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Termination of a Commercial Agency Agreement and Agent’s Compensation

Termination of a Commercial Agency Agreement and Agent’s Compensation

Published on : 17/01/2023 17 January Jan 01 2023
Publications et Séminaires

The status of commercial agents has been regulated since 1986 at the EU level (Directive 86/653/EEC) and at the French level since 1991 (Law 91-593 of June 25, 1991, incorporated into Articles L. 134-1 et seq. of the Commercial Code). This very protective status of the commercial agent's financial interests has recently been subject to important clarifications by French courts and by the CJEU, concerning (1) the impact of conditions of termination of the agreement on the recognition of the agent's right to compensation, (2) the evaluation of this compensation and (3) the assessment of serious misconduct, excluding this compensation. 

1. Conditions of termination of the agency agreement and impact on the right to compensation at the end of the contract

French law recognizes (art. L 134-12 of the Commercial Code) the commercial agent's right to compensation for the prejudice suffered by the agent in the event of end of the relationship with the principal. But this right to compensation is excluded (art. L 134-13 of the Commercial Code) in the following cases:
  • in the event of termination by the principal for serious misconduct/gross negligence (“faute grave”) by the agent or
  • in case of termination by the agent, unless it is justified by circumstances attributable to the principal or if it is due to the age, infirmity or illness of the agent, as a result of which the continuation of his activity can no longer reasonably be required.
Recent case law has clarified the conditions for the application of these exceptions, the practical consequences of which are perhaps still difficult to determine precisely.

A gross negligence of the agent not mentioned by the principal in his letter of termination cannot be invoked later to deny the right to compensation. 

It was already recognized by the jurisprudence that the behaviour of an agent cannot be qualified as gross negligence depriving him of the right to compensation, if the principal, although having been aware of this behaviour before the termination, did not mention it as serious misconduct in the termination letter. 

With regard to serious misconduct discovered after the notification of termination, the Court of Cassation has reversed its case law (November 16, 2022, No. 21-17.423, aff. Acopal) by ruling that the discovery, after the notification of termination, of misconduct committed by the agent cannot deprive the latter of his right to compensation, as it is the termination letter that locks in the grounds invoked by the principal and thus the conditions for awarding compensation.

The principal will still be able to claim damages for this gross negligence known after the letter of termination. But it will be necessary to scrutinize subsequent case law to see whether the courts grant the principal, more or less automatically, damages equivalent to the termination compensation amount, or whether the principal will be required to prove the reality of a loss suffered and a causal link between the agent's misconduct and its prejudice. 

The termination of the contract notified by the commercial agent freezes the legal ground of the termination compensation.

Wednesday November 16, 2022 was definitely a black day for principals, as the Court of cassation issued a second decision on the same day, which weakens the position of the principal and reinforces the right of the agent to obtain a compensation at the end of the agreement.

In this second case (November 16, 2022, no. 21.10.126, aff. SBA Vins), an agent had terminated the agreement based on breach of contract by his principal, and the principal had reacted by invoking serious misconduct on the part of his agent (representation of competitors). Although the faults were proven on both sides, the Court of Cassation refused to set aside the right to compensation at the end of the agreement, claimed by the principal on the basis of the agent's serious misconduct, on the grounds that the agreement had been terminated on the initiative of the agent, who justified this termination by a prior fault of his principal, and that "the possible commission of a serious fault by the commercial agent had no impact on his right" to compensation at the end of the agreement. The Court of Cassation gives a very formal reading of the scope of the notification of termination of the agreement: it is this notification that sets the legal regime for the determination of the termination compensation, independently of the subsequent proof of gross misconduct by the agent.

The practical impact of this decision, if confirmed by other decisions, may be considerable, as it seems to give a premium to the one who takes, first, the formal initiative to notify the end of the agent's agreement.

To summarize the potentially practical effect of the two rulings of November 16, 2022:
  • if the principal notifies the termination of the contract without mentioning a serious fault (known or not, on the day of this notification): it will not be able to invoke this serious fault later on to deny the commercial agent a right to compensation ;
  • if the agent notifies the end of the contract, proving that this termination is justified by a previous fault of the principal, his right to compensation at the end of the contract will be acquired, even if the principal succeeds in proving that the agent had committed a serious fault.

2. Determination of the amount of the termination compensation 

While the 1986 EC Directive and Article L. 134-12 of the French Commercial Code clearly establish a principle of compensation for the damage suffered by the commercial agent, French courts persist in granting the commercial agent compensation at the end of the agreement equal (in general) to two years of gross commission, calculated on the average of the last three years, without requiring the agent to prove the reality of its damage, or the causal link between the end of the agreement and his damage.

The Court of Cassation ruled in the above-mentioned decision of November 16, 2022 that this compensation must not be reduced by the amount of commissions that the agent continued to receive, after the end of the contract, for prospecting on behalf of a new principal, the clientele that he had brought to the principal whose contract was terminated.

