In a recent ruling, the Court of Justice of the European Union (CJEU) has interpreted the scope of the indemnity provisions in the Commercial Agents Directive. The ruling will be of interest to businesses that appoint commercial agents as it extends the circumstances in which they may be required to indemnify the agent on termination of the agency relationship.
The Commercial Agents Directive is a piece of EU legislation dating back to 1986. Its primary purpose is to protect commercial agents as being the perceived weaker party in the principal/agent relationship. Amongst other things, the Directive requires, in certain circumstances, a principal to indemnify or compensate an agent on termination of the agency. An indemnity is capped at one year’s commission and is often, therefore, the preferable alternative for a principal. A compensation payment is uncapped and aims to compensate the agent for the loss of the value of the agency (the amount that a hypothetical purchaser would be willing to pay for the agency as at the date of termination). Compensation is the default position unless the parties have expressly provided for payment of an indemnity in the agency agreement. The parties cannot contract out of the agent’s entitlement to one of these payments.
The issue before the CJEU was the interpretation of Article 17(2)(a) of the Commercial Agents Directive. This provides (emphasis added):
2.(a) The commercial agent shall be entitled to an indemnity if and to the extent that:
- 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, and
- the payment of this indemnity is equitable having regard to all the circumstances and, in particular, the commission lost by the commercial agent on the business transacted with such customers.
In this case, Ms Karaszkiewicz (Ms K) was a commercial agent of Marchon, the principal. Marchon was a wholesaler of spectacle frames. The key issue was that each agent of Marchon was appointed to sell only some of the spectacle frames within its range – not the entire range. Ms K, for example, sold the brands A and B. Another agent would sell two or three different brands within Marchon’s range. And another agent, different brands again within the range. Marchon gave Ms K a list of opticians with whom it already had business relationships with regard to other brands of frames and Ms K negotiated with those opticians the sale of the frames assigned to her.
On termination of the commercial agency, Ms K sought an indemnity from Marchon on the basis that she had brought in “new customers” within Article 17. The CJEU was asked to rule on whether “new customers” meant brand new customers that had never had a business relationship with the principal before or could include customers that already had a business relationship with the principal in respect of some of its goods where the agent had subsequently sold different goods to those customers from within the principal’s range.
The CJEU held that the latter interpretation was the correct one. This was in order to give effect to the objective of the Directive which was to protect commercial agents. Although Ms K was negotiating with existing customers of Marchon, she had been required to establish with them a business relationship specific to the brands assigned to her. It did not matter that it was, arguably, easier for an agent to sell goods to customers who already had a business relationship with the principal. Even if that was the case, this could be taken into account by a court in its analysis of whether payment of an indemnity was “equitable” under Article 17.
This is a broad interpretation of the indemnity provisions of the Commercial Agents Directive and will extend the circumstances in which an agent will be entitled to be indemnified. EU member states have implemented the Directive into their national law. In relation to agents in the UK, Article 17(3)(a) of the Regulations implementing the Directive is identical to Article 17(2)(a) of the Directive and so will be interpreted by the UK courts in the same way, following CJEU precedent. This may not be the case, of course, in other EU member states where their national implementing legislation differs from the Directive. This could mean that agents with authority to negotiate the sale or purchase of services, or even distributors, may be entitled to an indemnity on termination of the contractual relationship. Accordingly, local law should always be considered in respect of a termination in the EU.
To discuss the implications of this case for principals or agents, or commercial agency more generally, please feel free to call Carlton Daniel.