Commercial Agents & Sole Distributors
Commercial Agents in Denmark
The Danish Commercial Agent Act, no. 272 of May 2nd 1990, is based on the EU-directive dated December 18th 1986 (86/653/EEC). The same legislation, subject to certain modifications, therefore applies in all member states of the EU.
Commercial agents do not enjoy the same level of contractual freedom as exclusive distributors do. According to the Danish Commercial Agent Act a number of agreements cannot be concluded in advance if the agreement leaves the commercial agent worse off than is provided for by law. This for instance concerns the commercial agent’s entitlement to commission and may give rise to instances where what one thinks was agreed does not actually apply. The commercial agent may enjoy a better legal position than what is set forth in the contract.
The Agency Agreement
In Danish law there is an extensive contractual freedom and the main principle is that agreements can be concluded orally as well as in writing; correspondingly they can be concluded implicitly or in consequence of the actions of the parties involved.
According to § 3 of the Danish Commercial Agent Act the commercial agent as well as the principal can demand a written contract. If one of the parties should refuse to enter into a written contract it can, under the circumstances, be considered a breach of contract; however this is hardly of practical relevance. In the initial phase, in which the contract is usually needed, it is rarely a good idea for the future cooperation to invoke remedies for breach.
Who is considered to be a Commercial Agent
In business there is often confusion in determining for example the difference between a commercial agent and an exclusive distributor, and even when there is a written contract it is commonly seen that “commercial agent” is used synonymously with for example an “exclusive distributor” or “intermediary”.
However, the decisive factor is not only which name has been assigned to the parties, but also how the parties actually trade with each other, which customs have developed and how the cooperation is otherwise regulated.
Intermediary is the legal common name for the complete category of businesses or persons who sells products from a producer to customers. The exclusive distributor, the commercial agent, the distributor, the commissionaire etc., are all intermediaries.
In § 2 of the Danish Commercial Agent Act a commercial agent is defined as follows:
“For the purpose of this law a commercial agent is defined as the person, who on behalf of someone else (the principal) has assumed, for remuneration in his own name and at own risk, to sell or purchase goods by obtaining offers (orders) to the principal or by concluding agreements hereof in the principal’s name.”
A commercial agent is therefore self-employed (not a salaried employee) and typically sells the producer’s goods within a certain area. The commercial agent usually meets his customers or for example approaches them at exhibitions and takes orders on the goods of the producer, which are then sent to the producer. The producer is responsible for the rest of the handling of the order and also receives payment for the goods. In Denmark the Commercial Agent Act does not regulate the provision of services; these are for instance also regulated in the German Commercial Agent Act.
The Commercial Agent’s Relation to Competition Law
Commercial agents who merely conclude agreements on behalf of the principal will, as an outset, fall without the scope of competition law. The commercial agent is in this case considered an integrated part of the principal’s sales-unit, and in respect to others, acts as the principal’s entrusted intermediary. The principal therefore continues to be a competitor on the market, who merely uses the agent as the performing link on the market.
Commercial agents, who assume a greater economic risk, may fall within the scope of competition law.
Commercial agents, who operate in Denmark, must be registered in The Central Business Register (CVR), where all corporations (ApS, A/S) or personal liability companies (I/S) are registered. Typically, VAT-registration at the tax authorities is not necessary for the commercial agent, as the producer is the part, who concludes the agreement and receives payment from the customers. The producer collects and settles VAT.
General remarks on the Obligations and Rights in Commercial Agency Contracts
- § 4-5 of the Danish Commercial Agent Act provides the outline of the obligations of the commercial agent and the principal.
The commercial agent must, when carrying out his task, protect the interests of the principal and act loyally and in good faith. The commercial agent must especially 1) make reasonable efforts to obtain orders, 2) notify the principal of obtained orders or concluded agreements and other circumstances known to the agent, or circumstances that should be known to the agent and 3) follow reasonable instructions given by the principal.
The principal must act loyally and in good faith. The principal must, especially,
- provide any necessary equipment or instruction regarding the specific goods to the commercial agent,
- provide the agent with the pieces of information necessary to carry out his task, and
- within a reasonable time-limit, notify the agent on acceptance or rejection of an offer given to him by the agent, which also applies in the case of cancellation of an agreement, mediated by the agent. If the principal anticipates that the commercial transactions will be less favourable than could normally be expected by the commercial agent, the principal must, within a reasonable time, notify the commercial agent hereof.
The rules are broadly formulated, and serve mostly to emphasize the commercial agent’s obligation to protect the interests of the principal, and that he must not arbitrarily ignore these as well as the obligation of the principal to loyally support the commercial agent in his sales efforts.
