The legal status of commercial agents in the European Union is regulated in the Council Directive 86/653/EEC of December 18th 1986 on the coordination of the laws of the Member States relating to self-employed commercial agents. It is a minimum directive, which sets the lower limits for protecting commercial agents in the EU. The member states are obligated to enforce the directive and the Court of Justice can be consulted by the member states on matters of interpretation of the directive.
The objective of the directive is to create uniform trade conditions within the internal market, promote trade and ensure commercial agents a minimum level of protection.
Damages and Compensation
According to art. 17 in the Commercial Agent’s Directive the member states must take the measures necessary to ensure that commercial agents obtain compensation or damages in matters of contractual termination. Art. 17 express a compromise between the member states. It was therefore decided to give the member states the choice between the system of compensation and the system of damages.
The Two Models
The Model of Compensation (the German model)
Within the system of compensation, the agent, once the contractual relationship is terminated, has the right to compensation, if and when he has brought the principal new customers or has significantly increased the volume of business with existing customers and the principal continues to derive substantial benefits from the business with such customers after the termination of the contractual relationship.
The compensation has to be reasonable when taking all circumstances into account, especially including the commercial agent’s loss of commission from business with these customers.
As a final point an upper limit of the amount of the compensation is specified in the directive, equivalent to an annual compensation, calculated on the basis of the average annual remuneration of the commercial agent during the last five years; and if the contract is concluded less than five years prior the compensation is calculated on the basis of the average remuneration during the contractual relationship.
The compensation embodies the advantages which the principal still has following the efforts of the commercial agent. However the commercial agent has only received commission during the contract period, which normally does not reflect in the goodwill created to the principal’s advantage. This explains why compensation for goodwill is commercially justified. Compensation shall only be paid if the commercial agent has brought the principal new customers or has increased the volume of business with existing customers. If goodwill is not created or if the principal has not benefited from the existing customers compensation is not to be paid. The principal shall therefore not be forced to pay an unreasonable compensation.
The system of compensation was drafted on the basis of art. 89b in the German Trade Act, which has, since 1953, contained a provision relating to the payment of compensation for goodwill and has therefore been the basis of extensive case law regarding the calculation of compensation. This case law and practice should be a valuable help to the courts in the rest of the member states when interpreting art. 17 (2).
The calculation of the compensation shall be made as follows:
Commission originating from new and/or activated customers within the last 12 months of the agency, EURO 50.000,00.
The duration of the benefits is estimated at three years at the average rate of migration of 20 %.
First year 50.000-10.000 = EURO 40.000,00
Second year 40.000-8.000 = EURO 32.000,00
Third year 32.000-6.400 = EURO 25.600,00.
Total loss of commission: EURO 97.600,00.
Adjustment to present value i.e. 10 %.
The number corresponds to the actual compensation of EURO 87.840.
The number can be adjusted according to principles of fairness.
Finally, the number is adjusted if the amount exceeds the limit in art 17 (2) (b) of the directive.
According to art. 17 (2) (b) in the directive the compensation shall not prevent the agent from claiming damages. The provision addresses situations where the commercial agent, according to domestic law, is entitled to claim damages for breach of contract or non-compliance of the notice specified in the directive.
The Model of Damages (the French model)
According to article 17 (3) in the directive the commercial agent is entitled to damages for the loss sustained due to the termination of the relationship with the principal. Such damage particularly occurs when the termination takes place under such circumstances that the commercial agent is deprived of the commission which proper performance of the contract would have procured him whilst providing the principal with substantial benefits linked to the principal; and/or in circumstances which have not enabled the commercial agent to amortize the costs and expenses that he has incurred for the performance of the contract.
There is no limit on damages for sustained loss.
The system of damages was based on French law from 1958 with the purpose of compensating the commercial agent for his loss due to the termination of the agency contract. As is the case with the German system of compensation, an extensive amount of case-law has been generated regarding the right to and the level of damages. In several rulings the French courts have justified the award of damages on the grounds that it illustrates the costs entailed in the purchase of the agency to the successor of the commercial agent, or that it compensates the time necessary for the commercial agent to recover the customers, of which he was robbed.
In case-law the level of compensation is established as the total amount of commission of the past two years or the total amount of the commission of two years calculated as an average of the last three years of the agency contract, which is in accordance with the practice in the profession. The courts reserve the right to award damages based on other grounds, when the principal, for example, can prove that the actual loss of the commercial agent was smaller, due to the short duration of the contract, or, the commercial agent, for example, can prove that his loss was greater due to the age of the agent or its long-term operation. Damages are calculated on the basis of the total amount of remuneration, not just the commission, on the basis of the gross figures. No distinction is made between old and new customers, and the basis for calculation includes special commission. There is usually no adjustment for business-costs. Outstanding commission must also be taken into account.
The damages compensate for the fact that the commercial agent has lost part of his market, and loss is quantified at that time. Future circumstances, such as the business termination of the principal, the commercial agent’s continued business with the same customers or developments in the market are not taken into account. Furthermore it is not required that the commercial agent seeks to mitigate his loss.
EU Competition Law
Art. 101 of the Treaty on the Functioning of the European Union (TFEU) prohibits anti-competitive agreements and concerted practices between corporations. According to the Commission’s guidance on vertical restraints in trade, ordinary agency contracts, in which the job of the commercial agent consists of mere negotiation of orders, and in which the principal bears the full economic risk, fall outside the scope of art. 101 of TFEU. In this case the commercial agent is considered as being an integrated part of the principal’s sales-unit, in which the commercial agent competes on the market on behalf of the principal.
In the less common agency contracts, in which, for example, the commercial agent concludes agreements on behalf of the principal, finances storage or otherwise takes on greater financial risk, it must be specifically assessed whether the commercial agent falls within the scope of art. 101 in TFEU.