Edited by Jürgen Basedow, Giesela Rühl, Franco Ferrari and Pedro de Miguel Asensio
Chapter C.19: Commercial agency, franchise and distribution contracts
I. Concepts and commercial background
The three types of contract which form the subject of this entry have two things in common. From an economic perspective all three are related to the distribution of goods and services. And from a legal viewpoint all three are framework contracts of a relational type and a certain duration which have to be distinguished from single transactions. A third feature that is sometimes related to such contracts concerns the allegedly inferior bargaining power of the distributor as compared with the supplier; while this feature is true in many cases it is not in all: commercial agents and franchisees may be large corporations with bargaining power superior to that of the supplier.
The concept of a distribution contract (concession de vente, Vertragshändlervertrag) is the widest of the three notions. It encompasses any continuous relationship between a supplier of goods and services and a dealer promising to offer, and promote the distribution of the supplier’s goods and services. Few countries have enacted legislation on distribution contracts; →Belgium is one of them. The two other concepts identify specific forms of distribution contracts characterized by diverse criteria. All three types pose numerous legal problems relating to competition law, tax law, contract law, labour law, and private international law. In this entry only issues of private international law will be discussed; they require, however, a brief look at some aspects of substantive contract law.
1. Commercial agents
The characteristic feature of commercial agents is their acting, not on their own behalf, but on behalf of the supplier, the principal. In EU Directive 86/653 (Council Directive (86/653/EEC) of 18 December 1986 on the coordination of the laws of the Member States relating to self-employed commercial agents  OJ L 382/17) a commercial agent is defined as a ‘self-employed intermediary who has continuing authority to negotiate the sale or the purchase of goods on behalf of another person, hereinafter called the “principal”, or to negotiate and conclude such transactions on behalf of and in the name of that principal’ (art 1(2)). In some countries, such as Belgium and Germany, the concept is wider and refers to transactions in general, thereby including the distribution of services and also the purchase of goods and services.
Commercial agents are not employees, but self-employed. Contrary to workers, they are free essentially to determine their own working hours and work design; the instructions they receive from the principal must be sufficiently flexible to allow the agent to act autonomously. Commercial agents may be endowed with the p. 392authority to bind the principal by concluding contracts with other persons on his or her behalf; for the law applicable to such third-party effects see →agency. Where the principal has not bestowed such authority on the agent, the latter’s activity is more limited and exclusively consists of the initiation and negotiation of contracts which are concluded between the principal and the third party directly. The present entry is confined to the contractual relation between agent and principal.
Comparative law literature indicates that this wording has garnered ample support; see, for example, the similar wording of art IV.E.-4:101 DCFR (Christian von Bar and Eric Clive (eds), Principles, Definitions and Model Rules of European Private Law: Draft Common Frame of Reference (DCFR) – Full Edition, vol 3 (Sellier ELP 2009) art IV.E.-4:101, notes 6–8).
franchise means the rights granted by a party (the franchisor) authorising and requiring another party (the franchisee), in exchange for direct or indirect financial compensation, to engage in the business of selling goods or services on its own behalf under a system designated by the franchisor which includes know-how and assistance, prescribes in substantial part the manner in which the franchised business is to be operated, includes significant and continuing operational control by the franchisor, and is substantially associated with a trademark, service mark, trade name or logotype designated by the franchisor.
While this definition excludes franchisees acting – like commercial agents – on behalf of the franchisor, such a limitation is not contained in all relevant national rules of law, eg it is not contained in the Federal Trade Commission Franchise Rule 16 CodeFedReg § 436.1(h) in the →USA. The other elements – the design of the trading system or network by the franchisor, his or her operational control, the association of the franchisee’s activities with the franchisor’s trademark, and the payment of a fee by the franchisee – are more essential anyway.
