Goodwill Payment Claims and the Termination of Sales/Distribution Agreements in Germany

In light of this decision, a quick review of goodwill payment claims following the termination of distribution agreements would appear called for. Indeed, based on his years of experience practicing law in Germany, Jonathan Branch at KSB INTAX lists post-termination goodwill indemnity payments as one issue that repeatedly comes up between non-German companies and their sales agents/distributors in Germany. This is especially true where the manufacturer is originally from a non-EU country.

Checklist – Goodwill Claims upon Termination:

Whether or not a post-termination indemnity/compensation is due at the end of a sales/distribution relationship depends on a number of factors. These include:(i) the nature of the relationship between the manufacturer and its partner (for example - commercial/sales agent, distributor, commission agent, etc.) and - depending on the nature of the relationship - the degree of integration of the partner in the manufacturer’s organization;

(ii) whether or not new customers were acquired by the partner or business with existing customers expanded;

(iii) whether or not the manufacturer continues to enjoy the benefit of the business relationships listed above (the goodwill) after the termination of the relationship with the partner; and(iv) the circumstances of the termination itself.

How High is the Claim?

Where the relevant conditions are met, a post-termination indemnity payment is required in Germany under statutory law and/or case law. Determining the amount of the claim can be complicated. To at least provide some orientation, the statutory provisions for sales/commercial agents (sec. 89b of the German Commercial Code) cap the amount of this particular claim at the average annual commission payment over the past five years of the agent’s activity.

Recommendations for Best Practices:

The parties should be aware that these claims cannot be waived prior to the actual end of the agreement in question. However, the conditions themselves can and should be reviewed when drafting the agreement. At the latest, it should be clarified before termination if a payment is due. Otherwise, the parties involve risk damaging the brand, and could potentially disrupt product distribution during the transfer of existing business following notice of termination.

On the principle that an ounce of prevention is worth a pound of cure, please feel free to contact us should you have any questions about this important aspect of doing business in the EU/Germany.