An overseas company wishing to sell its products in the Danish market may consider appointing a Danish based commercial agent with specific market sector knowledge to negotiate orders on its behalf. Alternatively, the foreign company may seek to sell its products directly to a distributor with knowledge of its domestic marketplace. Such options offer the overseas company a cost-efficient way to test whether its products are suitable for the local market place, before establishing a more permanent presence in the form of, say, a Danish subsidiary company or branch office.
This guide briefly highlights some of the differences between the two types of legal relationships and examines some of the factors to consider when managing an agent or distributor in Denmark.
1.1 Some differences
In agency relationships the parties are normally referred to as the principal and the agent. In distributorships the parties are typically referred to as the manufacturer and the distributor.
In order to retain more control over the sales process the principal may consider appointing a commercial agent to promote and conclude sales/purchases in the principal’s own name and ensure that payment is made directly to the principal. A commercial agency could for example be set up as a del credere agency where the agent guarantees the customer’s payment to the principal, usually in return for an enhanced rate of commission.
A distributor on the other hand will market the manufacturer’s products independently and also deal with most practical issues in respect of the business. Distributorships may therefore be a particularly appropriate route to the market for a business producing specialist products or requiring after-sales support in the local territory.
The commercial agency agreement is structured in such a way that the principal pays the agent commission linked to the sales concluded; whereas a distributor will get his remuneration from the profit margin he makes on his own sales.
2.1 Definition of agent
The 1986 EU Directive on the Co-ordination of the Member States legislation on Independent Commercial Agents has been implemented in Denmark by the Commercial Agents and Sales Representatives Act No. 272 on 2 May 1990 (the “Act”). The Act regulates the internal relationship between the principal and the agent and contains some mandatory provisions which cannot be derogated from to the detriment of the agent, see 1.7 below.
In the Act, a commercial agent is defined as an agent who undertakes for the principal to independently and permanently engage in the sale or purchase of goods on behalf of the principal by procuring offers to the principal, and/or by concluding agreements in the principal’s name.
The Act does not regulate the external legal relationship between the commercial agent and third parties. The question of authority to bind the principal is regulated elsewhere, namely in the Contracts Act. In brief, where the agent has exceeded its authority, the principal will usually be bound unless the third party had reason to believe that the agent exceeded its authority. The principal may avoid being bound by an agreement entered into by the agent, if he/she informs the third party immediately after having obtained knowledge of such an agreement.
2.2 The agency contract
There is no legal requirement that a written contract is put in place. However, according to the Act, each party has the right to request that the terms of the agency contract are set out in writing. In any event, it is advisable to protect your interests by agreeing and setting out the terms and conditions for the engagement in an agency contract.
When drafting an agency contract, the following points should be addressed as a minimum:
- Details of the parties;
- description of territory, product and exclusivity;
- the legal position of the commercial agent and the extent of his authority;
- sales activities of the commercial agent, acceptance and conclusion of orders/sales and complaints handling;
- stock held by the agent;
- rate of commission, how the commission is calculated and when it becomes due;
- should minimum sales targets be inserted? If so, what are the consequences, if the minimum is not met?;
- restraint of trade clauses;
- duty to supply information;
- terms and conditions of business;
- duration of the contract and period of notice;
- marketing efforts;
- further education/training;
- choice of law; and
- court jurisdiction and/or arbitration and/or alternative dispute resolution (such as mediation).
Some of the above-mentioned points are dealt with in more detail below.
2.3 The right to commission
A detailed regulation of the agent’s right to commission is contained in sections 8-15 of the Act.
Under sections 9 and 10 the commercial agent is entitled to commission on the completion of commercial transactions concluded during the period of the agency contract:
(1) Where they are the result of the agent’s actions; or concluded with a third party whom he has previously acquired as a customer for transactions of the same kind; and
(2) where – if the agent has been given exclusivity to a certain geographical area or a certain group of customers – a transaction is concluded (not as a result of the agent’s direct efforts) with a customer belonging to such area/group.
In some circumstances the agent will also be entitled to commission on transactions concluded after termination of the agency contract. This would be the case if
(1) The transaction is mainly attributable to the agent’s efforts during the period covered by the agency contract; or
(2) where an order from a third party reached the principal before the agency contract was terminated.
