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Compensation for Termination of the Commercial Agent Contract

Compensation for Termination of the Commercial Agent Contract

I.The right to compensation for termination of the commercial agent contract

In the event of termination of his/her relations with his/her principal, the commercial agent has right to compensatory allowance for redress for the harm suffered on this occasion (art. L 134-12 of the Commercial Code).

In French law, this compensation results from the fact that the commercial agent contract is a mandate of common interest, praetorian notion derived from case law during the second half of the nineteenth century and enshrined subsequently by the legislator as set forth in article L 134-4 of the Commercial Code which stipulates:

The agency agreements which took place between the commercial agents and their principals are entered into in the common interest of the parties.”

So, due to this common interest represented by the commercial agent contract, if such a contract is breached by the principal, this means that the commercial agent is ipso facto deprived of the asset value acquired by the contract thanks to the work of the commercial agent. Compensation for termination of commercial agent contract therefore has the objective of remedying this situation, i.e., at this loss of value for the commercial agent (loss of value which could not be compensated for in advance by the collection of his/her commissions by the commercial agent). It in no case concerns compensation of clientele, contrarily to what the majority of the other countries of the European Union have stipulated or to what is planned for the sales representative.

1.Principle of the right to compensation for termination of the contract of the commercial agent

Combined reading of articles L 134-12L 134-13 and L 134-16 of the Commercial Code show that in the event of termination of the commercial agent contract, this compensation is the principle and non-payment of this compensation is the exception. In effect, article L 134-12 is written as follows:

In the event of termination of his/her relations with the principal, the commercial agent has the right to compensatory allowance for redress for the harm suffered. The commercial agent loses the right to redress if s/he has not notified the principal, within a period of one year from termination of the contract, that s/he intends to assert his/her rights. The right-holders of the commercial agent also benefit from the right to redress when the termination of the contract is due to the death of the commercial agent.”

Contrarily to what prevailed before the law of 1991 (codified in articles L 134-1 et seq. of the Commercial Code), this compensation for termination of contract is due whether the commercial agent contract had been entered into on a permanent basis or for a fixed period, the possibility of entering into a fixed term contract was, moreover, expressly stipulated by article L 134-11 of the Commercial Code.

This rule was confirmed by the Court of Cassation during several orders (see notably Cass. Com. 23 April 2003 and 3 October 2006) and resumed by the court jurisdictions (see in particular CA Versailles 7 January 2010).

And it is also the case in the event of breach of the commercial agent fixed term contract by the principal before the end of the aforesaid contract in the absence of serious misconduct of the commercial agent.

The right-holders of the commercial agent also benefit from the right to this compensation for termination of commercial agent contract when the termination of the commercial agent contract is due to the death of the commercial agent.

The scope of this rule is so broad, that it is particularly true including in the event of suicide of the commercial agent as the Court of Cassation has already had the opportunity to confirm in 2010 (for more details (see our article Death by suicide of the commercial agent and the right to compensation of his/her right-holders).

2.Exceptions to the right to compensation for termination of the contract

The sole exceptions to this principle of the right to compensation for termination of contract of the commercial agent are restrictively set out by article L 134-13 of the Commercial Code. Thus, with respect to article L 134-13 of the Commercial Code, the sole exceptions to this right to compensation correspond to the following cases:

–          if the termination of the commercial agent contract is caused by the serious misconduct of the commercial agent (see our article on our blog The notion of serious misconduct of the commercial agent),

–          if the termination of the commercial agent contract is the result of the initiative of the commercial agent unless this termination is justified by circumstances attributable to the principal (see our article Breach of the commercial agency agreement due to the performance of the principal) or due to the age, disability or illness of the commercial agent, following which the continuation of his/her activity can no longer be reasonably required,

–          if, according to an agreement with the principal, the commercial agent transfers his/her contract.

 

II. Serious misconduct of the commercial agent

Knowing that the notion of “serious misconduct” of the commercial agent recovers is particularly important insofar as where the serious misconduct is one of the rare events stipulated by article L 134-12 of the Commercial Code as deprived of the right to compensation for end of contract.

However, the notion of serious misconduct of the commercial agent is not easy to grasp due to the absence of legal definition.

Moreover, as the provisions relative to compensation of the commercial agent in the event of breach of the contract by the principal are of a public nature, the parties cannot agree on a definition of serious misconduct in their contract. In these circumstances, the definition of the serious misconduct is therefore essentially a jurisprudential matter.

