Rights and entitlements of a commercial agent upon termination of an agency contract in France
EU Council Directive 86/653/EEC on the Coordination of Laws of the Member States Relating to Self-Employed Commercial Agents established intra-EU guidelines regarding the relationship between commercial agents and their principals. Specifically, Article 17 of said Directive requires Member States to take the measures necessary to ensure that the commercial agent is, after termination of the agency contract, indemnified or compensated.
Under the indemnity system – which essentially reflects payment for the goodwill generated by the agent for the principal- after cessation of the contract, the agent is entitled to payment of an indemnity 1) if, and to the extent that, he has brought new customers to the principal or 2) has significantly increased the volume of business with existing customers and the principal continues to derive substantial benefits from such customers after the cessation of the contract.
Such payment must: 1) be equitable in regards to the circumstances of the prior relationship between the agent and principal, 2) must especially be equitable in terms of the commission lost by the commercial agent on the business transacted with such customers, and 3) cannot exceed the ceiling, provided for in the Directive, of one year (this number is determined by taking the average of his annual remuneration over the preceding five years, and if such contract is shorter than five years, the maximum is calculated on the average for the amount of time such contract existed.)
Under the compensation system, the agent is entitled to compensation for the damage suffered as a result of the termination of his relations with his principal. Such damage is deemed to occur particularly when the termination takes place in circumstances 1) depriving the agent of the commission which proper performance of the agency contract would have procured him whilst providing the principal with substantial benefits linked to the agent’s activities, and/or 2) which have not enabled the agent to recoup the costs and expenses he had incurred for the performance of the agency contract on the principal’s advice.
The compensation system, based on French law dating from 1958, does not set a maximum level of compensation, unlike that of the indemnity system. In fact, French jurisprudence concerning the right and level of compensation have justified this system on the grounds that it represents the cost of purchasing the agency to the agent’s successor or on the ground that it represents the time it takes for the agent to reconstitute the client base of which he has been forcefully deprived.
In contrast to compensation, an indemnity focuses on the degree to which you have gained and continue to benefit post-termination from the agent's work, rather than on what the agent has lost. In all cases, unlike compensation, an indemnity is capped at one year's average annual remuneration over the last five years or over the duration of the contract, if shorter. Grant of indemnity payments does not prevent the agent from seeking damages; there is no equivalent provision for compensation.
POSITION OF FRANCE
The terms and conditions on relations between commercial agents and their principals in France are governed under Act No. 91-593 of 25 June 1991. This legislation encompasses EU Council Directive 86/653/EEC on the Coordination of Laws of the Member States Relating to Self-Employed Commercial Agents, including Article 17’s requirement that each Member State take the measures necessary to ensure that the commercial agent is, after termination of the agency contract, indemnified or compensated.
As per its longstanding tradition and pre-existing jurisprudence, France adopted the compensation system as promulgated under the Directive. As noted in the EU Commission Report on the Application of Article 17 of the Directive [COM(96) 364 final, Brussels, 23.07.1996], compensation awarded in the vast majority of cases in France amounts to 2 years’ commission, about two times the legal maximum provided for under the indemnity option. Thus the appointment of an agent in France under French law is generally considered to be a costly enterprise, but has not caused problems or uncertainty for agents and principals in France.
Under Act No. 91-593 of 25 June 1991, an agent is one who:
- as an independent professional and
- without being bound by an employment contract,
- is responsible on a permanent basis for negotiating, and possibly concluding, contracts of sale, purchase, rental or for the provision of services,
- in the name of, and on behalf of, one or more principals (producers, manufacturers, merchants, artisans or other commercial agents)
- and can be either a legal or natural person.
Termination of a contract
Articles 11 until 13 govern the termination of a contract, with Article 11 articulating the terms of notice of such termination. Specifically, the period of prior notice to effectuate the termination of an agency contract is:
- one month of notice during and until the end of the first year of the contract
- two months notice once the second year has commenced, and
- three months notice once the third – and all thereafter - year has commenced.
If the parties have not stipulated otherwise, the end of the notice period shall coincide with the end of a calendar month.
