Sole-distributor agreements are not directly regulated in Danish legislation, and the starting point is therefore that the producer and the exclusive distributor have an extensive contractual freedom to decide the terms of their cooperation. Inspiration can be drawn from the Commercial Agent Act when interpreting the contract; however the Commercial Agent Act does not apply directly. This means, among other things, that compensation cannot be required for loss of clientele (goodwill) when the agreement is terminated. Danish law presumes that the exclusive distributor includes the profit necessary to compensate in case of the termination of the agreement, in his resale price.
The Sole-distributor Agreement
There are no formalities required to execute the agreement. It can be concluded orally, in writing or it can be implied, i.e. on the basis of a longstanding cooperation of the parties. It is the rule rather than the exception that an actual written contract is drafted. Typically there is an initial correspondence that may be useful for the determination of the agreement and the prerequisites hereof later on. Through case law and general contract law, general unwritten legal principles have been developed, which, to a certain extent, and in lack of a written contract, regulate the content of sole-distributor agreements. However, it is the person, who wishes to rely on the existence of an agreement, who has to prove the content. If a secure legal position is desired a written agreement should be concluded.
Who is Considered to be a Sole-distributor
In business there is often confusion as to the definition of an exclusive distributor instead of i.e. a commercial agent, and even when a written contract is concluded it is often seen that “commercial agent” is used synonymously with i.e. “exclusive distributor”. Intermediary is the legal common name for the category of businesses or persons who work with selling products from a producer to customers. The exclusive distributor, the commercial agent, the distributor, the agent etc., are all intermediaries.
In Danish law there is no clear definition on who can be defined as an exclusive distributor, but there are a number of characteristics that define the exclusive distributor:
- the exclusive distributor has been given an exclusive right by the producer to market and sell a product or a group of products within an area, typically a region or a country.
- the exclusive distributor acts on his own behalf and for his own account, which means that it is the exclusive distributor that concludes the agreement directly with the customer, whereas the suppliers of the products in question do not become part of the agreement. It is therefore the exclusive distributor who is responsible for and has an obligation to fulfil the agreement concluded with the customer.
Contrary to the exclusive distributor the distributor has no exclusive right to supply the producer’s product within a certain area. The distributor must accept to compete with other distributors of the same product.
The Exclusive distributor and Competition Law
It is in breach of the Danish Competition Act § 6, if the supplier stipulates mandatory resale prices for the exclusive distributor’s sale of the products, and it can, as the case may be, also be in breach of the prohibition to abuse a dominant position following § 11 of the Danish Competition Act.
Provisions that obligate the exclusive distributor to abstain from competing with the producer after the termination of the contract, are covered by the Danish Competition Act as well as § 38 in the Danish Act of Contracts. Long-term non-competition clauses can hardly be expected to prevail.
If sole-distributor agreements have Community dimension they may also be covered by EU-competition law.
Exclusive distributors, who do business in Denmark, must be registered in The Central Business Register (CVR), where all corporations (ApS, A/S) or partnerships (I/S) are registered. The corporation must also be registered for VAT at the tax authorities.
General Observations on Obligations and Rights in Sole-distributor Agreements
The Sole-distributor Agreement is typically the start of a longstanding business cooperation with the purpose of distributing the producer’s products in the exclusive area of the distributor. This will usually be stated in the contract and it has also resulted in a series of unwritten obligations, which is assumed that the exclusive distributor and the supplier meet.
The key obligations are: The producer’s obligation to provide his products to the exclusive distributor within the exclusive distributor’s area, and the exclusive distributor’s obligation to loyally and professionally sell the producer’s products.
Exclusive distributors are not necessarily obliged to abstain from selling competing products; however the exclusive distributor as well as the supplier is obliged to act in good faith when trading with each other, and keep each other informed concerning matters that are significant for the market, sale and marketing of the products covered by the sole-distributor agreement. The sale of substantial competing products falls within the scope of the obligation to notify the producer and failing to inform the producer hereof may, depending on the circumstances, constitute a substantial breach of contract, giving the producer the right to terminate the agreement.
The supplier cannot be forced to supply the products; however the exclusive distributor is, in the case of repeated breach of the supply obligation, entitled to terminate the contract and seek compensation for his loss, i.e. lost business, founding- and marketing costs etc.
