Expanding your business: application of the 1986 Directive on Commercial Agents - employee or agent?

17 December 2007

Jane Player

The 1986 Directive on Commercial Agents is an attempt to create an EU-wide regime governing the relationship between commercial agents and their principals. Most importantly, the regime provides financial protection to agents on termination of an agency agreement. As a result, unexpected penalties may be imposed on principals wishing to end their relationship with an agent.

Principals looking to appoint agents within Europe should beware; how do you appoint, as an agent or an employee? Which description would fit your commercial needs? Which title best protects your position on termination? If you wanted to set up a subsidiary of your own in any particular jurisdiction in due course, will your agent be able to claim compensation for lost future commission?

Due to the varied implementation of the Directive across the EU Member States, forum shopping inevitably results. Agents with wide-ranging territories will, no doubt, benefit from these provisions and principals will need to review their arrangements ensuring either that the agent’s job title and activities fall clearly outside the definition of agent or by making different arrangements for the promotion of their goods abroad (for example by employing their distributors). Principals may find that a sub-contract or distributorship agreement is more appropriate taking the contractor’s activities outside the scope of the Directive.

This country by country report aims to guide you through the effect the 1986 Directive on Commercial Agents has had to date in Belgium, France, Germany, Italy, The Netherlands, Spain, Sweden and the UK. Twenty one years on, we examine how each jurisdiction has transposed the Directive into local law and what precedents have been created.

Belgium

The Directive was implemented into Belgian law by an Act of 13 April 1995. An agent is protected where he negotiates and/or concludes contracts on behalf of the principal in return for remuneration. The agent must act for the principal on a permanent basis, without being subordinated to the authority of the principal.

The Act of 19 December 2005 on pre-contractual information introduced burdensome obligations (compulsory information, waiting periods, etc) on the principal who wants to enter into a distribution relationship with a distributor. Although the law is primarily aimed at franchises, its wording is so wide and vague that it may also apply to agency agreements. As there is very little case law regarding this new law and as a failure to comply with its provisions renders the agreement void, it is highly recommendable to comply with it.

Exclusions

Contracts concluded between insurance companies, banks or stockbrokers and their agents were initially excluded by the Act, as well as contracts pertaining to specific products, such as financial instruments. Since June 1999, only one exclusion remains: an agent does not benefit from the protection of the Act if he does not carry out a regular activity as an agent.

Forum shopping

Parties may not normally choose the applicable law. Subject to applicable EU Regulations any activity of a commercial agent having its principal place of business in Belgium is subject to Belgian law and jurisdiction. However, a Belgian court would normally decline jurisdiction if the parties agreed upon an exclusive jurisdiction clause in favour of the courts of another EU state.

Remuneration

The provisions laid down in the law regarding the agent’s remuneration as a general rule can not be altered to the detriment of the agent.

Termination

The agreement may be terminated subject to a notice period equal to one month per year of effect of the agreement, with a maximum of six months. The agent is entitled to an indemnity if the principal terminates the contract without giving notice or with insufficient notice. Such indemnity in lieu of notice is equal to the current remuneration corresponding to the duration of the notice period or the remaining part of this period. This entitlement applies to contracts entered into for an indefinite period but also to fixed term contract containing a clause allowing early termination. Parties cannot validly agree upon a shorter notice period before the termination of the agreement.

Indemnity

In addition to the indemnity in lieu of notice, the agent also has the right to receive a client or goodwill indemnity where he has introduced new clients to the principal or noticeably increased the principal's business with existing clients, to the extent that the principal continues to derive substantial benefits from the business with such clients. This level of compensation is at the discretion of the court on the basis of the development of the business and the contribution of goodwill but the maximum amount awarded is one year's remuneration calculated from the agent's average annual remuneration over the preceding five years, or, if the agreement is shorter than five years, the average for that period.

In addition to the above indemnity and to the extent that it does not cover the actual damage suffered by the agent, the agent is entitled to additional damages equal to the difference between the actual damage suffered by him, which the agent has to evidence (e.g. terminating sub-agents, recovering certain investments), and the indemnity.