Definition of serious misconduct of the commercial agent

In principle, the misdemeanour which constitutes a serious breach in the duties of a good professional is considered as serious misconduct, assessed in consideration of the specific performance of the principal, jeopardising the finality of the agency agreement.

In effect, the commercial agent contract is a mandate of common interest the objective of which is to maintain, even develop a market share of which the value is commune to the principal and to the authorised representative. For there to have been serious misconduct, it is therefore necessary, by the alleged facts, that the commercial agent suffered a loss at this common value.

Serious misconduct could therefore constitute, notably, within clearly specified conditions, to be assessed on a case by case basis:  

–          facts of competition on the part of the commercial agent, subject, however, that the principal did not have knowledge of such facts and had not tolerated them,

–          an abnormal reduction of turnover resulting from an obvious lack of activity of the commercial agent and not from the economic circumstances,

–          circulation by the commercial agent of erroneous information or the denigration by the commercial agent of the principal and/or of his/her products.  

Proof and effects of the serious misconduct of the commercial agent

Considering a well-established case law, it is up to the principal to provide evidence of the serious misconduct of the commercial agent.

The principal must therefore prove that the commercial agent committed serious misconduct, by proposing precise grievances to the judges who must respond to these. Failure to provide evidence of the alleged acts, the serious misconduct of the commercial agent is not characterised.

It is, however, up to the principal to prove that the termination of the mandate of the commercial agent was justified through the fault of the commercial agent.

What is more, the facts retained as constitutive of the serious misconduct cannot be validly retained when the principal has had cognizance of them and has tolerated them until the breach of the agency agreement without having at any time reported the serious misconduct.

Lastly, if the fault of the commercial agent, even proven, was caused through the principal’s own fault, this will reduce its gravity.

Time of the serious misconduct of the commercial agent

And, of course, insofar as where article L 134-13 only excludes the right to compensation for the commercial agent if the termination of the contract is caused by the serious misconduct of the commercial agent, the principal who breached the contract of the agent without citing serious misconduct may subsequently cite serious misconduct of the commercial agent, what is more, committed during the notice period.

This case focuses on the assumption where the commercial agent decided to end the commercial agent contract by him/herself, without being constrained by the performance of his/her principal. In this case, the decision of the commercial agent is the equivalent of the resignation of the employee.

However, the commercial agent does not lose his/her right to compensation for termination of contract if, on the contrary, s/he is obliged to end his/her contract due to the performance of his/her principal.

In effect, article L 134-3 of the Commercial Code expressly stipulates that the commercial agent does not lose his/her right to compensation for termination of contract if the breach occurs at his/her initiative but due to “circumstances attributable to the principal“.

Therefore, the principal who does not respect the clause of exclusivity which the agent benefits from and who is not commissioned on all the transactions completed on his/her exclusive sector creates the circumstances which render him/her attributable the breach of the contract at the initiative of the agent.

Likewise, in the event of acknowledgement of the breach of his/her contract by the agent due to a unilateral modification of the latter by his/her principal, the latter also takes the risk of the breach being attributed to him/her. Such as will notably be the case in the event of unilateral modification of the sector entrusted to the agent.

Similarly, in the event of default of payment of the commissions to the commercial agent, the principal will also take the risk of acknowledgement of the breach of the contract by the agent attributable to the principal.

Obviously, the commercial agent must not take lightly the decision to breach his/her contract through the fault of his/her principal.

In effect, if the grievances raised by the commercial agent against his/her principal are unfounded, the commercial agent is considered to have automatically resigned and cannot therefore claim any compensation, besides the fact that his/her contract was terminated by him/her!

Lastly, the commercial agent will also have the right to claim his/her compensation for termination of contract if the latter took the initiative of the termination of the contract, due to his/her age, a disability or a disease.

The third exception to the right to compensation for termination of contract of the commercial agent focuses on the case where the commercial agent transfers his/her contract. That makes sense. The commercial agent may both transfer his/her contract and so, obtain in this respect financial compensation from his/her successor who replaces him/her, and at the same time claim compensation for end of contract.

On one hand, the contract does not end due to the transfer. It is the same contract which continues, which implies furthermore that the successor takes on the seniority of his/her predecessor. This will be important if the contract ends subsequently within the conditions giving the right to compensation for termination of contract.