One of the main tasks of the exclusive distributor is commonly to provide customer service, especially within technically complicated industries it will typically be the skills and the product know how of the exclusive distributor, that is essential for the conclusion of the contract in the first place.
The remuneration of the exclusive distributor is the difference between the price, which the exclusive distributor pays to the producer, and the price to which the exclusive distributor can sell the products. Price agreements made between the producer and the exclusive distributor are as an outset in breach of competition law.
Duration and Termination of the Agreement
Sole-distributor agreements can be concluded for a specific period of time or indefinitely. According to case-law, if the agreement is concluded indefinitely termination may be effected with reasonable notice. In longstanding relationships, i.e. 7 years or more a reasonable notice is 6 months. In shorter relationships 3-6 months can be considered.
Damages and Compensation for Loss of Customers (goodwill)
The typical conflict arising between the exclusive distributor and the producer is, ironically, when the exclusive distributor has developed the market to such a level that the producer finds the exclusive distributor redundant, as the customers are now on the market and the demand is stable. The producer will at this point be tempted to terminate the exclusive distributor and take the entire profit for himself. If the exclusive distributor has not protected his network of sub-distributors or customer database the producer’s foundation for doing so will be good.
If the sole-distributor agreement is terminated earlier than allowed in the terms of the contract, even if it is concluded for a certain period of time or it is wrongly terminated, the exclusive distributor will have the right to damages for the loss of his income (margin) until the point in time where the agreement would have ceased, had it been terminated with proper notice. The claim is calculated according to common Danish principles of tort and damages. Consequently an economic documented loss must have been suffered.
The exclusive distributor does not have the right to compensation for the loss of customers (goodwill).
The Commercial Agency Act does not apply. The exclusive distributor must in his pricing be aware that he does not have the right to compensation when the contract is terminated, or ensure that it is agreed, that in case of termination compensation is paid in accordance with the principle of the Commercial Agency Act.
General Observations on the Danish Market and Choice of Sales Organisation
According to the latest study carried out by the World Bank, Denmark is the easiest country within Europe to establish and operate a corporation in. Furthermore Denmark has one of the most solid economies of the world. This manifests, inter alia, in Denmark’s qualification as an AAA country at the rating bureaus:
“The Danish economy has many structural strengths,”Maria Malas-Mroueh, an analyst from the Fitch rating agency, told Politiken newspaper. “It’s versatile, personal income is high and there are robust economic, political and social institutions. A long tradition of sensible economic policies is reflected in a relatively low level of structural unemployment and a stable currency.” Ivan Morozov from Standard & Poor’s added that Denmark’s prized triple-A rating is a result of the government’s “continued commitment to fiscal discipline and growth orientated macroeconomic policy”. (September 24th, 2012, Copenhagen Post)
In spite of the above the Danish market is a very small market compared to the rest of the markets within the EU*:
- In the 3. quarter of 2012 Denmark’s GDP was EURO 61.340 mill.
- For matters of comparison Germany’s GDP was EURO 664.880 mill.
- The average GDP in the EU 27 in the 3. quarter of 2012 was EURO 325.574 mill.
Undoubtedly, a fact that means that many foreign corporations, when deciding in which markets to invest overlook or disregard the Danish market entirely.
However, Denmark is a very strong and wealthy market, if the absolute size of the market is disregarded.
- In 2011 the Danish GDP per capita was EURO 31.500
- For matters of comparison, Germany’s GDP per capita was EURO 30.300
- The average GDP in the EU 27 was EURO 25.000
* All numbers, Eurostat
The price level is the highest in the EU and the competition is the lowest! Thus there are great opportunities to sell products on the Danish market gaining a profit that is not possible within many other markets around the world.
Regardless of the opportunity of a great remuneration in the Danish market, establishing a corporation is obviously not attractive if the costs of establishment exceed profitability to such a degree that it would require several years of operation to cover the costs.
The costs can swiftly become significant, if establishment includes rent or purchase of real estate, hiring employees and generation of an independent sales-unit, creation of a subsidiary etc.
Especially on the Danish market it is appropriate to employ external assistance, i.e. commercial agents or exclusive distributors. Denmark is a country with small and medium-sized corporations that are eager to act as a spearheads on the market when new products are introduced.
The commission to commercial agents will normally be 10-15% of the revenue. The exclusive distributors set the resale price themselves and pay the suppliers the purchase price set by the supplier. The exclusive distributor is not entitled to payment from the supplier.