With regard to the Lonsdale case, it must be noted that Belgium has opted for the "German approach" i.e. the indemnity provided for in article 17.2 of the Directive 86/653, but it has tempered its effects by preserving the possibility for the agent to obtain additional damages.

As for the quantum of the indemnity below the cap of one year's remuneration, there is no mathematical rule. The judge decides in equity. Practitioners frequently refer to tables of cases which detail the amounts granted by courts and the reasons cited by the courts to grant such amounts. It must be noted that when an agency is terminated because the principal ceases his activity (as is the case in Lonsdale), Belgian courts have frequently decided not to grant any indemnity.

No notice period or indemnity

The parties cannot exclude the right to a notice period or indemnity on termination except in the following circumstances:

  • if the contract is terminated by the principal because of a serious breach of the agent

  • if the agent terminates the contract (except if termination is due to a serious breach by the principal)

  • if the agent transfers its contractual rights and obligations to a third party.

Compensation is only due if the agent makes a claim within one year of the termination of the contract.

Since March 2005, the ability to terminate an agency without a notice period or indemnity in case of serious breach has been suspended unless the principal proves that the termination is based on objective economic criteria applied uniformly to all agents. The penalty for wrongful termination is a payment equal to 18 months remuneration.

Alternatives

Any contract stating that the agent has no power to negotiate or to bind the principal will not be a commercial agency agreement. However, if in practice, the agent is authorised to negotiate on behalf of the principal and/or to bind him, Belgian courts will qualify such contract as an agency agreement. Alternatively, the contract may be redefined as an employment contract if the agent has a subordinate relationship with the principal.

France

Council Directive 86/653 was implemented into French law by Law 91.593 dated 25 June 1991 (the “Law”), being incorporated as article L. 134-1 and following the French Commercial Code. The Law applies to all commercial agency agreements entered into after 28 June 1991 and from 1 January 1994 onwards and is applicable to all agreements which existed on that date.

Under article L.134-1 of the Commercial Code, a commercial agent is an individual or a legal entity who, on a continuous and independent basis, and without being bound by an employment contract, negotiates and/or concludes agreements for the purchase or sale of products or services in the name and on behalf of one or several principals.

An agent must comply with the terms of the agency agreement, report regularly on the business to his principal and respect the principal’s instruction. There are duties to account and keep information confidential. The agent may not compete with his principal (including acting as an agent for the distribution of competing products) and may be prevented from representing other principals if there is an exclusivity clause in the agency agreement. The commercial agent definition is not dependant on the agreement of the parties nor on the name of their agreement, merely the conditions of the activity actually exercised by the agent.

The principal’s main obligation is to pay the agent its commission. The agent is entitled to commission on all transactions concluded during the term of the agreement and those transactions concluded a reasonable time after the termination where the transaction was mainly due to the efforts of the agent.

The agency agreement must specify the rate of the commercial agent’s commission or it will be determined by Articles 5 – 11 of the Law (articles L. 134-5 to L. 134-11 of the French Commercial Code). Under these articles, commercial agents shall be entitled to remuneration in accordance with the usual practice in the sector of activity covered by their mandate and in which they carry out their activity. In the absence of any usual practice, the commercial agent shall be entitled to a reasonable remuneration which takes account of all elements involved in the operation.

Forum shopping

Parties may choose the applicable law of the agreement. If no applicable law is specified then the local law where the agent performs its main activities will apply.

Contracting out

The parties may agree, in writing, to waive the application of the Law where the agent is engaged in secondary activities. The contract is then governed by the Civil Code provisions relating to the so-called “mandate d’interet commun”.

Term and Notice

French law provides a high level of protection to commercial agents.

An agency agreement can be for either a fixed or an indefinite term and does not even have to be in writing (although it is advisable). If the relations between the parties continue after the term has ended it is automatically transformed into an agreement with an indefinite term.

If the agency agreement is for an indefinite term, each party may end this agreement by giving prior notice (article L.134-11 of the commercial code). The notice period should be one month for each year of the agreement with a maximum of 3 months. The parties may not agree shorter periods of prior notice.