Alongside this contractual model of ‘subordinate’ franchising is another one based on a community of interest which can be likened to a partnership merging the various franchisees and the franchisor in a common structure of ‘coordinate’ franchising (Michael Martinek, Franchising (R von Decker’s Verlag, G Schenck 1987) 256 ff and 378 ff). For example, the law of Minnesota provides for alternative types of franchising; one of them, instead of referring to a unilateral →prescription of sales procedures and the operational control by the franchisor, requires the ‘franchisor and franchisee [to] have a community of interest in the marketing of goods or services at wholesale, retail, by lease, agreement, or otherwise’ (Minn Stat. § 80C.01, subd (4)(a)(ii); Aldo Frignani and Marco Torsello, Il contratto internazionale – Diritto comparato e prassi commerciale (2nd edn, CEDAM 2010) 668). Depending on the intensity of partnership-like structures, such ‘coordinate’ franchising may be governed by the law applicable to →companies. This entry only deals with the contractual type of ‘subordinate’ franchising.
3. Commercial background
Commercial agency contracts and franchise agreements relate to different, although sometimes overlapping segments of the market for distributive trade services. Where a supplier, through its goods, trademark, and trading system, is already well-known in any given market for goods or services, a dealer interested in benefiting from the trade in those goods and services may have to pay a fee for the mere concession to be part of the system (hence the French expression concession de vente). In the absence of such notoriety, of a familiar trademark, uniform trading system and network, a supplier desirous of entering a new market will be in a much weaker position vis-à-vis the dealer who may refuse to bear the commercial risk of marketing the supplier’s goods and services on his or her own behalf, and will require remuneration (commission) for his or her assistance.
The different commercial background has contributed to the widespread choice by strong suppliers of franchising models with regards to the marketing of consumer goods and services, whereas small and medium enterprises targeting markets without strong brands avail themselves of the services of local commercial agents when entering a foreign market. p. 393Through the agents’ activities, suppliers expect to build up reputation and a clientele that enable them to change the distribution system after some time.
II. Historical development of the law
1. Commercial agents
The old commercial codes following the model of the French Code de commerce of 1808 did not address the law of commercial agents. Until the 19th century merchants would still entrust the sale of their goods mainly to factors participating in the risk of the mercantile transactions, or to employed commercial travellers (commis voyageurs). As the Industrial Revolution stressed the need to find new markets, suppliers would gradually turn to the services of independent businessmen familiar with the target market, but who were unwilling to bear the commercial risk of the transactions. The legal relation between these persons, designated as Handlungsagenten, and their principals was for the first time regulated in the German Commercial code of 1897 (Handelsgesetzbuch of 10 May 1897, RGBl. 219, as amended, henceforth HGB), §§ 84–92. Soon after, some Nordic countries, →Austria, the →Netherlands, →Italy and →Switzerland followed suit. The rules laid down in the new statutes were of a dispositive nature and allowed for contractual derogations and modifications.
When labour law emerged as a new body of law from industrial disputes after the First World War, traders started increasingly to evade the new mandatory provisions by appointing their salesmen, not as employees, but as self-employed commercial agents. Under the liberal rules applicable to them, contract clauses were enforced that would be invalid in employment contracts. In response to such practices, more and more European countries enacted mandatory standards for commercial agency contracts. They relate eg to the mutual information duties of the parties, to the calculation of commissions and to the time when they fall due, to the termination of the contract and – most important in practice – to the payment of a post-contractual compensation or indemnity.
Despite the approximation of these rules by EU Directive 86/653, legal divergences on these matters subsist within the EU. The post-contractual payment does eg not exceed an annual commission according to the DCFR (art IV.E. – 3:312(3) with Comment G and Note 8), in Germany (§ 89b(2) HGB) and the United Kingdom (Reg 17(4), The Commercial Agents (Council Directive) Regulations 1993, SI 1993/3053), whereas it usually amounts, under the heading of compensation, to two annual commissions in France (Till Fock, Die europäische Handelsvertreter-Richtlinie – Kompetenzgrundlage, Systematik, Angleichungserfolg (Nomos 2001) 163 f; Thomas Steinmann, Philippe Kenel and Imogen Billotte, Le contrat d’agence commerciale en Europe (Schulthess 2005) 595). Divergences become even more visible in commercial relations between EU parties and parties established outside the EU where no similar legislation constrains the freedom of contract.