The agent’s claim for commission will cease where a contract – for which the agent is otherwise entitled to receive commission – is not performed by the principal, provided the principal can show that the failure to perform the contract is due to circumstances beyond the control of the principal, cf. section 14(1). Most instances of non-performance will naturally be due to the particular third party’s failure to perform his obligations under the contract and thus – under the wording in section 14(1) – the risk for the third party’s insolvency will typically be on the commercial agent.
In the absence of any agreement on commission the commercial agent shall be entitled to the remuneration which is customary in that business sector. If there is no such customary practice, the agent shall be entitled to a reasonable remuneration taking into account all aspects involved in the business of the agent.
2.4 Termination of the agency relationship
The Act further protects commercial agents by providing rules on the provision of termination notices (sections 22-23) and additional rules for compensation payable to the agent upon the termination of the contract (sections 25-29), see 2.5 below.
If the agency agreement has been agreed for an indefinite period, the agent shall be entitled to a termination notice corresponding to one month for each year the contract has been in force. The maximum termination period is six months unless a longer termination period has been specifically agreed between the parties. It is possible to limit the termination notice to a maximum of three months’ notice even if the contract has been in force for more than three years.
If the parties agree to a longer period of notice, the notice to be given by the principal must not be shorter than that to be provided by the commercial agent.
Unless otherwise agreed, a notice of termination will expire at the end of a calendar month.
If on the other hand the agency contract is for a fixed period, the contract will expire automatically on the agreed date without any action required by either party. However, should the parties continue their relationship after the end of the agreed contract term; the whole agreement shall be deemed to be for an unlimited period of time. When determining the termination period, the whole contract period shall be included in the calculation.
Danish law also allows for immediate termination of an agency contract; i.e. without observing the period of notice, should one of the parties be in material breach of its obligations under the contract.
2.5 Compensation to the agent
When a principal decides to sell its products in any new territory via a commercial agent, the introduction of the new product often require considerable efforts by the agent in the start-up phase. In the beginning these will normally only lead to a modest amount of orders, and consequently the agent’s commission will be limited. The commercial agent is therefore at risk of being out of pocket if the agency contract, for whatever reason, is terminated early.
The commercial agent is entitled to claim compensation from the principal after termination of the contract, if:
- The commercial agent has solicited new customers for the principal or has extended the existing business relationship in a way that the principal stands to gain considerable advantages after the termination of the contract; and
- payment of compensation is deemed reasonable taking all circumstances into account.
The claim for compensation is normally up to a maximum of one year’s average commission, based on the agent’s commission over the last five years. If fewer than five years, the average commission will be based on the period in question.
However, a commercial agent will not be entitled to compensation if:
- The principal has terminated the contractual relationship because of faults attributable to the commercial agent which would justify immediate termination of the agency contract; or
- the commercial agent has terminated the contractual relationship (unless such termination is justified by circumstances attributable to the principal), or when age or poor health of the commercial agent prevents him from carrying out his duties; or
- the commercial agent, with the principal’s consent, assigns his rights and duties under the contract to a third party.
The commercial agent will lose its entitlement to claim compensation if he/she fails to notify the principal of his/her intention to pursue a claim for compensation within one year after the termination of the agency.
2.6 Restraint of trade clauses
The inclusion of restrictive covenants in an agency contract is recommended. It is possible to agree a restraint of trade clause covering a period of maximum 2 years from the expiry date of the agency contract without paying specific compensation to the agent. A restraint of trade clause is only valid if and to the extent that:
- It is in writing;
- it relates to the geographical area or the customer group and the geographical area entrusted to the commercial agent in the agency contract; and
- it concerns the products covered by the agency contract.
The restraint of trade clause may be void if it goes beyond the limits necessary to protect the interests of the principal or if it unnecessarily limits the agent’s possibilities to earn a living, cf. sections 30(1) and 30(2) of the Act.
Section 30(3) provides that a restraint of trade clause may be set aside by the courts under the conditions mentioned in section 38 of the Contracts Act.
2.7 Mandatory rules
The Act contains a number of mandatory rules which cannot be derogated from to the detriment of the agent. It is not possible to enter into a choice of law clause which precludes the commercial agent from the protection under the Act. If such clause is entered into, all the mandatory provisions of the Act shall remain applicable.