Indemnity or compensation on termination

An agent is entitled to an indemnity on termination of the contract for an indefinite period. Although there is in principle no predetermined scale, a figure equivalent to twice the agent’s average annual gross remuneration over the two or three years prior to termination is usually awarded.

The amount of the indemnity is determined according to several elements, especially:

  • the origin of the custom/clientele, its significance and age,

  • the loss of commissions to which the agent could reasonably claim,

  • the goodwill value of the agency to the principals business.

The parties can not contract out of the indemnity.

The agent must make a claim for compensation within one year of termination of the agreement otherwise the right to indemnity is forfeited.

The indemnity is also due on the death of the agent (article L.134-12 paragraph 3) or on the agent’s resignation if this resignation is motivated by his age or physical disability preventing him to continue to agreement.

If the contract between an agent and its principal is for a fixed term, commercial agents are entitled to an “indemnity of termination”. Under this indemnity, the agent is entitled to an indemnity equivalent to the amount of the commission that he would have received between the date of termination and the term of the agreement.

An indemnity is not due under either a fixed or indefinite term agreement in the following circumstances:

  • serious negligence or breach of contract by the agent

  • termination by the commercial agent unless such termination is due to circumstances caused by the principal (such as the unilateral modification of the terms of the agency agreement) assignment of the agency agreement to a third party without the principal’s consent,

  • Where the principal terminates the contract for a good cause i.e. competing with the principal, divulging trade secrets, or the termination of the contract by the agent without notice or justification.

Application

The directive is applied (especially the contract termination indemnity) in the case of a agent conducting an activity in the EU but having its main office registered outside the EU.

The French Supreme Jurisdiction (“Cour de Cassation”) and the European Court of Justice have a different position on the contract termination indemnity.

For the ECJ Articles 17 and 18 of the EU Directive 86/653, which grant an indemnity to the representative at the termination of the contract, have to be applied when the agent has an activity inside the EU. This is the case even where its main office is registered in a country outside the EU and is governed by the law of a non-EU country Ingmar GB Ltd vs. Eaton Leonard Technologies Inc No 381/98.

The French Supreme Court (Cass. Com 8 November 2000 No 237) has decided that the French Law of 25 June 1991 has only domestic and not international effect. Consequently, the French court refused to grant an indemnity to an agent based in France working for an American firm with a contract submitted to the laws and jurisdiction of the state of the New York.

The decision of the French Supreme Court was drafted by the judges before the ECJ rendered its decision on 9 November 2000. Consequently, the French Supreme Court, in its annual report, has declared that its decision of 8 November 2000 had been overruled by the above-mentioned decision of the ECJ. As a consequence, the above mentioned decision rendered by the Cour de Cassation could not be considered as a precedent and the interpretation/decision of the ECJ on the contract termination indemnity fully applies in France.

Alternatives

A commercial agency contract may be redefined as an employment contract if the agent has a permanent subordinate legal relationship with the principal. This avoids the Act.

Germany

The Directive was implemented into German substantive law by amending its Commercial Code on 23 October 1989 which has been in force since 1 January 1990 and applies to contracts in operation after 1 January 1994. A commercial agent is defined as a self-employed intermediary who has continuing authority to negotiate on behalf of the principal and who solicits orders in the name and at the expense of such principal. Neither regular employees, i.e. those not self-employed, nor distributors who are reselling goods in their own name and at their own expense are commercial agents. However, German courts have continuously applied various provisions directly applicable to commercial agents and distributors, provided the relationship with the principal exceeds the usual seller-buyer relationship. Most statutory provisions applicable to commercial agents apply analogously to distributors if :


  1. the distributor is incorporated in the sales organisation of the principal, and if

  2. the principal has the use of the customer list of the distributor during or at the end of the contractual relationship.

Forum shopping

Generally, the parties may choose the applicable law. However, pursuant to a recent judgment of the European Court of Justice, a commercial agent carrying on his activities within the EU cannot evade certain rights granted to commercial agents although the principal is established outside the EU and the parties have explicitly chosen the law of the principal to apply. If no applicable law has been specified, the law where the commercial agent mainly performs his activities shall apply.