As pointed out above, franchising is closely related to the emergence of markets for consumer goods and services, which is a fairly recent occurrence developing only after the Second World War; laws dealing with franchising contracts are therefore of recent origin as well. A need for regulation was primarily perceived with regards to the provision of information to the franchisee by the franchisor. In light of the franchisee’s investment and commitment to pay a fee, a duty had to be imposed on the franchisor requiring the latter to provide correct and meaningful information allowing for the assessment of the business expectations of the franchise. Other obligations concern the disclosure of the pertinent know-how and intellectual property, the details of the business plans eg with regard to the training of the personnel, details of the franchisee’s payment duties, a minimum duration of the contract allowing for a sufficient return on the franchisee’s investment, and the protection of the franchisee against a premature termination of the contract by the franchisor.
The laws and regulations adopted on these issues vary greatly in form and content. Some are long and detailed, others rather short; some cover all issues listed above, others only some of them; some are mandatory, others dispositive. In the USA the information and disclosure obligations are laid down in a federal regulation of the Federal Trade Commission (16 CodeFedReg § 436) while the rules governing the contractual relationship and in particular termination are covered by state law in more than 20 states. Some jurisdictions, such as →Italy, →Japan or p. 394→Sweden, have enacted special statutes on franchising, while the →Russian Federation and →Argentina have included the subject in their general codifications of civil and commercial law. These differences generate a large potential for conflicts of laws in cross-border franchising relations.
III. Conflict rules
The distribution contracts covered by this entry are commercial contracts. They are not employment contracts which in many countries are subject to special conflict rules designed to protect the employee. Instead, the conflict rules governing general commercial contracts basically apply (→Contractual obligations). In most jurisdictions the governing law may therefore be determined by the parties’ choice; only a few countries such as Brazil (art 9 Decree-Law No 4.657 of 4 September 1942, Law on the introduction to the norms of the Brazilian civil code), Iran (art 968 Civil Code of the Islamic Republic of Iran, 23 May 1928) and Uruguay (art 2399 and 2403 Civil Code (Código Civil de la República Oriental del Uruguay as of 26 February 2010)) exclude such choice.
In the absence of choice the applicable law has to be determined on the basis of objective criteria. Some more recent pieces of legislation have adopted specific rules applicable to distribution contracts, see below III.2.–4. In others the law governing distribution contracts is determined by general rules. They refer to the →place of performance eg in Argentina (art 2652 Civil and Commercial Code (enacted by Law of Congress No 29.994 of 1 October 2014, signed into law on 7 October 2014, Official Gazette No 32.985, entered into force on 1 January 2016)), to the place of contracting in countries such as Brazil (art 9 Decree-Law No 4657) or some US jurisdictions while many other states in the USA apply the conflict rules of the Restatement 2nd Conflict of Laws (→Restatement (First and Second) of Conflict of Laws), ie either the law of the place where the services are to be rendered (§ 196) or the most significant relationship test under § 291 (Peter Hay, Patrick Borchers and Symeon Symeonides, Conflict of Laws (5th edn, West 2010) 1192 and 1199 f).
Where the applicable law is determined by general conflict rules, the enforcement of mandatory laws designed to protect the distributor is left to general principles as well, in particular to →public policy. On this ground US courts have repeatedly struck down, in disputes arising from franchising agreements, the choice of a state law lacking a franchisee protection statute in cases where the lex causae applicable in the absence of choice provided for the protection of the franchisee (P Hay, P Borchers and S Symeonides, Conflict of Laws (5th edn, West 2010) 1123 ff). This case-law is often supported by specific provisions of the franchise acts which, by their terms, prescribe the territorial application in the enacting state.
2. Distribution contracts
In order to determine the law applicable to a contract in the absence of choice modern legislation often refers to the characteristic performance of a contract; the domicile or habitual residence (→Domicile, habitual residence and establishment) of the debtor of that performance indicates the applicable law. Following the Swiss codification of private international law of 1987 (art 117 Swiss Private International Law Act (Bundesgesetz über das Internationale Privatrecht of 18 December 1987, 1988 BBl. I 5, as amended)) a trend has emerged to specify the characteristic performance for certain types of contracts or to directly determine the law applicable to the contracts listed. The Swiss code contained only a single general reference to services contracts subjecting them to the law of the service provider. In Russia additional rules apply to the mandate, to the agent and to the commission agent (art 1211(2)(13)–(15) Civil Code of the Russian Federation (as amended by Federal Law No 260-FZ on 30 September 2013)), all designating the service provider’s law.
