Characteristics of a commercial agent/sales representative
Sections 84 to 92c of the German Commercial Code (HGB-Handelsgesetzbuch) regulate the rights and obligations of the commercial agent and the company represented. According to section 84 HGB, a commercial agent is the person entitled in representing an independent trader, mediating with other entrepreneurs or finalizing businesses on its behalf.
It is considered self-employed, someone able to freely determine his own activities and working ours, carrying his own entrepreneurial risks (thus not an “employee”). So-called trade representatives exists in all conceivable industries and sectors, regardless of the type of legal form (for instance also as OHG, KG or GmbH). The actual features of the activity and the commercial agent´s contracts are decisive for the existence of a commercial representative business. Following, the characteristics that should be fulfilled in order to be considered a commercial representative:
- Permanent contractual relationships with the represented company;
- Mediation/ Conclusion of transactions and customer care in the name and on behalf of the represented company;
- Self-employed (own business, entrepreneurial risks, trade taxation etc.);
- Free organization of activities and free determination of working hours (freedom from instructions);
- Payment of remuneration without deduction of taxes and social security contributions.
Definition of similar contractual relationships
Sales representative differs from others employed in the business market by acting in behalf of an external name and for a third party.
Travelling salesmen law
In contrast to the trade representative, travelling salesmen can not freely determine their working hours, travel itinerary, visits to customers and similar activities. He is an employee, and as employee he shall follow directions in behalf of the company he represents. As far as concerned the remuneration of a travelling salesman, he shall receive a fixed basic salary, generally supplemented by a success commission.
Commission Agent law
The commission agent differs from the commercial agent as he sells goods in his own name but for external parties (such us magazine sellers). The special provisions of section 383 et seq. HGB apply to this figure.
Authorized distributors and separate traders
Authorized distributors and separate traders typically buy goods on the basis of a permanent contract with manufacturer/supplier that he sells in his own name and on his own account. Individual clauses in distributors ’contracts are similar to those on a commercial agent contracts. If the trader has similar rights and obligations of an authorized distributor, and he is integrated into the sales organization of the manufacturer or supplier, commercial agents’ rights may be partly applied.
Between franchisee and franchisor there is a permanent contractual relationship with extensive mutual rights and obligations. As a rule, the franchisor provides the franchisee with a business concept for the distribution of goods or services, with a business name, and often offers other requirements for the Cooperate Identity for which the franchisee must pay a franchising fee. However, the franchisee is acting on its own name and on its own account, in contrast with a commercial agent.
Commercial Brokers law
A commercial broker shall enter into business on a non-commercial basis. He generally has not a permanent contractual relationship with a client, and is therefore also not obliged to constant customer support and business procuring. The proprietary regulations of Section 93 et seq. HGB apply to commercial brokers.
Commercial agent as tradesman
A commercial agent must register his trade in the municipality where its business is based. If his company does not require an established commercial enterprise, the commercial agent is considered a trader without being a businessman. An example of a correct business ´organization can be found on the site “IHK Information- Pflichtangaben auf Geschäftsbriefen”.
Special forms of a commercial agent
Following, various forms of sale representative´s contracts:
Side-line commercial agent:
According to Section 92b HGB (German Commercial Code), the latter is not primarily active as a commercial agent, but is also extended to other areas. Students, housewives or pensioners are often employed as commercial agents in side-line. Critical criteria for the establishment of a side-line are regularly the main activity of the commercial agent and this make the gross wage income. If this is partly derived from the activity as a commercial agent, and mainly from other occupations, a classification as a side-line commercial agent comes into question.
There are some legal features for the commercial agent as secondary profession. The most important differences are the shorter notice period of one month for the end of a calendar month, the possibility of agreeing a different termination period for both parties, and the possibility of contractually excluding the right to advance payment.
Moreover, the commercial agent in side-line is not entitled to any compensation claim.
Subagents and sale representatives:
In order to carry out his duties, a commercial agent may enter into a multi-level representation relationship with the company. A distinction must be drawn between a truthful sub-agency and a false sub-agency.
In the case of a truthful sub-agency, the sub-representative shall be considered the subcontractor of the main representatives. There is only a contractual relationship between the subcontractor and the principal representatives. The principal representative is thus obliged to pay the commissioner a commission. The main representatives shall receive commissions from the representing company, with the consequence of the compensation claim pursuant to §89b HGB, even if the sub-delegate has mediated or executed the transaction. The termination of the contractual relationship between the represented company and the principal agent does not automatically terminate the contractual relationship between the subagent and the principal representatives. A particular act of termination is necessary in order to release those compensatory claims of the subagent against the main representative.