Contracting out

Most provisions of the German Commercial Code dealing with commercial agents are mandatory provisions and may not be modified to the disadvantage of the commercial agent unless the commercial agent carries out his activities outside the territory of the EU or the European Economic Area.

Indemnity, compensation and termination

Goodwill indemnity claims have been recognised by German law since 1953. The commercial agent is entitled to an indemnity claim upon termination of the agency agreement with no fault on the commercial agent's side if:


  1. the termination deprives the commercial agent of benefits in the future,

  2. the principal retains substantial advantages from soliciting new customers or expanding business relations, or if

  3. the compensation is equitable.

The maximum amount of compensation is no more than the average annual commission over the last five years. If the duration of the contract is less than five years the annual average remuneration is calculated according to the duration of the agreement. Due to the calculation of claim being complicated, disputes are widely settled out of court and an average of 50% of the maximum indemnity is paid out. The indemnity claim may not be waived in advance and must be ascertained within one year of the termination date. Since 15 December 2004 the limitation period is generally three years.

Avoiding compensation

The right to indemnity is excluded if:

  • the agent has terminated the agreement, unless the agents reason for terminating is the principals misconduct or the agent cannot continue his activity due to illness or age,

  • the principal has terminated the contract due to the agents negligent conduct,

  • the agent assigns the agency agreement to a third party with the consent of the principal.

If the commercial agent has not solicited any new customers, an indemnity claim theoretically exists, but amounts to nothing. This can be easily proven if a list of the principal's existing customers is attached to the original commercial agency agreement.

Insurance agents are only entitled to claim commissions for business which has been acquired through their activity. The right to indemnity amounts in this case to a maximum of three average yearly remunerations, differing from the usual one year- remuneration.

Alternatives

As principals are typically concerned about indemnity claims, alternatives to commercial agency agreements can be considered, for example, the use of salaried employees or distribution agreements.

Indemnity payments are not paid to salaried employees as employees are protected by employment law provisions and termination must be for personal or operational reasons. An agency agreement will be assumed by the Courts as an employment agreement if the commercial agent is unable to act independently from the principal.

Another alternative is to enter into a distribution agreement whereby the distributor sells goods belonging to the principal in his own name and at his own expense. However, a distributor integrated in the principal's distribution organisation is entitled to an indemnity.

Italy

The original provisions of the Italian Civil Code on the commercial agency have been deeply affected by the European provisions contained in the Directive 86/653/CEE, which has been implemented by the legislative decree n. 303/1991 and subsequent amendments (in particular the legislative decree n. 65/19999). An agent is someone who permanently works for a principal securing contracts in a specified territory for remuneration. The agent does not have the power to act on behalf of the principal and directly complete contracts unless the principal expressly grants the agent that power. The principal should not employ more than one agent at the same time for the same area and business. In addition, an agent should not transact business in the same area in relation to the same goods and services for the benefit of several competing principals. These provisions can, however, be waived by agreement between the parties.

Forum shopping

Parties may choose the applicable law but this rule is subject to public policy considerations and the mandatory rules in respect of certain aspects of agency agreements.

Contracting out

Many of the provisions of the Italian Civil Code in respect of commercial agents are mandatory provisions and may not be modified to the disadvantage of the commercial agent unless the commercial agent carries out his activities outside the Italian territory. In particular, the parties cannot agree to waive the indemnity provisions to the detriment of the agent.

Commissions

The agent is entitled to commission on the agreements concluded through his activity.

A commission is due to the agent, unless a different agreement is reached between the agent and the principal:

  • with regard to parties that have been previously acquired by the agent as customers;

  • with regard to parties located within the agent’s territory, or relating to the customer group or category assigned to the agent.

The agent is entitled to commission on the agreements reached after the cancellation of the agency contract if the purchase order is sent to the principal or to the agent before the cancellation of the agency contract, or if the agreements are reached within a reasonable period from the date of such cancellation and their conclusion is prevailingly due to the agent’s activity.

