In the common market, the producer of a good has various options on how to market the product. The first way that comes to mind is to sell the goods directly to the customer. For this the producer can establish a retail or a retail system or market the goods through a mailorder system. The producer can also distribute the goods to resellers throughout the market.

In all these cases, the producer makes direct contact with the customer and concludes sales contracts with each personally. Once international trade is involved, this leads to international sales contracts usually involving the applicability of the CISG.

The system of selling own goods oneself, particularly abroad, can result in significant disadvantages. The market in which the goods are to be sold is not only huge in its geographical dimensions, but also extremely diverse as regards to languages, legal systems and commercial customs. It is almost impossible for a small or medium-sized company to maintain an overview of all the different trades in the various geographical markets. Even if it could, it would be disproportionally expensive when compared to potential profit.

Furthermore, for optimal marketing success, a company would have to develop specific advertising campaigns adjusted to the special conditions of the respective market. Further, central marketing e.g. via e-commerce, is still restricted to certain types of goods which are suitable for distribution without any close contact with the customer.

This is especially why medium-sized producers, for whom it is unprofitable to establish an own subsidiary in another country, largely make use of third parties as their representatives in that country. These representatives are familiar with the local conditions and thus more effective in placing the products into the market. On the other hand, they are independent and can also distribute products other than those of only one producer, so that the producer can benefit from a local distribution system without having to invest in the costs of this alone.

In order to perform an effective representation for the principal, the representative may have to make significant investments. Such risk will only be undertyken though, if there is some prospect to reap the benefit of the market position created for the respective product. Therefore a system of exclusive representation is usually used, i.e. the representative shall have the exclusive right to distribute the product with a certain territory.

The traditional form of representation in another country is that of the commercial agent. A commercial agent is an independent entrepreneur who undertakes to promote the sale of certain products with a certain territory. Merchandising is undertaken and customers thereby acquired. He does not, however, act as a party himself to the various sale contracts that have been arranged. The commercial agent prepares the contract which is then concluded by the principal himself.

As a remuneration for the commercial agent’s activity, said agent has the right to a commission for every contract successfully arranged. The amount of such commission depends on the purchase price that the customer has agreed to pay. The agent commission is lost if the customer fails to render payment. On the other hand, the agent is not generally liable for the customer’s payment, nor responsible for non-performance or defective performance on the principal’s side.

As an alternative to the commercial agent, producers increasingly make use of sole distributors. Unlike a commercial agent, the sole distributor does not arrange contracts between the principal and the customer, but instead makes those contracts himself in his own name. Technically, the sole distributor acts like a normal reseller: Goods are bought from the principal and sold onto the customer. The difference is, that the sole distributor is contractually obliged to promote the sale of a product in a certain territory, just as a commercial agent would do. In return, exclusive distribution rights are granted in that territory. The sole distributor is not remunerated by the principal but instead makes aprofit from the margin between the purchase and resale prices.

The law on commercial agents is largely codified throughout Europe. In particularly, many mandatory rules protect the agent’s rights towards the principal. Conversely, rules concerning the rights of the sole distributor are almost completely absent, which begs the question whether and to how far the rules on the commercial agent can also be applied to the sole distributor.

Hereafter, the focus shall first be placed on the law of the commercial agent. Following this, the rules applicable to the sole distributor shall be examined. European law and the national system of Finland shall be the focus of both.

When the legal relations arising from the activity of a commercial agent are examined, a distinction must be made between the agency contract between the principal and the agent on the one hand, and the sale contract on the other hand.

A sale contract arranged by a commercial agent is, as mentioned above, concluded between the customer and the principal. Here, the agent is not a party to such a contract. Since this presentation focuses on the use of commercial agents abroad, the contract formed by the principal and the customer will be an international sales contract. This means that, in general, the CISG will apply to such a contract, insofar as those countries involved have signed the convention.

The agency contract on the other hand is of different nature. Although the aim of the contract is to facilitate the sale of goods, the agency contract deals, in essence, with a service provided by the agent for the principal. Clearly, the CISG does not apply to such a service contract. Indeed, there are no international conventions on the material law relating to the commercial agent. This means then, that national law must be applied.

The question of which national system has to be applied to a contract, is determined by the rules of international private law. Contrary to what the name might suggest, international private law is not an international system of rules, but is by its very nature national law. This means, that every national system basically decides for itself, if its own laws shall be applied to a certain case or if another national system should be referred to.

In the European Union, the applicable law in contractual relations is governed primarily by the European Treaty on Contract Law (ETC). Unlike the CISG, this treaty does not contain any material rules on contract law but only deals with the question of which national contract law shall be applied. The treaty was conceived within the framework of the European Union. However, it does not automatically aquire legal force in every member state until it is signed and ratified by the respective state.

