, giving a customer the choice of making a claim under the manufacturer's guarantee or against the distributor as his contractual partner under warranty. As the distributor will always act on the basis of a defect not caused by him but by the manufacturer, distribution agreements regularly contain a claim for reimbursement of expenses in the form of a so-called flat-rate reimbursement.

Statute of Limitations

With respect to the parties’ claims arising out of the distribution agreement, the general rules on limitation shall apply. Thus, claims become time-barred after a period of three years, beginning at the end of the year in which the party became entitled to bring the claim, and was aware or was not aware in a grossly negligent manner of the circumstances entitling it to such claim. This period of limitation can be suspended, for example, by taking action against the other party prior to the end of the aforementioned period.

The law applicable to an international distribution agreement is determined in accordance with German conflict of laws rules (including Regulation (EC) No 593/2008 on the law applicable to contractual obligations (Rome I)). Such rules provide that the parties are free to choose the law governing the agreement. In the context of agreements between merchants, such clauses governing the choice of applicable law are generally valid. However, the conflict-of-law public policy exception in section 9 of the Rome I Regulation may overrule the law chosen by the parties, if the foreign law or a specific provision of that foreign law is contrary to fundamental principles of the national law. Moreover, section 3 para. 3 of the Rome I Regulation can limit the party’s choice-of-law, as it stipulates that the parties are not allowed to deviate from mandatory provisions of German law if there is no sufficient connection to the respective foreign law.
In the absence of an explicit or implied choice of law, the agreement is governed by the law of the country with which it is most closely connected. It is presumed that an agreement is most closely connected with the country where the party carries out the characteristic performance of the agreement; in the present case, the distributor is domiciled or, in case of a corporate entity, where it has its registered office at the time the agreement is signed. Therefore, if the distributor is domiciled or registered in Germany (which is also the distribution territory), German law is applicable.

The parties are free to establish the place of jurisdiction for all disputes arising out of or in connection with the distribution agreement. The validity of an agreement on the place of jurisdiction must be appraised in accordance with lex fori (= law of the place where the lawsuit takes place). In Germany, this is primarily the Recast Brussels Regulation (EU) No. 1215/2012 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters, and the revised Lugano Convention of 2007. For other international cases, agreements on jurisdiction are possible according to sections 38 and 40 of the German Civil Procedure Act (Zivilprozessordnung, ZPO). In principle, such agreements are limited to businesses where both parties are merchants (= Kaufmann) within the meaning of section 1 of the HGB, as will regularly be the case for distribution agreements. Agreements on jurisdiction may be concluded explicitly or tacitly; there are no requirements as to the form (see section 38 para. 1 ZPO). Different from the Recast Brussels Regulation, agreements according to section 38 of the ZPO are generally not to be considered as to exclusive jurisdiction. In fact, whether or not the parties intended to agree that the chosen court shall have exclusive jurisdiction will be determined by means of interpretation.

If the parties have not agreed upon the place of jurisdiction, the framework for deciding which jurisdiction applies depends on whether the defendant is domiciled in an EU Member State, irrespective of its nationality. If the defendant is domiciled in an EU Member State, the general rule of Regulation (EU) No. 1215/2012 is that the defendant shall be sued in the courts of the EU Member State where it is domiciled. Alternatively, a person domiciled in a Member State may be sued in another Member State in matters relating to a contract, in the courts of the place of performance. With regard to disputes between a distributor and a principal, the place of performance is the place where the distributor carries out its activity under the distribution agreement. Which local court is competent is established by the German Civil Procedure Act (ZPO). Generally, according to Section 17 para. 1 ZPO, it is where the distributor has its registered seat.

The German law on arbitration is contained in sections 1025 et seq. ZPO. It is an almost literal adaptation of the UNCITRAL Model Law. Almost all commercial disputes, including antitrust law, competition law, and IP law, can be referred to arbitration (section 1030 para. 1 ZPO). The only disputes that the law on arbitration explicitly declares non-arbitrable are disputes relating to the existence of a lease of residential accommodation (section 1030 para. 2 ZPO).

In order to be valid, an arbitration agreement must state that all or specific disputes between the parties, in relation to a ‘specific legal relationship’, shall be subject to arbitration. It is recommended, even if not required by law, to agree on the number of arbitrators, the place and language of arbitration, as well as the applicable substantive law. In B2B cases, arbitration agreements can be concluded as a separate agreement, or be included as a clause in the main contract. In any event, the arbitration agreement constitutes a separate agreement, with its validity and enforceability determined independently of the main contract.