Indemnity or compensation on termination

The principal must pay an indemnity to the agent upon termination in the following circumstances:

  • where the agent has secured new customers for the principal or has significantly developed the business with existing customers

  • where the payment of an indemnity is deemed fair in all the circumstances

The indemnity cannot exceed the equivalent of an agent's average annual remuneration calculated over the preceding five years. If the duration of the contract is less than five years, the annual average remuneration is calculated according to the duration of the agreement, i.e. two months for two years' duration. The agent must notify the principal of his intention to pursue his right to an indemnity within one year of the termination of the agreement.

The payment of an indemnity does not prevent the agent from seeking compensation for damages, if any, caused to the agent by the unlawful termination of the agreement by the principal.

Avoiding compensation

A principal does not have to pay any indemnity to the agent in the following circumstances:

  • if the principal terminatesthe agency relationship due to a serious breach by the agent;

  • if the agreement is terminated by the agent, unless this termination is due to the acts of the principal, or because the infirmity or illness of the agent prevents him from continuing his activities;

  • if the agent, in agreement with the principal, assigns his rights and duties under the contract to third person.

Alternatives

The above mentioned provisions, particularly those regarding the termination indemnity, may not be altered to the detriment of the agent. For this reason, alternative relationships should be taken into consideration before concluding an agency agreement.

The agency agreement is a somewhat hybrid relationship, where the agent has a substantial degree of independence from the principal, but is nevertheless entitled to a legislative protection which is somewhat familiar to that of an employee.

In addition, where an apparent agency contract has the typical characteristics of an employment contract, Italian labour law applies to the agreement. In such case the judge can declare the existence of an employment relationship.

Employment is an alternative, particularly when it is envisaged that the agent will be strictly supervised in its activity.

On the other hand, when the prospective agent is supposed to act independently (and is financially viable) the relationship can be contractually construed as a distributorship, with very different features. A distributor is an independent purchaser of goods from the principal (whereas the agent merely solicits business for the principal) and enjoys a substantial degree of independence from the principal as to the terms and conditions of resale. Upon termination of a distributorship agreement, no indemnity is payable to the distributor unless specifically provided for in the agreement.

The Netherlands

The Directive was implemented into Dutch law by an Act of 1989.

A commercial agency agreement is defined as an agreement in which the principal instructs the commercial agent to perform, for a definite or indefinite period of time intermediary services in concluding agreements. The Act of 1989 does not apply if the Financial Supervision Act is applicable to the agency agreement.

An agency contract need not be in writing but each party is obliged to co-operate in drawing up a written contract if either party requests one.

Forum shopping

The parties can choose which law governs the agency agreement, provided it is connected with the agreement. If the parties do not choose a particular law, then the law of the country where the agent is established or in which he carries out his activities will apply. Generally speaking, parties cannot contract out mandatory rules implemented by virtue of the Directive, not even by choosing law from a non-EU country.

Contracting out

Dutch law does not allow the alteration of the legal compensation provisions to the detriment of the agent.

Commission

For agreements concluded after termination of the agency agreement the agent is entitled to commission for the preparation of these agreements if:


  1. these agreements owe their origin to the work of the commercial agent and have been concluded within a reasonable time after termination of the agency agreement, or

  2. the order was placed before termination of the agency agreement and the agent is the one who solicited the party.

Indemnity or compensation on termination

The amount of an indemnity payment for goodwill is limited to one year's commission and is calculated by taking the average annual remuneration of the agent over the preceding five years. If the contract lasted for a shorter period, payment is calculated by the average remuneration earned by the agent for the entire duration of the contract. Any remuneration earned by the agent for performing supplemental services may also be taken into account as well as any remuneration earned by the agent in winning new customers. The agent must make a claim for indemnity within one year of the termination of the agreement.

The agent may claim damages in addition to the goodwill indemnity if the principal has unlawfully terminated the agreement.

Avoiding compensation

An indemnity payment for goodwill will not be awarded in the following instances:

  • if the principal has terminated the agency contract due to the agents misconduct,

  • if the agent himself has terminated the contract, unless such termination is justified by circumstances attributable to the principal, or by the agent’s age, infirmity or illness

  • if the agent terminated the contract by assigning the rights and duties under the contract to a third party with the permission of the principal

Alternatives

Agency agreements under Dutch law are distinct from employment contracts, which are covered by labour law. Distribution agreements are not regulated by statutory law and can be freely contracted. However, the termination of distribution agreements may lead to similar liability of the principal on the basis of the rules of equitability and fairness as developed in Dutch case law.