Under section 1(1) of the Act, the Act may be deviated from by agreement unless otherwise stated in the Act. Apart from the rules in Part III, governing employed commercial sales staff, the rules of the Act cannot be derogated from by custom or usage.
2.8 Choice of law
Private international law sets out which country’s laws shall govern an international legal relationship. The main rule under private international law is that the commercial agent’s place of business determines which country’s legal rules must be applied. Sections 1(2) and (3) of the Act contain provisions regulating the – comparatively limited – extent to which it is possible to deviate from the rules in sections 22 and 25-27 regarding the termination of the agency contract via a choice of law agreement.
There is no Danish legislation directly governing the relationship between a manufacturer and a distributor so the general rule of freedom of contract applies. Nor is a distributor defined in statute. It is, however, commonly accepted that a distributor trades in its own name and on its own account as opposed to an agent.
For these reasons it is important to negotiate and enter into a written contract between the parties in order to create certainty.
3.2 The distributorship
Distribution agreements may be structured as an exclusive, sole or non-exclusive distributorship.
Under an exclusive distributorship the manufacturer appoints only that particular distributor in a given territory and the manufacturer would normally refrain from selling directly into the territory. This allows the distributor to prevent both the manufacturer and other distributors from actively operating in his “territory”. However, if a so-called absolute territorial protection is built into the agreement; i.e. protection from parallel import, the agreement may be contrary to EU competition law.
Under a sole distribution agreement, the manufacturer commits to not appointing any other distributors in the territory. However, the manufacturer often retains a right to sell directly to customers in the territory. If such direct sales do take place the manufacturer is obliged to account for any profits relating to these sales to the sole distributor.
A distributor bears all risks associated with its sales, including non-payment by a customer. The distributor is normally under an obligation to maintain and insure warehouse facilities at its own costs. The distributor will be obliged to keep the manufacturer’s goods separate from other goods in the warehouse and to maintain up to date records in relation to the goods, payments and shipping etc.
Critically, a manufacturer cannot set minimum prices for the re-sale of the products by the distributor in Denmark. Such conduct would be regarded as price-fixing and anti-competitive. It renders the company and any relevant directors liable to fines and any such requirement is void. Such prohibition is a stark contrast to agency arrangements, where the principal has full control over pricing (subject to the usual market forces). A manufacturer can, however, advertise a recommended re-sale price provided he makes it clear that this is non-binding.
A manufacturer can, however, prohibit a distributor contractually from re-selling at prices in excess of a given level. Such maximum prices are permitted and not considered anti-competitive, as the law regards them as protecting the interests of the consumer.
3.3 The distributorship contract
When drafting a contract for a distributorship it is important that the terms are not identical to the terms of an agency agreement as similar wording could lead to the contract being interpreted as a commercial agency agreement and consequently liable to protection under the mandatory rules in the Act.
It is common practice to impose obligations on the distributor in respect of marketing activities to be undertaken, minimum sales, after-sales support and training of staff. The distributor will usually employ its own staff.
The distributor’s ability to act independently, the calculation of prices, marketing measures and the registration of trademarks are some of many aspects to be considered. It is strongly recommended that manufacturers take steps to register and protect intellectual property rights such as trademarks and patents, which should then be carefully licensed for use by the distributor during the lifetime of the agreement and brought to an end upon termination. This should be tackled as part of an overall brand strategy in appropriate cases, taking into account tax, corporate governance and group structures.
3.4 Notice periods
Notice periods may be stipulated freely.
If no notice period has been stipulated both parties have the right to a “reasonable” period of notice. Pursuant to Danish law, a reasonable notice is typically between 3 to 6 months, depending on the duration of the contractual relationship.
In case of material breach of contract by one of the parties, the contractual relationship may be terminated immediately without notice.
3.5 Compensation to the distributor
The rules of the Act governing agency are generally not used analogously on distributors. The Danish courts have, however, been asked to determine whether a distributor would be entitled to compensation in connection with the termination of contract; only in rare circumstances have the courts found in favour of the distributor. In some cases, the distributor has succeeded, but until now this has only been the case when the manufacturer has terminated the contract without proper notice.
Compensation may also be awarded in cases where the manufacturer has encouraged the distributor to invest in the sale of the products and then terminate the contract.