On the other hand, it should be noted that the CJEU ruled on 13 October 2022 (C 593/21, aff. NY v. Herios) that the compensation normally due by the agent to his sub-agents could be disregarded, in the name of fairness, in particular in case the sub-agent continues his activity with the principal. This principle of fairness and a more rigorous reading of the 1986 Directive (art. 17.3) should also lead to the conclusion that an agent whose sub-agent directly continues the relationship with its (former) principal cannot include in the basis of its termination compensation requested from the principal, the part that should accrue to its own sub-agent.

This willingness to protect (too much?) the agent and its compensation, is still reflected in the decision rendered by the Court of Cassation on September 28, 2022 (n° 21-12.292, aff. Seafoodia). The Court ruled on the one hand that the principal could validly terminate a fixed-term agent contract in advance, without this constituting a fault, and on the other hand that the termination compensation amount should still be calculated taking into account the initial term of the agreement.

But this combination by the Supreme Court of the rules of ordinary contract law (possibility of terminating by anticipation a fixed-term contract, without fault) and the special rule of the commercial agent contract (compensation for termination of the contract) does not seem justified. Not only does it contradict the first part of the reasoning authorizing the principal to terminate the contract, without fault, before its term, but it also breaks with the classic method of calculating the indemnity, which consists in considering the average of past commissions, and not extrapolating on future commissions. Here again, it will be necessary to verify in the coming years whether (and how) this position of the Court of Cassation is applied by the first instance judges. 

The decision of October 19, 2022 of the Court of Cassation (ch. com. N°21-20. 680, aff. VG Sport) recalls that when the principal proves a serious fault committed by the agent, this serious fault not only excludes the right to termination compensation, but also authorizes the principal to claim for damages against the agent to compensate him for the prejudice he has suffered; at the very least, if the fault is not serious, the damages awarded will be offset against the agent's compensation.

Finally, and even if it has no direct relation with the calculation of the compensation, the solution reached by the CJEU in its decision of October 13, 2022 (No. 64/21, Rigall Arteria case) is worth noting, even if it was already deduced from Articles L134-6 and 134-16 of the French Commercial Code. 

The CJEU states that the agent's right to commission on "repeated" sales (i.e. a sale "concluded with a third party whom the commercial agent has previously acquired as a client for operations of the same nature”) may be set aside by the agency agreement. This contractual arrangement (which may also take the form of a reduced or capped commission rate) will necessarily have a mechanical and future impact on the calculation of the basis of the compensation.

3. Determination of the agent's gross negligence, exclusive of compensation 

According to French jurisprudence, a commercial agent's gross misconduct is one that "undermines the common purpose of the mandate of common interest and thus makes it impossible to maintain the contractual relationship between the principal and his commercial agent". For example, the denigration of the principal's products, the detour of orders to the benefit of another principal, the violation of a non-competition undertaking or the manifest or recurrent disinterest of the agent in his prospecting mission, may constitute serious misconduct which exclude the compensation. On the other hand, failure to meet a turnover target does not in itself constitute serious misconduct.

Recently, French courts ruled that the failure of the agent to inform the principal of his change of shareholder (Court of Cass. June 29, 2022, no. 20.11.952, aff. Signa Deco), or of his change of manager (Court of Cass. June 29, 2022, no. 20.13.228, aff. Bystronic France), can constitute serious misconduct. These two cases also confirm that it is in the principal's interest to stipulate such notification obligations in the agency agreement.

It also constitutes serious misconduct for an agent to modify the access codes to its principal's website and to improperly put this website into maintenance (Court of Cass. October 19, 2022, cited above).

Finally, it should be remembered that the principal's tolerance in case of serious misconduct by the agent may lead to a double sanction for the principal: on the one hand, the principal will not be able to invoke serious misconduct to deny the right to compensation and on the other hand, the principal will not be able to seek damages as compensation for this serious misconduct. It is therefore in the principal's interest to stipulate a non-tolerance and non-renunciation clause and, above all, to manage its relationship with its agent so that he can react at the right moment.

Key Takeaways

  • The principal must really ask himself the question of the choice of the contractual scheme of promotion: commercial agent or other contractual schemes (see here our article on Legalmondo);
  • the agency agreement must be prepared and drafted very precisely in order to define the obligations of the agent, the non-observance of which could lead to the qualification of a serious fault excluding the right to compensation.
  • the provision by the principal to the agent of a customers/prospects list can be valued and be the subject of a remuneration paid by the agent, deferred until the end of the agreement and set-off with the possible compensation (see Legalmondo guide).
  • if the relationship with the agent deteriorates, the principal must be proactive and determine very quickly if it should be the first to take the initiative to terminate the agreement by invoking a serious fault of the agent.

What Altaïr Avocats can do for you

•    Negotiation and drafting of commercial agency agreements;
•    Setting up and restructuring a network of commercial agents;
•    Assistance in the selection of the most suitable promotional contractual scheme;
•    Audit of agency agreements;
•    Pre-litigation negotiations and conciliation;
•    Assistance and representation in domestic and international litigation and arbitration proceedings.


Christophe Héry 
Agathe Raffin
 
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