On the other, the successor of the commercial agent substitutes the rights and obligations that s/he holds due to the contract and pays him/her compensation for succeeding him/her. This implies, therefore, that the right to compensation for termination of contract that the commercial agent held is transferred to his/her successor due to transfer of the contract.

 

III. Public policy 

No derogation to the rules recalled above is authorised, namely:

–          the right to compensation for termination of contract of the commercial agent, which is the principle,

–          the sole exceptions to this right to compensation for termination of contract are those set out by article L 134-13 of the Commercial Code. In effect, article L 134-16 of the Commercial Code specifies that:

Is deemed unwritten any clause or agreement (…) derogating, to the detriment of the commercial agent, to the provisions (…) of articles L. 134-12 and L. 134-13”.  

Concretely, this results, notably, in the following consequences:

–          the commercial agent cannot in advance renounce his/her compensation for end of contract,

–          the amount of compensation for termination of contract cannot be fixed in advance in the contract,

–          the fact of contractually stipulating an increase of the commission due to the agent during the execution of his/her contract and that in counterpart the latter cannot claim compensation for breach of contract can no more prevent the commercial agent from claiming such compensation eventually (Cass.Com. 17 June 2003, Bull. Civ. IV, no. 99, D. 2003, p. 2428, obs. D. F., RJDA December 2003, no. 1170, p. 1018),

–          the commercial agent contract may only validly stipulate that a determined performance of the commercial agent constitutes serious misconduct (for example, non-achievement of a minimum turnover).

 

IV. Amount of the compensation

Except for particular circumstances, the custom sets at two years of gross commissions the amount of the compensation due to the commercial agent by the principal. Of course, it will still be necessary to use the correct elements of calculation so that the amount of compensation for termination of contract is correctly calculated.

The Court of Cassation has already had the chance to specify on several occasions the factors which must be taken into account to determine the loss suffered by the agent due to the breach of contract.

So, in a case submitted to the Court of Cassation, the contractual remuneration of the agent was comprised of five positions, of which one stipulating of the commissions on delivery, proportional to the quantities supplied, intended to remunerate the logistical activity, namely storage, transport, delivery and the corresponding administrative tasks.

The court of appeal had retained that the amounts collected with respect to this position were intended, mainly, to cover the expenses and charges set out with respect to execution of the mandate which would disappear with termination of the activity and that as a result, they should not be taken into consideration to calculate compensation for end of contract.

In the terms of its order, the Court of Cassation quashed the judgement of the court of appeal for the reason that compensation for termination of contract due to the commercial agent had the objective of compensating for the loss suffered which includes the loss of all the remuneration acquired during the activity developed in the common interest of the parties without it being necessary to distinguish according to their nature.

The Court of Cassation therefore agrees with the commercial agent who sustained that the amounts described as “expenses and charges” by the trial judges actually constituted remuneration and not a simple reimbursement of expenses. Such a solution was again confirmed subsequently under the same terms.

Moreover, in the event of fixed remuneration and commissions, the compensation for termination of contract must also be calculated on the basis of all of these elements of remuneration

See Period of claim of compensation for termination of contract 

Be careful, however! Since the law of 25 June 1991, compensation for termination of contract of the commercial agent must imperatively be claimed within the period of one year from the termination of the commercial agent contract.

In effect, once this deadline has passed, the commercial agent from then on loses his/her right to redress. In effect, in the terms of article L 134-1 of the Commercial Code, the commercial agent loses his/her right to compensation “if s/he has not notified his/her principal within a period of one year from termination of his/her contract that s/he intends to assert his/her rights.”

Of course, the devil is in the details, it will be advisable not to make a mistake on what is agreed by termination of the contract, the corresponding date is not always straightforward and an error on this subject could be fatal!

Ultimately, if the legal regime of compensation for termination of commercial agent contract is marked out clearly enough, the implementation of such a right may be delicate, notably, with respect to the mode of calculation of this compensation, from the respect of the period of one year to claim it or even for the competent jurisdictions in the event of attributive clause stipulated in the contract or international contract (commercial agent in one country and principal in another).  

 

 

FOUSSAT AVOCATS: our expertise at your service

Specialised in commercial agent law and managing over a long time the issues linked to the breach of commercial agent contract, FOUSSAT AVOCATS advices and assists its clients throughout the life of their commercial agent contracts, including in the event of international contracts, as well as concerning their conclusion, execution and cessation.

We are therefore at your disposal for any additional information that you may wish.

 

FOUSSAT AVOCATS, Paris Marseilles Brussels