Earlier this year, the ECJ ruled that commercial agents are generally entitled to compensation, even if the distribution agreement was terminated during a trial period.
The ECJ's decision (C-645/16) was preceded by the French Cour de Cassation's request for a preliminary ruling on whether Art. 17 of Directive 86/653/EEC applies if the commercial agent's contract is terminated during a trial period. The French courts have previously ruled that a commercial agent is not entitled to any kind of compensation or damages under Art. 17 of the Commercial Agents Directive, because the contract was terminated during a contractually provided trial period of 12 months (Directive 86/653/EEC).
DTT, a French company, concluded an agency agreement with CMR as a commercial agent. CMR's target was to sell 25 individual houses per year. In fact, CMR sold one house within the first five months. The agency agreement stipulated a trial period of 12 months, during which each party had the right to terminate the agreement with 15 days' notice during the first month and with one month's notice after the first month. After five months, DTT informed CMR of the termination, citing the unsatisfactory sales numbers. CMR filed a claim at the Commercial Court in OrlÃ©ans for payment of compensation for the financial loss suffered due to the termination of the agency agreement and for payment of damages for unlawful termination of the agency agreement.
One less loophole
Following the advocate general's opinion, the ECJ decided that:
- commercial agents and principals may agree on a trial period, even if the Directive does not provide for one;
- a termination during the trial period is a termination within the meaning of Art. 17 (1) and (3) of the Directive, i.e. the provisions of the Directive are applicable as soon as the contract between the principal and the agent is concluded, even if the contract provides for a trial period;
- indemnity or compensation as provided by the Directive are not meant as a punishment for termination, but as an indemnification for the commercial agent;
- the Directive's objective is to protect the commercial agents; an interpretation that is detrimental to the commercial agent is not permitted.
Worth the hassle?
Apart from the fact that selling houses is not typical for a commercial agent, from an Austrian legal perspective it is exceptional that a claim for compensation has been filed at all.
For example, under Austrian law, a commercial agent is entitled to a maximum of the equivalent of the indemnity for one year calculated from his average annual remuneration over the last five years, and only if the manufacturer/principal continues to benefit from the business of new customers or existing customers whose business relationship has been significantly increased by the agent.
One sale of a house means that the principal has one new customer. So does the principal then actually profit from the newly established customer relationship? In general, most customers do not buy more than one house over a long period of time; the principals could perhaps benefit if a maintenance agreement had been concluded at the same time.
In contrast to Austrian and German law, French jurisprudence does not compensate the commercial agent, instead entitling him to damages for the loss of commissions sustained due to the termination of the business relationship Art. 17 of Directive 86/653/EEC provides for both systems: the German compensation (Ausgleichsanspruch) under Art 17. (2) of the Directive and the French damages (indemnité compensatrice) approach under Art. 17 (3) of the Directive. Member States may choose to implement either.
Moreover, under Austrian law, the agent's compensation would have been quite low, if awarded at all, because only one sale had been made during the term of the contract. Remarkably, French jurisprudence in general assesses the loss of termination at two years of the commercial agent's commission.
Avoiding compensation in the future?
Following the ECJ's decision, most European countries will not have to change their practice when it comes to the agent's compensation or indemnity. Entrepreneurs and manufacturers must be aware that an agent's compensation claim cannot be bypassed by the conclusion of an agency or distribution agreement for a limited time or by including a trial period. The ECJ closes unwanted loopholes, if the commercial agent's protection is at risk. Incidentally, principals should keep in mind that commercial agents enjoy more extensive protection than authorised dealers, who sell products in their own name and for their own account.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.