Spain

Spanish Law 12/1992, governs the regulation of commercial agents contracts. By these contracts either an individual or a company works for a principal, securing contracts in a specified territory for remuneration. The agent acts always on behalf of the principal, as an independent mediator, and takes no risks himself.

The agent may work for several principals, although he needs the consent of each principal in case the goods or services are similar.

These provisions may, however, be waived by agreement between the parties.

Forum shopping

The applicable law may be chosen by the parties, nevertheless, this rule is subject to public policy considerations and the mandatory law in respect of certain aspects of agency agreements.

Only the Courts of the agent’s domicile are entitled to hear actions regarding the agents contract.

Contracting out

The parties cannot agree to waive the indemnity provisions to the detriment of the agent.

Commission

The agent’s remuneration might be a fixed sum, a commission, or a combination of both. A commission is any remuneration which varies depending on the number or value of the contracts or operations secured or the agreements reached through the agent’s activity.

Commission becomes due once the principal has completed the agreements reached through the agent.

Termination

Law 12/1992 includes a specific regulation regarding the termination of the commercial agent contract:

  • If the contract is concluded for a fixed term, it shall expire on the due date provided that an effective termination of the agent’s activities occurs. Contracts for a fixed term that are continued by the parties after the term has expired are considered contracts for an indefinite period of time.

  • If the contract is concluded for an indefinite period of time, any of the parties will be entitled to give unilateral written notice of its termination, with a minimum advance notice of one month (which can be extended by covenant) per each year of the contract, with 6 months being the maximum notice required. In the event of a breach of the contract or bankruptcy of any of the parties, the duty of giving advance notice of termination does not apply.

Indemnity or compensation on termination

Indemnity for goodwill: The principal must pay an indemnity for goodwill to the agent upon termination of the agency contract in any of the following circumstances:


  1. If the agent has secured new customers for the principal or significantly developed business with existing customers;

  2. If the activity of the agent will continue to create positive consequences for the principal in the future;

  3. If the payment of the indemnity is fair taking in consideration any possible lost commissions, non-competitive limitations and, in general terms, all the circumstances involved.

The indemnity cannot exceed the equivalent of an agent's average annual remuneration calculated over the preceding five years. If the duration of the contract is less than five years, the average annual remuneration is calculated according to the duration of the agreement, i.e. two months for two years' duration.

Compensation for damages. The payment of a goodwill indemnity does not prevent the agent from seeking compensation for damages, if any, caused by improper termination by the principal.

Avoiding compensation

The principal does not have to pay an indemnity for clients or for damages to the agent if any of the following circumstances occurs:


  1. If the principal terminates the agency contract due to a breach of legal and contractual obligations by the agent;

  2. If the agent terminates the contract, unless such termination is due to the acts of the principal, or because the age, disability or illness of the agent made it impossible to oblige him to continue with the agency activity; and

  3. When the agent, with the principal’s consent, assigns his rights and duties under the contract to another person..

Alternatives

Under Spanish Law on commercial agents contracts it is not possible to devise alternatives to avoid the provisions regarding the obligations of the parties, the remuneration of the agent, and the termination of the contract.

The Spanish legal system contemplates several legal figures with similar characteristics to the commercial agent, such as employees or distributors, which are in practise hardly distinguished from agents.

Spanish Jurisprudence applies for analogy the imperative rules of the commercial agents contracts to all the contracts of distribution.

Sweden

Summary of the Swedish Commercial Agents Act

The Directive was implemented into Swedish law by amending the Commercial Agents Act on 1 January 1992 and applies to contracts in operation after 1 January 1994.