According to the ETC, in the absence of any agreement on the applicable law, the law of that country, in which the performance characteristic for that type of contract takes place, applies. In a commercial agent’s contract, this is the country where the agent performs his business. E.g. if a Finnish entrepreneur acts as commercial agent for a German company, the contract falls within the scope of Finnish law.

Following unification of law in the European Union, determination on applicable law has lost much of its significance. The law of commercial agents is one of those areas of law that are of special importance for the common market, since in the overwhelming majority of cases, commercial agents are used in international relations, i.e. for representation in another country.

The rules concerning agency contracts have therefore been unified by the European Union directive 86/653 ETY of December 18th 1986. This directive, which has been transposed by all member states, contains rather detailed provisions on the rights and obligations of the parties and especially on the protection of a commercial agent. However, it leaves room of play for deviating national provisions in certain questions such as that of indemnity, so that complete unification has not yet been achieved.

In Finland, the directive was transposed through the Finnish Act on Commercial Agents and Salesmen (Kauppaedustajalaki, hereinafter referred to as KeL) of May 8th 1992. In the following text, only the rules of this Act will be cited as an example. It should, though, be borne in mind that the laws of all member states contain more or less similar provisions.

The central right of a commercial agent under an agency contract is that of commission, i.e. remuneration for the agent’s services. It is however in the nature of an agency contract that commission is not paid for the mere activity of the agent, but only for every successfully arranged contract separately. This means that the agent will not receive any remuneration unless he manages to aquire customers.

Every commercial agent has the right to commission for all contracts that have been concluded between the principal and a customer, if the formation of the contract can be ascribed to the agent’s activity (10 § KeL). It is thus not necessary that the agent produced the actual contact with the customer. A causal relation to the agent’s performance is sufficient.

The right to commission is even more fare reaching in the case where an agent is exclusively responsible for a certain geographical area, as is usually the case in international agency. An agent can then claim commission for every contract made with a customer from that area, regardless whether the agent had contributed to the deal or not.

The amount of the commission can freely be agreed upon by the principal and the agent. In the case where an agreement on the commission has not been made, the usual commission is deemed to have been agreed upon (15 § KeL). What such usual commission is, is to be determined according to customs in the place where the agent performs his business and not at the principal’s place of business. In the absence of any agreement the commission is calculated in accordance with the purchase price that the customer must pay according to the arranged contract. In this case, commission will amount to a certain percentage of the purchase price.

As already mentioned, an agent is not liable for either side’s performance. Should a customer fail to pay the purchase price, the commercial agent loses the right to the commission (13 § subsection 2 KeL) but will not be demanded to recompense the principal’s loss. Should the principal not fulfil the contract, the agent’s commission remains unaffected.

By its nature, an agency contract is a long-term service contract. It can be concluded for a limited time period, but the usual case is that the agreement is made for an indefinite time period. The contract can then be terminated by either side by giving notice to the other party.

The unified law of the commercial agent takes the fact, that the agent needs protection from sudden termination of the contract, into account. In order to promote products subject to an agency agreement, the agent must make significant investments. A certain infrastructure as to staff, office rooms and equipment must also be maintained. By doing this, the commercial agent takes some of the risks as an entrepreneur does, on behalf of the principal. In the case of a sudden termination of the agency, these investments would partly be in vain.

Accordingly, The law of commercial agents grants certain terms of notice (23 § KeL). These rules are mandatory in the sense that the terms can be extended but not shortened by agreement between the principal and the agent. The terms of notice are graded in accordance with the duration of the agency contract, beginning with one month in the first year of the contract, two months in the second year, and three months in the third through to the fifth year. After a duration of an agency contract of five years it can only be terminated with a notice of six months.

Probably the most important right of a commercial agent in connection with the termination of the agency is that of indemnity. When the agent has acted for the principal for some time, a certain market position for the principal’s products will have been acquired. Contacts with customers will have been made, who might also turn to the principal’s products in the future. Products might have been made more familiar in the territory through marketing campaigns and the marketing opportunities for the future thereby increased.

This means that a commercial agent’s activity can produce significant benefits for a principal for a long period even after this activity has ceased. The concept of the commercial agency is based on the idea that the agent performs his business independently and on his own account, but receives remuneration from the principal insofar as the agent’s activity bears fruit for the principal. This is why an agent receives commission only in the case of a successful arrangement of a sale. But this is also why it is not acceptable that a principal further benefits from an agent’s work after termination of the contract without compensation.