On the other hand, in the case of a false subcontracting agent, there is a contractual relationship between the represented company and the subagent. In addition, a subordinate relationship between the principal representative and the subordinate is agreed. The subagent´s commission will be deducted from the main representatives.
With regard to compensation claims, special factors must be taken into account, depending on the remuneration of the main representatives, if the principal representative is involved in the successful mediation of the spurious subagent. Practically, this is done by means of the right of the main representative to retain a certain part as a separate remuneration (so-called “Provisionsspitze” in German) from the subordinate agent commission. Alternatively, under certain conditions, a shareholding may also be affected by the remuneration of the main representatives, if this participating, advertising activity of the main agent and the subagent´s activities are attributed to him.
Insurance and Building´s association representatives:
Insurance´s representatives are agents responsible for negotiating or concluding insurance contracts. They must fulfil all the fundamental requirements of a sales representative. A building association representative is a trade representative who arranges or finalizes buildings´ contracts. For the latter, the same legal regulations and peculiarities of the insurance representatives are applied. Section 92 of the German Commercial Code (HGB) provides certain provisions that are deviating from the Law on Sales Representative: the insurance and building´s society representatives are only entitled to commission for transaction that are attributable to their activity. This means that there is no district or customer protection´s commission as well as no commission for subsequent orders and reorders. In addition, the commission claim does not incur until the customer has paid the premium.
Trade representative contracts can be verbally agreed. It is always recommendable to conclude a contract in written form in order to avoid unpleasant misunderstanding or future misleading evidences. The creation of a contract is always difficult: contract´s samples can be helpful for the contractual parties during the actual designation of a contract.
Different kinds of commercial representation:
Within the framework of the trade representation activity, there are several legal kinds of commercial agents, all following particular rights and obligations.
Area Sales Representatives
An area sales representative is a technically a trade agent that has been assigned to a specific area or customer´s group. This figure shall also be entitled to commissions, if transactions with people of his area or his group of customers are successfully concluded.
An independent sales representative takes care of the most important customers’ protection. He shall make sure that the represented entrepreneur does not become active itself (direct business) or through other delegated representatives in an allocated areas. In accordance with the sole power to act in his district, he is entitled to both omission and the commission of any third party or entrepreneur who may have become active. However, in order to hold a position as the sole representative, a special provision is required in the contract between the commercial agent and the represented company. The allocation of a particular district is usually not enough. In order to determine the actual contractual relationship, the actual circumstances between the parties are relevant.
Multi-company or commercial trade representatives:
The multi-company representative is a commercial agent for several companies with different products. As a rule, they can not be trading products of competing companies, since otherwise the multi-company representative would be in breach of his obligation to protect the interests of the company (exception: explicit approval of the represented company). A sole representative may also be a multi-company representative.
The sole sale intermediary represents only one company, either on the basis of a contractual agreement or because it is not possible for it to represent other companies. In this case, the represented company usually has such a large number of products that the sales representative has no time to be active for other companies. In a contractual agreement, it should be noted that the commercial agent may only act for the contractual company, for the duration of the contractual relationship.
There is the legal possibility for the Federal Ministry of Justice to establish a lower limit for the entrepreneur´s contractual obligations to the social and economic security of the private representative, but so far, no use has been made.
Commission entitlement for a commercial agent:
The commercial agent is entitled to pay a commission for the concluded transactions. The amount of the commission (percentage, calculation basis) depends on the area of interest. Basically, the development of the commission entitlement also presupposes the execution of the transaction, by the delivery of goods or an advance payment. In addition, the claim may be omitted again, if the client is not going to pay. The entrepreneur however, has to charge his payment claim against the customer (exception: insolvency of the customer).
The amount of the commission is regularly determined as remuneration. The following calculation principles must be taken into account when determining the commission:
- Discount deductions for the payment of the invoice do not reduce the commission of the commercial agent ( Section 87 b Paragraph 2 HGB).
- Ancillary expenses such as freight, packaging, customs duties, taxes, insurance costs, etc. must not be deducted from the invoice amount (Section 87 b Paragraph 2 HGB). Ancillary costs may only be deducted during the calculation of the provisions, if this is contractually agreed with the commercial agent or these are invoiced separately according to the regulations with the customer.
- Discounts are reduced by provisions if they were announced to the customer from the start. Subsequent discounts towards the customers normally do not reduce the provisions.