Definition of agent

A commercial agent is defined as a person who, in the course of conducting a business, contracts with the principal to independently and on a permanent basis act on behalf of the principal in the sale or purchase of goods. This can be accomplished either through the receipt of offers made to the principal, or through the conclusion of contracts in the name of the principal. Employees are not agents. Because of the requirement that the agent must be involved in the sale or purchase of goods the law is not applicable to agents who deal with securities, bonds, shares, insurances, real estate or ships.

Commission

If the parties have not agreed upon the agent’s remuneration, such remuneration shall be determined in accordance with that which is customary in the location in which the agent carries out his business activities. If no such custom exists, the remuneration is determined according to what is reasonable. Commission must be paid within one month of the expiry of the quarter in which the commission is earned. The principal has to provide the agent with a commission statement not later than one month after the expiry of each quarter. The commission statement shall contain information about the commission earned during the quarter.

The agent is entitled to receive from the principal any and all information which is required by the agent in order to verify whether the commission note encompasses the amount of commission earned. Extracts from the principal’s accounts constitute such information. If the principal fails to provide the agent with such information or there is reason to assume that the information in the commission statement is incorrect the agent is entitled to review the principal’s accounts to the extent required. The principal may determine whether the review shall be conducted by the agent himself or by an accountant.

If the agent does not receive commission or other remuneration when due from the principal, or where there is material cause to believe that he will not receive it, the agent has the right to retain goods, materials and documents as security for his claim. However, power of attorney and other documents of importance may not be retained. Goods retained by the agent may be sold by him three months after the agent has notified the principal that the goods have been retained. The agent may apply the proceeds of the sale in satisfaction of the claims in respect of which the goods constituted security.

Severance compensation

Upon termination of the agency agreement, the agent shall be entitled to severance compensation if:

  • the agent has provided the principal with new customers or has significantly increased trade with the existing group of customers, and the principal will derive a significant advantage from such development

  • severance compensation is reasonable in all the circumstances and, in particular, the loss to the agent of commission in respect of contracts with the customers referred to in 1.

The severance compensation shall not exceed a sum corresponding to the remuneration for one year, calculated according to the average annual remuneration during the last five years or during the period in which the agent performed the agency, whichever is shorter.

The agent is not entitled to severance compensation

  • if the principal terminates the agreement as a result of the intentional or negligent failure of the agent,

  • the agency agreement is transferred to another party or

  • the agency agreement is terminated as a result of the bankruptcy or insolvent liquidation of the agent.

If the agent terminates the agency agreement he is entitled to compensation only where the termination is related to certain circumstances attributable to the principal or the termination is a result of the agent’s age, sickness etc. and he cannot reasonably be required to continue with his activities. The agent must notify the principal of his claim to severance compensation within one year from the date of termination of the agreement.

The Swedish legal system did not recognise severance compensation for agents before the Council directive came into force. The law had to be amended to comply with the directive.

Damages

If the agent or the principal fails to fulfil his contractual or statutory obligations or the agency agreement is terminated as a consequence of the bankruptcy or insolvency of either of the parties, the party shall be liable to compensate the other for damage so caused, unless he can show that the failure was not due to his own negligence. A party claiming damages shall notify the other party without unreasonable delay when he becomes aware or should have become aware of the circumstances that the claims are based on. If he fails to do so, he shall forfeit his right to damages unless the other party has acted with gross negligence or in bad faith.

United Kingdom

Scope of protection

The Directive was implemented by the Commercial Agents (Counsel Directive) Regulations 1993 and came into force on 1 January 1994. The Regulations have retrospective effect, i.e. they affect contracts made prior to 1 January 1994. The Department of Trade and Industry published guidelines giving a broad interpretation to the Regulations and subsequent case law has confirmed this approach.

Agents who market goods as opposed to services are protected by the law. Goods, however, are not defined. It is not clear what the position is if the supply comprises a mix of goods and services. Principals may consider using two separate contracts to distinguish between goods and services. The services that may be excluded include car hire or car leasing, package holidays, subscriptions to satellite television channels, insurance and other financial services. It is still unclear whether computer software will be regarded as a good or a service. Case law currently indicates that data alone is not considered to be a form of tangible property (i.e. a good). It has been held, however, that when integrated to a disk, it may be capable of constituting a good. These cases are not definitive and may yet be distinguished.