The unified law on the commercial agent therefore grants the agent an indemnity which cannot be excluded in the agency contract. According to the aforementioned reasons, indemnity is only granted if and insofar as (28 § KeL):

The amount of compensation will be calculated according to these criteria. At maximum it can reach the sum of the commissions that the agent has on average earned in each year during the preceding five years.

Compared with a commercial agent, which is the traditional way to sell products abroad, sole distributorship is a rather new concept. It bears a number of advantages for the principal.

First, the distributor not only arranges contracts, but buys the products from the principal and then resells them abroad. This gives the principal an advantage in the cash flow, since the purchase price has already been received in advance of the product’s actual sale to the customer. Secondly, since the principal does not enter into legal relations with the customer, their solvency is not an issue. This risk is taken by the distributor, and the principal then only has to be concerned with the distributor’s own solvency. Thirdly, the majority of the single purchasing contracts with the customer are made between the distributor and the customer within the respective country. The sales are thus sales inside one country and do not require the formalities demanded of cross-border trading. The latter is done only between the principal and the distributor, and there the formalities can be bundled together and thus be dealt with more efficiently.

While the law of the commercial agent is not only precisely regulated under national laws but also largely unified throughout the European Union, there are no special rules on sole distributorship whatsoever. It was long assumed that there would not be a pressing need for any, since the legal relationships mainly consist of sale contracts and the law of sales applies to such relations. The distributor simply acts like an importer and reseller.

There are, however, differences that place the sole distributor into a position very close to that of a commercial agent. A normal importer can choose the products to buy and resell from day to day. Conversely, the sole distributor is contractually obliged to particularly promote the principal’s products, and in many cases a minimum amount of products to be purchased by the distributor is stipulated in the distribution contract. The sole distributor is also obliged to undertake marketing activities and thus make investments for the sale of the specific goods. Furthermore, the distribution contract usually contains clauses that prevent the distributor from selling competing goods.

The sole distributor is thus as closely bound to the principal’s business as is a commercial agent. The burden of risk is even heavier for a distributor in comparison to an agent, since the risk for the customers’ solvency is also taken. Furthermore significant investments must be made so as to build up a stock, to perform marketing etc., so that a sudden termination of the contract poses a severe economical threat.

Due to this construction of the contract, the question arises on whether the sole distributor should be given protection comparable to that of a commercial agent. In the absecnce of any statutory regulation, this question has to be addressed by the courts.

Here, the focus shall first be put on the concept developed by courts in Germany. The protection of the sole distributor has been the subject of Supreme Court decisions on numerous occasions. In these cases the Supreme Court has considered the factors described above, and held that in cases where a distributor’s position is in effect comparable to that of a commercial agent, commensurate protection is indispensable. This is particularly so in relation to the rules on termination and indemnity.

The Supreme Court has decided to solve the problem through the analogous application of the rules governing the commercial agent (§§ 84-92c HGB) and has set up the following preconditions for this analogy:

If these conditions are fulfilled, the contract can only be terminated with the notice as is applicable to a commercial agent,

and a sole distributor can claim indemnification after termination of the contract according to the same principles that would apply to a commercial agent.

In Finland, judicial activity in the field of the sole distributor has not been quite as vivid. It is in the nature of the Finnish legal system as with the system of a sparely populated country, that on most questions of law, Supreme Court decisions are rather scarce. Therefore developments in other countries are taken into account much more than would be in other European countries, when determining how a specific problem should be solved. Traditionally, most attention is paid to the other Nordic countries, but other European and particularly German views have also often been invoked in Finnish legal discussion.

There is even more need for an international view in the case of commercial agents and sole distributors. As previously mentioned, the law on the commercial agent is unified by EU directive. According to the principles of European Law directives are not only meant to adjust the wording of statutes but to adjust the material law. This gives reason to attempt a unitary interpretation also as regards the analogous application of the unified rules. As to the perspective taken by the German courts, mention should also be made that the Finnisch Commercial Agents Act was meant to be conform with the EC directive, but especially based on the German Commercial Code in its wording. Finally, the Finnish legislator has stated in the Act’s preparatory works that the Act should be open for application to similar cases.

It is thus justified to seriously take into account the solutions found by the German courts. Accordingly, an analogous application of certain rules of the KeL on sole distributors has also been called for in Finland. The Finnish Supreme Court has also applied the KeL analogously on one occasion to a sole distributor.

It can clearly be seen that the legal development in Finland is going into the same direction as that in Germany – and for good reason. Therefore, in practice it has to be assumed, that in practice the sole distributor has, under the conditions mentioned above, those rights as provided given by the KeL.