The Rome I Regulation (Regulation (EC) No 593/2008 of the European Parliament and of the Council of 17 June 2008 on the law applicable to contractual obligations (Rome I)  OJ L 177/6; →Rome Convention and Rome I Regulation (contractual obligations)) provides a general rule for all kinds of service providers, art 4(1)(b) and an additional rule for distribution contracts. According to art 4(1)(f) Rome I ‘a distribution contract shall be governed by the law of the country where the distributor has his habitual residence’. This provision is meant to end the prior dispute between the courts of several EU countries, some of which considered the performance of the supplier or manufacturer as essential or characteristic while others gave priority to the distributor’s service (Marie-Elodie p. 395Ancel, ‘The Rome I Regulation and Distribution Contracts’ (2008) 10 YbPIL 221, 225 f). For the sake of uniform application the courts of the former group will hopefully abide by this legislative decision and abstain from making use of the escape clause of art 4(3) Rome I to find that the distribution contract ‘is manifestly more closely connected’ with the supplier’s country.
3. Commercial agents
Commercial agency contracts are governed by the law chosen by the parties or, in the absence of choice, by the law of the agent’s habitual residence or establishment (arts 5, 6 Hague Agency Convention (Hague Convention of 14 March 1978 on the law applicable to agency, Hague Conference of Private International Law (ed), Collection of Conventions (1951–2009) (Intersentia 2009) 268); for Russia art 1211(2)(15) Civil Code of the Russian Federation); this also follows from art 4(1)(b) Rome I (Peter Kindler, ‘Handelsvertreterrichtlinie und Rom I’ in Herbert Kronke and Karsten Thorn (eds), Grenzen überwinden, Prinzipien bewahren – Festschrift für Bernd von Hoffmann (Gieseking 2011) 198, 201 f).
The crucial question in commercial agency involving an EU agent relates to the mandatory provisions laid down in Directive 86/653 and outlined above (II.1.), in particular the right to a post-contractual compensation or indemnity under its art 17. Where the parties do not choose the applicable law, the law of the agent’s habitual residence will apply and the agent will benefit from the rights under the Directive. Could they be derogated from by the choice of the law of a third state? Where the principal is also established in the EU such choice cannot prejudice the application of mandatory EU standards, art 3(4) Rome I Regulation.
But what about a principal from outside the EU? In Ingmar, a British agent had concluded a commercial agency contract with a US principal. The contract was subject to the laws of California which do not provide for any post-contractual compensation or indemnity for the agent. After termination of the contract, Ingmar nevertheless claimed such payment relying on the Directive and its implementation in the UK. The CJEU (→Court of Justice of the European Union) was requested to issue a preliminary ruling on the geographical scope of the Directive. In light of its purposes – the protection of agents and the creation of a level playing field of competition in the EU – the Court held that a principal established in a third country cannot evade the mandatory rules of the Directive by the simple expedient of a choice-of-law clause where the agent carries on his or her activity in the EU (Case C-381/98 Ingmar v Eaton Leonard Technologies  ECR I-9325, paras 21, 23, 25).
Similar conflicts may arise where a Member State, such as →Belgium, has extended the rules of the Directive beyond its material scope of application into the services sector. In Unamar, a Belgian shipping agent had rendered its services to the Bulgarian shipping line NMB under a contract subject to the law of Bulgaria. In Bulgaria, the Directive has been implemented for the trade in goods only. When Unamar, after an allegedly unlawful termination of the contract by NMB, brought an action for compensation in a Belgian court, NMB invoked an arbitration clause in the agency contract and declared Unamar’s action inadmissible. The Belgian Hof van Cassatie considered the provisions of the Belgian statute on commercial agents as →overriding mandatory provisions which could not be set aside by the choice-of-law clause and the arbitration clause of the contract. Upon the request for a preliminary ruling the CJEU held that view to be compatible with the binding force of choice-of-law agreements under what is now art 3 Rome I Regulation (Case C-184/12 Unamar v Navigation Maritime Bulgare (17 October 2013)). It is noteworthy that the Court of Justice, although dealing with the case under the 1980 Rome Convention (Rome Convention on the law applicable to contractual obligations (consolidated version)  OJ C 27/34), explicitly pointed out that its interpretation is in accordance with the successor of the Convention, ie the Rome I Regulation (para 48).