There must be a contract between the principal and agent and/or between the principal and sub-agent for the Regulations to apply.

Secondary activities

Member States were given the right to introduce provisions on secondary activities where the agent would not be protected. Under English law, if the agent does only a small amount of agency work, his tasks may be considered “secondary” to his other activities taking him outside of the scope of the protection. A principal should always ask an agent for details of his other activities to determine whether he falls within the scope of the Regulations.

Forum shopping

The Regulations apply only to the activities of an agent in the United Kingdom. Parties can agree however that an agency contract will be governed by a law of another Member State.

Exclusions

The Regulations expressly exclude from protection: offices of companies/associations; partners; salaried employees; receivers or liquidators; Crown agents for overseas governments; unpaid agents; and commercial agents who operate on commodity exchanges.

Form of contract

There is no requirement for the contract between an agent and principal to be in writing. However, Regulation 13 gives a non-derogable right to both the agent and the principal to receive a signed written document incorporating all the terms of the agreement on request. Although the Regulations appear to apply to individuals only, in practice they are frequently applied to limited companies.

Authority to negotiate

For the Regulations to apply the agent must have continuing authority to negotiate. Even if they are unable to change prices or conditions of business and their job is simply to encourage customers, they may still be protected under English law. Agents who only effect introductions between their principals and third parties and lack the power to bind their principals in the sale or purchase of goods, or to negotiate and conclude transactions are not protected by the Regulations. Furthermore, if an agent is appointed for one transaction only or for a specified number of transactions, then he will not be protected as his authority is not continuing.

Indemnity or compensation on termination

An indemnity or compensation may be available on termination unless the agent has substantially breached the contract. The parties are free to choose either mechanism and incorporate it into their contract. In the event that the contract is silent on this issue the default option reverted to is a compensation payment. Where the parties have not entered into a written contract, they will fall back on the Regulations to determine the appropriate mechanism for making a payment on termination. Where it is just to do so, an indemnity will be payable where the agent has introduced new customers or increased business such that the principal continues to derive substantial benefit. The Regulations limit the indemnity to a maximum of 1 year’s commission. Alternatively, compensation will be available where the agent has been deprived of commission or he is unable to amortise the costs and expenses he has incurred in performing the contract. The Regulations, however, do not mandate a basis for calculating the level of compensation payable to agents, a situation which has been recently confirmed by the House of Lords in Lonsdale (t/a Lonsdale Agencies) v Howard & Hallam Limited. In Lonsdale the House of Lords held that UK agency agreements were not subject to the French method of calculating compensation and instead compensation should be assessed by an expert by reference to the agent’s loss, that is, the value of the agency at termination. Ordinarily, the courts would expect the parties to appoint an expert to assess the value of the terminated agency. This is likely to add further cost and expense to the process.

Avoiding compensation

Compensation is not payable where the agent substantially breaches the contract or where the agent terminates the contract. If, however, an agent resigns due to the actions of the principal, compensation may still be payable. Principals should be cautious in “encouraging” agents to terminate the agency agreement.

Contracting out

The Regulations do not permit the alteration of the compensation provisions to the detriment of the agent, even if the principal and agent agree to such alteration.

Alternatives

Businesses should consider the following commercial alternatives to an agency agreement to avoid potential difficulties on termination:

  • consider a fixed term employment contract rather than an agency agreement as employees are not protected by the Regulations,

  • ensure a tightly written contract exists; an unwritten contract will be interpreted to protect the agent, in particular,

  • give the agent no power to negotiate or bind the principal, preventing the application of Regulations,

  • insert an indemnity into the agency contract capping the commission at 1 year upon termination,

  • define the agent’s responsibilities especially if the agent is involved in the sale of a service as opposed to goods,

  • draft a clear contractual clause in the agency agreement requiring the principal’s consent to the agent taking on or giving up an activity which brings him within the scope of the Regulations,

  • enter into a binding settlement following termination to avoid compensation calculations under the Regulations,

  • wait for a claim; compensation is only available if the agent makes a claim within 1 year of termination.