Commercial Agents – Indemnity for termination in trial period?

Commercial agents are very suitable for expanding one’s business into new markets – especially for two reasons: First, because they generally have a good expertise of the market (especially if they reside in that country). Second, because their remuneration (“commission”) can be configurated completely profit-oriented (= remunerated only if they successfully negotiate a new transaction), and related to the turnover they generate.

Nevertheless, both the supplier and the commercial agent may feel the need for an initial period, in which both get to know each other, the product, the market and the customers as good as possible to subsequently evaluate how to proceed on that market. Therefore, they may agree on a trial period within which the commercial agency contract can be terminated more easily and sooner than without or after such trial period, e.g.:

“This Agreement shall come into effect on [●] and shall be in force for a trial period of [●] months (“Trial Period”) during which each Party can terminate the Agreement with [●] months written notice. After such Trial Period, the Agreement shall continue indefinitely, unless terminated according to the rules below.”

Even if the agency agreement is terminated within such trial period, however, the agent may be entitled to indemnity or compensation – as the Court of Justice of the EU just now confirmed (Case Conseils et mise en relations (CMR) SARL, decision of 19 April 2018, C-645/16).

The court basically argues with the wording, context and objective of the Commercial Agency Directive:

• The Commercial Agency Directive also applies to ‘”trial periods”.
• Ending a commercial agency contract – even within an agreed trial period – constitutes a “termination” of the agency contract, which triggers the claims for indemnity or compensation – because the commercial agency contract has already been definitively concluded (understanding contrary to French case law, e.g. Cour de Cassation, Case No. 14-17894).
• Goodwill indemnity or compensation are not forfeited because termination within the trial period is not included in the exhaustive list of exceptions in Article 18 Commercial Agency Directive.
• The parties may derogate from the commercial agent’s mandatory rights only from the end of the contract (Article 19 Commercial Agency Directive) because the Commercial Agency Directive aims to protect the commercial agent vis-à-vis the principal (recital 2 of the Commercial Agency Directive).

Practical tips

1. Parties are free to agree on trial periods because it is covered by freedom of contract.
2. At termination, the commercial agent is, as a matter of principle, entitled to an indemnity or compensation – to “indemnify the agent for his past services from which the principal will continue to benefit beyond the termination”, as the EU Court of Justice now put it. Whether the agent can claim indemnity or compensation depends on the law chosen by the parties (or, in absence of choice, by the law of the country where the commercial agent has his habitual residence).
3. As far as the indemnity (payable e.g. according to German law) is concerned, its amount strongly depends on the commercial agent’s performance during the term of the contract – because the claim accrues if and to the extent that (i) the agent has brought the principal new customers or (ii) has significantly increased the business with existing customers and (iii) the principal continues to derive substantial benefits from such business, plus (iv) such indemnity must be equitable. As a maximum, the indemnity shall not exceed of the past five years’ average annual remuneration (including commissions and other payments). Such possible costs should therefore be included in one’s business planning before starting to distribute products or services through commercial agents.
4. Throughout the EU, agency agreements are widespread in a vast variety of industries: roughly 740,000 commercial agents operate for 1.7 million companies and generate sales of EUR 260 billion. These figures from 2012 keep growing as indicate Eurostat’s data, reported by the European Commission in its Refit Evaluation. The EU Member States with the most commercial agents are Slovakia (35k) Czech Republic (42k), Germany (42k), France (50k), Spain (50k) and – by far – Italy (220k). If the agent operates outside the European Economic Area, Principals and commercial agents are free to derogate even from the otherwise mandatory Commercial Agency Directive, especially if German law is chosen. For details, please see the article “Commercial Agents outside the EEA – No Goodwill Indemnity (Ingmar reloaded)”.
5. Alternatively, one can also do business through distributors or franchisees or other intermediaries – where, however, an indemnity may arise at well, especially vis-à-vis distributors. For details, see the article “German Distributor Indemnity – How to avoid it”.