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The formulation of termination clauses in contract dealership agreements
11.02.2015
Notes on the article published in the journal “Zeitschrift für Vertriebsrecht” 2015, p. 8 ff.
If a contract dealership agreement is to be terminated, it is worth formulating the termination clauses of the agreement with care. Careful formulation will ultimately save the costs of legal advice not only with regard to the notice of termination, but also in the event of a dispute over the validity of the termination. This applies both to ordinary and extraordinary termination. Whilst the drafting of termination clauses does harbour considerable pitfalls, there is nevertheless a wide range of formulations possible in contract dealership agreements.
Ordinary termination
The ordinary termination of a contract dealership agreement requires no grounds for termination. Rather, this aspect of effective contractual formulation focuses far more on a valid notice period and this is closely related to the term of the contract dealership agreement, which may be contractually stipulated if necessary. The required duration of the notice period is not easy to determine as there are no specific legal provisions for contract dealership agreements. There are consequently various methods for determining the required notice period and the term of the agreement, and the effects of a unsuitable notice period should be considered here.
Extraordinary termination
Contract dealership agreements that constitute a continuous obligation can be terminated without notice, however, if there is good cause. This general principal arises from Section 314 of the German Civil Code (Bürgerliches Gesetzbuch – BGB) unless a special provision is applicable. Special provisions conceivable here are primarily provisions relating to the sales agent, the application of these provisions depending in any given case on the specific form of the relationship with the contractual dealer. Consideration should also be given to how far the right of extraordinary termination can be modified, if necessary, by defining good cause in the agreement.
Imminent insolvency as grounds for extraordinary termination
The “dissolution clauses” (Lösungsklauseln) under insolvency law constitute a special case in such an agreement. These clauses grant one party the right of extraordinary termination if the other party faces imminent insolvency, if an application to institute insolvency proceedings has been filed or, indeed, if insolvency proceedings have already been instituted. Unlike sales agent agreements, contract dealership agreements make no fundamental distinction between “dissolution clauses” for the account of the manufacturer whose products are sold by the contract dealer, and those for the account of the contract dealer. The relevant insolvency law provision (Section 116 of the German Insolvency Code (Insolvenzordnung – InsO)) – which is generally held to be applicable to sales agent agreements and results in cancellation of the sales agent agreement in the event of the manufacturer’s insolvency – does not apply to contract dealership agreements. Rather, contract dealership agreements continue to exist pursuant to Section 108(1), sentence 1 InsO, but to the credit of the insolvency estate. It is generally held, however, that dissolution clauses to the manufacturer’s benefit in the event of the contract dealer’s insolvency are admissible.
Please get in touch with us if you like more information on this subject. We will be happy to provide you with the complete text of the article published (in German) in the journal “Zeitschrift für Vertriebsrecht” 2015, p. 8 ff.
If a contract dealership agreement is to be terminated, it is worth formulating the termination clauses of the agreement with care. Careful formulation will ultimately save the costs of legal advice not only with regard to the notice of termination, but also in the event of a dispute over the validity of the termination. This applies both to ordinary and extraordinary termination. Whilst the drafting of termination clauses does harbour considerable pitfalls, there is nevertheless a wide range of formulations possible in contract dealership agreements.
Ordinary termination
The ordinary termination of a contract dealership agreement requires no grounds for termination. Rather, this aspect of effective contractual formulation focuses far more on a valid notice period and this is closely related to the term of the contract dealership agreement, which may be contractually stipulated if necessary. The required duration of the notice period is not easy to determine as there are no specific legal provisions for contract dealership agreements. There are consequently various methods for determining the required notice period and the term of the agreement, and the effects of a unsuitable notice period should be considered here.
Extraordinary termination
Contract dealership agreements that constitute a continuous obligation can be terminated without notice, however, if there is good cause. This general principal arises from Section 314 of the German Civil Code (Bürgerliches Gesetzbuch – BGB) unless a special provision is applicable. Special provisions conceivable here are primarily provisions relating to the sales agent, the application of these provisions depending in any given case on the specific form of the relationship with the contractual dealer. Consideration should also be given to how far the right of extraordinary termination can be modified, if necessary, by defining good cause in the agreement.
Imminent insolvency as grounds for extraordinary termination
The “dissolution clauses” (Lösungsklauseln) under insolvency law constitute a special case in such an agreement. These clauses grant one party the right of extraordinary termination if the other party faces imminent insolvency, if an application to institute insolvency proceedings has been filed or, indeed, if insolvency proceedings have already been instituted. Unlike sales agent agreements, contract dealership agreements make no fundamental distinction between “dissolution clauses” for the account of the manufacturer whose products are sold by the contract dealer, and those for the account of the contract dealer. The relevant insolvency law provision (Section 116 of the German Insolvency Code (Insolvenzordnung – InsO)) – which is generally held to be applicable to sales agent agreements and results in cancellation of the sales agent agreement in the event of the manufacturer’s insolvency – does not apply to contract dealership agreements. Rather, contract dealership agreements continue to exist pursuant to Section 108(1), sentence 1 InsO, but to the credit of the insolvency estate. It is generally held, however, that dissolution clauses to the manufacturer’s benefit in the event of the contract dealer’s insolvency are admissible.
Please get in touch with us if you like more information on this subject. We will be happy to provide you with the complete text of the article published (in German) in the journal “Zeitschrift für Vertriebsrecht” 2015, p. 8 ff.
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