A proper understanding of the judgment has to depart from the fact that Unamar did not avail itself of a right granted by the EU Directive. Since Belgium had extended the scope of its implementing provisions beyond that of the Directive, Unamar’s compensation claim solely flowed from national provisions which may be held, by that Member State, to be of such a fundamental importance that, as →overriding mandatory provisions, they must be enforced irrespective of the law otherwise applicable to the contract. Whether the said provisions have to be classified as overriding was left to the national court (para 50). But p. 396such a classification would be doubtful since the provisions in question are exclusively aimed at the protection of a private party’s interests. It is difficult to see how they can serve the public interests of a state such as its political, social or economic organization, as required by the definition of overriding mandatory provisions laid down in art 9(1) Rome I Regulation.
4. Franchising contracts
The law applicable to franchises may be chosen by the parties and, in the absence of choice, will be determined by the franchisee’s habitual residence or establishment or the place of his or her activities. The new Russian conflict rule is bilateral and stresses the intellectual property aspect of franchising, designating the law of the country in the territory of which the franchisee is permitted to use the bundle of exclusive rights owned by the rightholder; where the permission relates to several states, the rightholder’s domicile shall be decisive (art 1211(6) Civil Code of the Russian Federation). Under art 4(1)(e) Rome I Regulation the franchisee’s habitual residence determines the law governing the contract in the absence of choice.
The mandatory rules adopted for the protection of the franchisee aim in most cases at persons habitually resident and/or operating in the respective country. The franchising laws of US states are usually unilateral and apply – eg in the case of Minnesota – to all sales and purchase activities carried out in that state (Minn Stat. § 80C.19 (2014)). The designation of the law of the franchisee’s habitual residence as the law governing the contract in general will therefore usually help to enforce those mandatory rules.
Where the law of another state has been chosen by the parties the law governing the contract in general and the law providing for franchisee protection may, however, diverge. As pointed out above, numerous courts in the USA in those situations give priority to the protective provisions of the franchisee’s state which are enforced as part of public policy. In the EU, a similar solution based on art 9 Rome I Regulation is allegedly excluded. Franchisee protection laws are not considered to be overriding mandatory provisions since they are said to exclusively protect private interests, but not public interests as required by art 9(1) Rome I Regulation (Laura García Gutiérrez, ‘Franchise Contracts and the Rome I Regulation on the Law Applicable to International Contracts’ (2008) 10 YbPIL 233, 241 f). While this approach deserves approval, the Unamar judgment (see above III.3.) raises some doubts as to whether the CJEU adheres to such a strict view on overriding mandatory provisions. The fact that it left the classification of the provisions at issue as overriding to the national court rather suggests that the CJEU contemplates at least the possibility that binding provisions targeted at the franchisee’s protection may be characterized as overriding.
Franchising contracts are usually of a mixed nature: they encompass a commitment – on both sides – to render services, and the licensing of intellectual property (IP). Since the choice of the applicable law is permitted for both types of contracts, frictions are unlikely to occur in practice since the parties will usually choose one and the same law for all parts of the contract, thereby avoiding →dépeçage. In the absence of choice the objective connecting factors for franchising and licensing have been brought in line in the 2013 amendment to the Russian Civil Code: in both cases the applicable law is that of the area of contractual use of the intellectual property right (art 1211(6) and (7) Civil Code of the Russian Federation). The Rome I Regulation does not provide for a special conflict rule on licensing contracts, but art 4(2) and (3), read in conjunction with recitals 19 and 20, suggest that the law governing the franchising should also apply to the licensing elements.
The types of distribution contracts discussed in this entry have developed in commercial practice under the impact of a variety of factors. Since these factors differ from country to country, over time the legal situation of distribution contract law has become multifaceted as well. Three focal points of the legal development can be discerned: the distribution contract proper (concession de vente), commercial agency contracts and franchising contracts. For all three of them some legislation aimed at the protection of the distributor by mandatory rules can be found. The divergence of the substantive provisions generates a great potential for conflicts of laws.