- VAT is not to be taken into account in the calculation of the commission despite the fact that the invoice is separately designated. Unless otherwise agreed, the commission is therefore also to be paid from the value of the VAT.
The commission has to be paid monthly. The billing period can be extended to a maximum of three months. In order to verify the commission statement, the commercial agent can request information about the circumstances that are important for the commission claim. In special circumstances, he can also claim access to books and accounts.
Obligation of the commercial agents
The commercial agent shall endeavour to mediate or conclude transactions, thereby taking advantage of the entrepreneur´s interests. This includes advertising of new customers as well as sales maintenance or increase with already existing customers. He shall inform his contractual partner of all important matters such as negotiations and settlements.
Perception of interests
The commercial agent must consider interests of the company in his/her activities. This includes in particular customer supports after the conclusion of the contract. However, it may also be associated to the liquidity of customers.
The commercial agent shall immediately notify the company in case of any business dealings or transactions, breaches of contracts or other important circumstances. The scope and frequency of the reporting obligation depends on the individual need of the company and can be specified in the contract, in a monthly report, for instance.
Duty of confidentiality
The commercial agent may not exploit or divulge any business secrets of the company during or after the termination of the commercial agent contract. This also means that he is not allowed to use or distribute the customer ´s list.
Prohibition on competition
The commercial agent is also subjected to a ban on competition, even if it is not been agreed during the contractual relationship. This restraint on competition is fundamental to legally protect the interests of the parties. Generally, the prohibition on competition is expressly regulated in written contracts.
Obligation of the Company
The commercial agent must be informed by the trader of any important development in order to comply with his interests. These include for instance, terms of delivery, prices, changes in the product´s range or modification of individual products, operational discontinuation and sale of a business. Furthermore, the employer shall notify the commercial agent, possible approval or rejection of transactions, or the non-execution of a concluded transaction. It should be carefully considered that the entrepreneur is free to decide whether to conclude a mediated transaction or not.
Transfer of documents
Nonetheless, the commercial agent shall provide the necessary documentation for the performance of his duties. This obligation covers only those documents which are required in order to have a successful promotion of the products, such as price lists, samples, designs, advertising material, terms of business, special computer programs etc. Exempted are those objects (suitcases, computers, office supplies) considered only general auxiliary tools for the commercial business of the sale agent.
The entrepreneur has to pay an agreed remuneration to the representative. Typically, the commercial agent receives also a commission/premium. Generally, the entrepreneur settles the commission claim monthly, or at the latest, by the end of the following month. The accounting period can be extended by an agreement of a maximum of 3 months.
Prohibition of competition: restriction of competition during the term of the contract
In order to preserve a sense of interest, the commercial agent shall respect a ban on competition. Even without an expressed regulation, the sale agent can not promote or distribute competing products. However, the prohibition of competition can be more restricted in written contracts. Such clauses should have their admissibility legally checked.
Prohibition of competition after the end of the contract
Basically, there is a free competition after the termination of the commercial agreement. A “post-contractual restraint” needs to be previously agreed; it is not a result of the statutory obligation of a commercial agent. In Section 90a HGB (German Commercial Code), the preconditions of the non-competition clause are standardized by the contracting parties:
- Agreement before the end of the contract;
- A written form of the competition agreement as well as a certificate with the complete content of the agreement;
- Agreement for a period of two years from the termination of the commercial contract;
- Restriction only applies to the district or customer group assigned to the sales representative;
- Extension only to products (services, insurance contracts, etc.) that refers to commercial agent for the mediation or business initiation;
- Appropriate compensation, whereby the adequacy is on one hand based on the disadvantages of the commercial agent arising from the competition offense. On the other hand, the previous remuneration has to be taken into account.
The agreement of a post-contractual competition ´s understanding should be well calculated in each individual case from an entrepreneurial point of view.
Termination of the sale representatives‘ agreement
Both parties may terminate the sale´s representatives´ agreement, in compliance with the statutory time´s limitation. The time limit is one month in the first year, two months in the second year, three months in the third and fourth year, six months from the fifth year, unless a different agreement has been reached. Longer periods may be agreed in the contract. In case of a justified termination for important reasons, the limit of time does not count anymore.
If a fixed-term contract is concluded, this automatically terminates with a deadline, obviously this happen only if the contractual parties have not agreed a clause on an automatic renewal. However, the contract can always be terminated by mutual agreement. In any case, the conclusion of the contract should be presented in written form, as a matter of evidential basis.