There is no clear answer on whether the commercial agent can only work for one principal or if he can represent as many principals as he wishes. If the parties wish to prevent possible conflicts from arising, they must ensure that the issue is clarified in a written agreement. If no agreement has been entered the commercial agent will not be considered to act disloyally until he acts in direct competition with the principal.
The Extent of the Work
The commercial agent must protect the interests of the principal and act loyally and in good faith. This does not mean that the commercial agent does not have to act loyally to the customers as well; however protecting the interests of the principal is his main priority.
It is in the nature of the job, that if someone is contracted as a commercial agent, he needs to provide a certain effort to sell the goods of the principal. To avoid disagreement on the level of the required performance it is recommended both for the principal and the commercial agent that the agency agreement contains provisions regarding this matter.
It is important to be aware of the fact that such provisions in the contract may later be used against a party. If the parties have been too optimistic in their assessment of the market, thereby leaving an agreement of a minimum sale impossible to achieve, it can result in the principal obtaining an “easy way out” of the contract, without an actual breach of obligations on the part of the commercial agent.
If the agreement between the commercial agent and the principal contains an exclusive right for the commercial agent to arrange for the sale of the goods concerned, greater requirements to the work effort can be demanded from the commercial agent, as the principal due to the agreement, is barred from selling his product through other channels.
Obligation to Provide Information
Apart from notifying the principal of offers and concluded agreements, the commercial agent has an obligation to inform the principal of other significant circumstances. What defines these circumstances depends on the agreement concluded between the parties and on the customs within the relevant industries.
The principal must notify the commercial agent of the data and information necessary for the commercial agent to perform his task. For example this can be data on general market conditions, specific conditions on sales and procurement of goods, product development, pricing etc. If the principal anticipates that the activity of the commercial transaction will be substantially less extensive than the commercial agent could expect on the basis of the agreement of the parties or the previous level of activity, the principal must, within a reasonable time, notify the commercial agent hereof.
The principal must inform the commercial agent of any acceptance or rejection of the offers procured by the commercial agent. This can be done by sending a copy of the invoice, the order confirmation or similar documentation to the commercial agent. Unless otherwise agreed, notification of the status on procured offers must be given once a month.
Product Distribution and Storage Conditions
The commercial agent is not responsible for product distribution and storage conditions unless this is specifically agreed. Usually, the principal receives orders from the commercial agent and hereafter the principal sends the goods to the customer directly from his own storage.
If a buyer wishes to complain about a product he can do so to the commercial agent. The commercial agent must then disseminate the complaint to the principal. The commercial agent cannot, as an outset, assess the complaint.
Remuneration – commission
If the level of remuneration, to which the commercial agent is entitled, is not agreed upon in advance the commercial agent must receive remuneration according to what is customary for the relevant type of business, on the place of business of the commercial agent. The remuneration of the commercial agent is called commission.
In the agency relationship the remuneration is usually calculated as a percentage of 8-15% of the turnover within the area of the commercial agent.
The commercial agent’s claim for commission is due at the latest if one of the following events has taken place; the customer has paid the purchase price, the product has been delivered or the product should have been delivered according to the agreement. The commission must be paid to the commercial agent, at the latest, the last day of the month after the quarter, in which the entitlement to the commission became due. A later time of payment cannot be agreed upon.
Duration and Termination
If the agency agreement has not been concluded for a specific period of time the commercial agent as well as the principal – in the first year after the conclusion of the agreement – are entitled to terminate the agreement with a notice of 1 month.
The period of notice is hereafter extended with one month for each commenced year of the agency agreement. Unless specifically agreed, the notice period cannot exceed 6 months.
Damages and Compensation for the Loss of Customers (goodwill)
If the commercial agent agreement is terminated early, when the agreement is concluded for a specific amount of time, the exclusive distributor will be entitled to damages of the estimated commission until the time on which the agreement would have ceased, had it been terminated correctly.
Contrary to the exclusive distributor, the commercial agent is, as an outset, entitled to financial compensation at the termination of the agency agreement, if and to the extent that the commercial agent has brought the principal new customers or has significantly increased the volume of business with existing customers.
However it is a prerequisite for such compensation that it is found reasonable under the circumstances, i.e. whether the customers in question will in the future place orders with the principal, so that the commercial agent loses the commission he would otherwise have obtained from these customers.
It is important to note that the entitlement to compensation forfeits if the commercial agent does not inform the principal that he will claim compensation within a year after the termination of the agency agreement.
Our office provides advice on all matters concerning sole distributor and commercial agents, and we consider ourselves to be among the leading specialists in this area.
We have considerable experience of conducting litigation on compensation for loss of goodwill in connection with termination of agency and sole trader contracts.