Compensation or Indemnity?
Pursuant to Article 12 of the governing French legislation, the agent is entitled to compensation for damages suffered. However, within one year, the agent must claim such compensation by notifying the principal of the agent’s intention to assert these rights, or it shall be deemed forfeited. According to a ruling by the Commercial Chamber of the Cour de Cassation, on January 18, 2011 (n°09-72.510), this one year period during which the commercial agent is entitled to notify the principal of its intention to assert his/her right starts running as of the effective termination of the agency contract, and not the end of the notice period, in situations where the two dates do not coincide.
Furthermore, in another ruling by the Cour de Cassation (n°09-17.167) on 23 November 2010, the court established that severance compensation must be paid to the commercial agent’s successors in accordance with Article 12 of Act No. 91-593 of 25 June 1991.
When is compensation available?
Compensation for the agent is available where the contract is terminated by the principal. In addition, the agent may claim compensation where he has been obliged to terminate the contract himself, due to a breach by the principal, or where the agent was justified in terminating the contract for exigent reasons, such as age, infirmity or an illness which precluded his reasonably continuing the activity.
Exceptions from requirement of compensation
Pursuant to Article 13, compensation may be withheld in a limited number of situations, including 1) where the termination was caused initiated by the agent (excepting the above exigent circumstances), 2) where the agent assigned his rights to a third party or 3) where the termination is the result of a serious breach by an agent.
Regarding this latter circumstance, the Cour de Cassation in 2010 held that a principal that terminates a commercial agency contract could escape his obligation to pay compensation in case of a serious default by the agent during the performance of a contract, even the principal became aware of such default after the termination
This has been challenged by a decision rendered by the European Court of Justice whereby the Court held that a commercial agent could not be deprived of compensation or severance indemnities where the principal establishes a default by that agent which occurred after notice of termination of the contract was given, but before the contract in question expired.
Thus, while this remains an ambit of compensation that is not yet fully delineated, it is likely that, pursuant to the position of the ECJ, an agency cannot withhold compensation for a breach by the agent during the course of the contract, if the principal did not know of such default until after the termination.
Calculation of compensation
As per the Directive and established French jurisprudence, the amount of such compensation is either:
1) the global sum of the last two years’ commission, or
2) the sum of 2 years’ commission calculated over the average of the last three years of the agency contract.
However, the courts retain a discretion to award a different level of compensation where the principal brings evidence that the agent’s loss was in fact less – for example, because of the short duration of the contract – or where the agent’s loss is greater, such as because of the agent’s age or his length of service.
1) Under French law, is it possible to have a restraint of trade clause operating during the agency agreement and, if so, is it subject to any qualifications?
A restraint of trade clause operating during the agency agreement is admissible under French law, specifically under Articles 3 and 4.
In the absence of an exclusive obligation towards his principal, an agent can, without needing authorisation from his principal, represent new principals. However, an agent is not permitted to represent another principal that competes with his existing principal, unless the existing principal provides consent to this representation (Article 3).
Case law has indicated a willingness in the courts to interpret the concept of competition narrowly. This means that an agent can, in theory, operate for several different principals if the products do not have the same characteristics or are used for different purposes.
2) Under French law, is it possible to have a restraint of trade clause operating following the termination or expiry of the agency agreement and, if so, is it subject to any qualifications?
Under French law, and specifically under Article 14 of Act No. 91-593 of 25 June 1991, a restraint of trade clause operating following the termination or expiry of the agency agreement is admissible.
The clause will only be permitted if it is in writing and covers a specific geographic area and, if applicable, if it covers the specific group of persons entrusted to the commercial agent and the type of goods or services which the agent previously represented.
There is an additional requirement of proportionality. The clause must be necessary for the protection of the principal’s interests, and the clause must not wholly prevent the agent from conducting other business.
Such a non-competition clause is valid for no more than a maximum of two years following the termination of the contract.
agentlaw.co.uk. wishes to thank Foucaud, Tchekhoff, Pochet & Associes of Paris for its contribution to this page
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