1. What’s the issue?
Commercial agents are protected in the EU and other places by laws which give them various rights including a right to compensation upon termination of the relationship. The essential logic being that if they generate new business for the principal then this needs to be rewarded and the principal should not be able to simply walk away and keep the benefit.
If we engage an external party to promote our products, then there is a danger that we inadvertently create a commercial agency relationship and provisions in our contract may be overridden by the protections of the law. In our experience, agents tend to be more aware of their rights than companies engaging them…
EU: 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
UK: The Commercial Agents (Council Directive) Regulations 1993 (also see amendments)
Spain: Ley 12/1992, de 27 de mayo, sobre Contrato de Agencia
2. What are the main protections?
- A commercial agent must be remunerated – we would expect this to be agreed in writing anyway but, importantly, for commercial agents remuneration becomes due when the transactions generated are carried out (i.e. not only when paid by the customer) and payable not less than one month after the end of the contract quarter. Also the contract cannot exclude ongoing commissions after termination for orders mainly attributable to the agent, which were executed later or which reached the principal or agent before termination.
- If a fixed term agreement continues after the end of the agreed duration, the term automatically becomes indefinite;
- The minimum termination notice periods for an indefinite term agreement are: first year: one month; second year: two months; third or later years: three months;
- The EU directive provided for two mechanisms for compensating the agent on termination: either: (i) an “indemnity” which, conditional upon the agent having generated new and continuing business, is based on what is “equitable” including the commissions the agent will lose in the future, up to one year’s average renumeration (including fixed and commission-based elements). Damages may be claimed in addition; or (ii) “compensation” for damage suffered due to termination, in particular where the agent is deprived of commissions or the ability to recoup costs and expenses incurred on the principal’s advice. English courts have based this on the value of the goodwill in the agent’s business with no particular limit.
The indemnity system is similar to the practice under German law. The compensation system is related to the law in France (where the practice has been to calculate the goodwill in the business at a level of two years’ commissions).
In the UK the mechanisms are alternatives: if no indemnity is set in the contract then compensation will apply.
In Spain they also coexist to an extent: the indemnity is the default (not needing to be agreed in the contract) and compensation for damages may apply in addition if the contract is unilaterally terminated by the principal and the indemnity does not cover the costs incurred by the agent.
3. Are there any solutions?
A. The marketer is not a “commercial agent” within the terms of the law
In the UK at least the legislation is quite specific and will apply only to agents that meet all the required criteria. And in the UK only commercial agents that promote goods and not services are protected. However, depending on the precise circumstances “goods” may include software. On the other hand, in some places (e.g. Spain) agents promoting either goods or services would be covered, so if Spanish law applied (whether by choice or due to the relevant facts) then services marketers may benefit from similar protections.
If the agency activity is considered to be “secondary” then the protections will also not apply. This is not very clearly set out in the UK regulations but if the primary purpose of the agreement is something other than the promotion of the principal’s goods by the agent then it may be possible to argue this.
Note that the definition of commercial agent is someone with “continuing authority” to “negotiate” or conclude the sale and purchase of goods on behalf of the principal. So one-off transactions and simple referrals without negotiation might be excluded.
If the marketer is in reality a reseller or distributor (i.e. they contract with the purchaser and earn a mark-up not a commission) then these provisions will not apply. Also they would not apply to sales persons that are employed by the principal. We know, normally the accepted attitude is to try to ensure that independent contractors are not considered employees and should not get any of the benefits that employees get. However, we also know of cases where on termination the award for unfair dismissal (and benefits) is significantly less than the compensation due and so this point has been argued the other way around.
Finally, terminology can be important. If we use the words “agent” and “commission” then we are reducing our ability to argue that these protections don’t apply and we may prefer to use terms such as “referrer”, “revenue share” etc. This of course won’t be conclusive. However, if we do use the agency language then clearly we are making an indication that we may prefer to avoid.
B. Another country’s law applies that doesn’t protect the agent so much
These rules are based on an EU directive and if the law of any EU member state applies then it’s very likely that similar protections exist for commercial agents under that law. However, they are not identical and we are at liberty to choose an applicable law in the contract. Within the EU this will normally be conclusive provided that the law of the particular member state where the agent works and so would normally govern the contract permits this “opting out”. We need to be aware that national laws will often specify as a starting point that they apply to commercial agents in the relevant territory so we may not have an entirely free choice. And the rules of international law may not permit us to choose a legal system that bears no connection to the parties or the services being provided. However, there may be an opportunity to reduce our exposure if we consider this (i) before making the relevant contracts (ideally); or (ii) later on particularly if documents don’t indicate a clear choice of laws or the facts point to another legal system being applicable.
C. The contract specifically excludes any compensation upon termination
This may risk being unenforceable. However, it can give us a strong negotiating position. On the other hand, if we fall squarely within the scope of the regulations, then at least in the UK what we should do is agree some form of “indemnity”. This can be less than the one year’s commissions referred to in the regulations but will be valid as long as it is “equitable”. Also, to be indemnified, the agent must have brought the principal new customers or have significantly increased the volume of business with existing customers and the principal must continue to derive substantial benefits from this business. By expressly making the indemnity conditional on these matters we may be able to limit the circumstances under which it applies.
Note that this right extinguishes one year from termination. Agents are quite strong on making claims in time. However, we should be aware of this point which favours the principal.
As ever, Eden Legal’s recommendation is always to consider these matters at the outset. If we are in an agency situation then that is fine and we should ensure that our contracts contain balanced provisions in line with applicable laws. What we want to avoid is creating a protected commercial agency relationship by accident where this might otherwise not be imposed by law. In any event, the regulations do permit some flexibility and their scope of application can be quite narrow, so even after the fact there may be arguments on both sides.
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