The pertinent conflict rules have emerged only in recent years and are still vague. The key issue is not so much the law applicable to the general aspects of contract law which is usually determined by choice-of-law clauses, but the p. 397effect of mandatory provisions protecting commercial agents, distributors and franchisees. Conflict rules assessing this effect in cross-border cases are not laid down in legislation but developed by the courts which make use of very general and unclear concepts such as →public policy and →overriding mandatory provisions from case to case. By their unilateral approach they create considerable uncertainty for suppliers and distributors.
A future development that could perhaps increase legal certainty should draw from the legislative models of the more recent conflict rules governing →consumer contracts and employment contracts. As shown eg by arts 6 and 8 Rome I Regulation both types repeat the same pattern: they are bilateral and allow the parties to choose the applicable law, but they subject this choice to the safeguard of the mandatory minimum standards established by the law that would be applicable in the absence of choice. Distribution contracts are similar to consumer and employment contracts in several ways: they are indispensable building blocks of networks which often extend over many countries. They are concluded in large numbers in accordance with specimens designed to create a rationalizing uniformity within a network. And they have to cope with growing numbers of mandatory local provisions designed to protect a certain class of people in their activities within a given territory. The model of arts 6 and 8 Rome I Regulation, which has inspired legislators across the globe in dealing with consumer and employment contracts, should also provide guidance for the development of the private international law of distribution contracts.
Cristelle Albaric and Marianne Dickstein (eds), International Commercial Agency and Distribution Agreements (Wolters Kluwer 2011) with 17 national reports;
Marie-Elodie Ancel, ‘The Rome I Regulation and Distribution Contracts’ (2008) 10 YbPIL 221;
Christian von Bar and Eric Clive (eds), Principles, Definitions and Model Rules on European Private Law: Draft Common Frame of Reference (DCFR) – Full Edition, vol 3 (Sellier ELP 2009);
Odavia Bueno Diaz, Franchising European Contract Law: A Comparison between the Main Obligations of the Contracting Parties in Principles of European Law on Commercial Agency, Franchise and Distribution Contracts (PEL CAFDC), French and Spanish Law (Sellier ELP 2008);
Richard Christou, International Agency, Distribution and Licensing Agreements (6th edn, Sweet & Maxwell 2011);
Till Fock, Die europäische Handelsvertreter-Richtlinie – Kompetenzgrundlage, Systematik, Angleichungserfolg (Nomos 2011);
Aldo Frignani and Marco Torsello, Il contratto internazionale – Diritto comparato e prassi commerciale (2nd edn, CEDAM 2010);
Laura García Gutiérrez, ‘Franchise Contracts and the Rome I Regulation on the Law Applicable to International Contracts’ (2008) 10 YbPIL 233;
Peter Hay, Patrick Borchers and Symeon Symeonides, Conflict of Laws (5th edn, West 2010);
Martijn Hesselink (ed), Commercial Agency, Franchise and Distribution Contracts (Sellier ELP 2006);
Peter Kindler, ‘Handelsvertreterrichtlinie und Rom I’ in Herbert Kronke and Karsten Thorn (eds), Grenzen überwinden, Prinzipien bewahren – Festschrift für Bernd von Hoffmann (Gieseking 2011) 198;
Alex Konigsberg, International Franchising (3rd edn, Juris Publishing 2008);
Souichirou Kozuka, ‘A Comparative Analysis of Franchise Law: Contracts, Courts and Economics’ in Gianmaria Ajani and others (eds), Studi in onore di Aldo Frignani (Jovene 2011) 313;
Philippe Le Tourneau, Les contrats de concession (Litec 2004);
Philippe Le Tourneau, Les contrats de franchisage (2nd edn, Litec 2007);
Michael Martinek, Franchising (R von Decker’s Verlag, G Schenck 1987);
Lena Peters, ‘The Draft Unidroit Model Franchise Disclosure Law and the Move Towards National Legislation’  Unif.L.Rev. 717;
Thomas Steinmann, Philippe Kenel and Imogen Billotte, Le contrat d’agence commerciale en Europe (Schulthess 2005);
UNIDROIT – International Institute for the Unification of Private Law, ‘Legislation and Regulations Relevant to Franchising’ (Annex 3 to the UNIDROIT Guide to International Franchise Arrangements, see <www.unidroit.org/guide-franchise-2nd-national-info> with around 30 national reports).