France – ECJ extends the protection of commercial agents and their right to termination indemnity

Summary – According to French case law, an agent is subject to the protection of the commercial agent legal status and therefor is entitled to a termination indemnity only if it has the power to negotiate freely the price and terms of the sale contracts. ECJ ruled recently that such condition is not compliant with European law. However, principals could now consider other options to limit or exclude the termination indemnity.

It is an understatement to say that the ruling of the European court of justice of June 4, 2020 (n°C828/18, Trendsetteuse / DCA) was expected by both French agents and their principals.

The question asked to the ECJ

The question asked by the Paris Commercial Court on December 19, 2018 to the ECJ concerned the definition of the status of the commercial agent who could benefit from the EC Directive of December 18, 1986 and consequently of article L134 and seq. of Commercial Code.

The preliminary question consisted in submitting to the ECJ the definition adopted by the Court of Cassation and many Courts of Appeal, since 2008 : the benefit of the status of commercial agent was denied to any agent who does not have, according to the contract and de facto, the power to freely negotiate the price of sale contracts concluded, on behalf of the seller, with a buyer (this freedom of negotiation being also extend to other essential terms of the sale, such as delivery or payment terms).

The restriction ruled by French courts

This approach was criticized because, among other things, it was against the very nature of the economic and legal function of the commercial agent, who has to develop the principal’s activity while respecting its commercial policy, in a uniform manner and in strict compliance with the instructions given.  As most of the agency contracts subject to French law expressly exclude the agent’s freedom to negotiate the prices or the main terms of the sales contracts, judges regularly requalified the contract from commercial agency contract into common interest mandate contract. However, this contract of common interest mandate is not governed by the provisions of Articles L 134 et seq. of the Commercial Code, many of which are of internal public order, but by the provisions of the Civil Code relating to the mandate which in general are not considered to be of public order.

The main consequence of this dichotomy of status lays in the possibility for the principal bound by a contract of common interest mandate to expressly set aside the compensation at the end of the contract, this clause being perfectly valid in such a contract, unlike to the commercial agent contract (see French Chapter to Practical Guide to International Commercial Agency Contracts).

The decision of the ECJ and its effect

The ECJ ruling of June 4, 2020 puts an end to this restrictive approach by French courts. It considers that Article 1 (2) of Directive of December 18, 1986 must be interpreted as meaning that agents must not necessarily have the power to modify the prices of the goods which they sell on behalf of a principal in order to be classified as a commercial agent.

The court reminds in particular that the European directive applies to any agent who is empowered either to negotiate or to negotiate and conclude sales contracts. The court added that the concept of negotiation cannot be understood in the restrictive lens adopted by French judges. The definition of the concept of “negotiation” must not only take into account the economic role expected from such intermediary (negotiation being very broad: i.e. dealing) but also preserve the objectives of the directive, mainly to ensure the protection of this type of intermediary.

In practice, principals will therefore no longer be able to hide behind a clause prohibiting the agent from freely negotiating the prices and terms of sales contracts to deny the status of commercial agent.

Alternative options to principals

What are the means now available to French or foreign manufacturers and traders to avoid paying compensation at the end of the agency contract?

• First of all, in case of international contracts, foreign principals will probably have more interest in submitting their contract to a foreign law (provided that it is no more protective than French law …). Although commercial agency rules are not deemed to be overriding mandatory rules by French courts (diverging from ECJ Ingmar and Unamar case law), to secure the choice not to be governed by French law, the contract should also better stipulate an exclusive jurisdiction clause to a foreign court or an arbitration clause (see French Chapter to Practical Guide to International Commercial Agency Contracts).
• it is also likely that principal will ask more often a remuneration for the contribution of its (preexisting) clients data base to the agent, the payment of this remuneration being deferred at the end of the contract … in order to compensate, if necessary, in whole or in part, with the compensation then due to the commercial agent.
• It is quite certain that agency contracts will stipulate more clearly and more comprehensively the duties of the agent that the principal considers to be essential and which violation could constitute a serious fault, excluding the right to an end-of-contract compensation. Although judges are free to assess the seriousness of a breach, they can nevertheless use the contractual provisions to identify what was important in the common intention of the parties.
• Some principals will also probably question the opportunity of continuing to use commercial agents, while in certain cases their expected economic function may be less a matter of commercial agency contract, but rather more of a promotional services contract. The distinction between these two contracts must, however, be strictly observed both in their text and in reality, and other consequences would need to be assessed, such as the regime of the prior notice (see our article on sudden termination of contracts)

Finally, the reasoning used by ECJ in this ruling (autonomous interpretation in the light of the context and aim of this directive) could possibly lead principals to question the French case-law rule consisting in granting, almost eyes shut, two years of gross commissions as a flat fee compensation, whereas article 134-12 of Commercial code does not fix the amount of this end-of-contract compensation but merely indicates that the actual damage suffered by the agent must be compensated ; so does article 17.3 of the 1986 EC directive. The question could then be asked whether such article 17.3 requires the agent to prove the damage actually suffered.