Cyprus: International Agency And Distribution Handbook – Cyprus Chapter

CYPRUS

1. Agency Agreement

1.1 General

Specific legislation on agency and distribution arrangements was first introduced in preparation for entry into the European Union. Until then, issues had been dealt with under common law and the Contract Law Cap. 149 (the "Contract Law"). Domestic law on the matter has continued to evolve in line with the acquis communautaire since Cyprus joined the EU.

1.1.1 Law Applicable

The legal framework with respect to agency consists of the following:

  • Articles 142-198 of the Contract Law, which essentially reflect English common law principles;
  • The Commercial Agents Law (the "1986 Law"), as amended by Laws 21(I) of 1994 and 148(I) of 2000;
  • The Regulation of Relations between Commercial Agents and Principals Law (the "1992 Law"), as amended by Law 149(I) of 2000; and
  • The Commercial Agents (Formation and Functioning of the Board, Registration of Members and Charges) (Amending) Regulations of 2003 (the "Regulations"), which came into effect on May 1, 2004, on accession to the EU.

Both the 1986 Law as amended and the 1992 Law as amended are substantially in line with EU legislation as Cyprus has implemented the Agency Directive. In the absence of express statutory provisions, English common law principles are applied. They also provide interpreting the provisions of the Contract Law.

A commercial agent is defined by Article 2 of the 1986 Law, as amended, as:

"Every legal or natural person who, by his capacity as an independent intermediary, has the permanent authority to negotiate on behalf of another person, the principal, the sale or purchase of goods or negotiate and conclude such actions in the name and on behalf of the principal."

The legal doctrines that have evolved may be divided into two broad categories relating respectively to the external aspects of the agency and its internal aspects. The first concerns the agent's power to bind his principal, and is of crucial importance to third parties dealing with agents. The second concerns the rights and liabilities of the principal and the agent inter se: it imposes certain obligations on the agent and regulates his rights to remuneration and indemnity.

Unless otherwise stated, any rules set out in the rest of this section apply to agents classified as "commercial agents." Where there is any overlap or inconsistency between relevant legislation and the common law, the former will prevail.

1.1.2 Formal Requirements

The relationship of principal and agent may be established only with the consent of both parties. An agency may be created by:

  • express appointment;
  • the conduct or situation of the parties or from the necessity of the case; or
  • ratification by the principal.

While it is common for an agency relationship to arise by way of an agreement, the legal requirement to have such agreements evidenced in writing applies only if the agreement is classified as a commercial agency agreement. The actual relationship of the parties is determined by all the circumstances of the particular case and not merely by the use of the word agent or agency in an agreement.

Part IV of the 1992 Law obliges both parties to a commercial agency agreement to sign a written agreement which determines the terms of the commercial agency and any other subsequent terms to be agreed. The following factors determine whether the contract between principal and agent falls within the ambit of the 1992 Law:

  • If the agreement is a written agreement concluded before the 1992 Law came into force (in July 1992), the 1992 Law will not apply and the relevant law will be the Contract Law and common law.
  • If the agreement is an unwritten agreement concluded before July 1992, all provisions of the 1992 Law will apply.
  • If the agreement is a written agreement concluded after July 1992, the 1992 Law will apply.

Article 143 of the Contract Law provides that any person who has capacity to contract may appoint an agent.

Article 3 of the 1994 Law, which amended Article 4 of the 1986 Law, restricts the ability to act as a commercial agent. The necessary requirements are that the commercial agent:

  • has not been convicted, within the last 10 years preceding the date of submission of the application for registration, of any offence under the Exchange Control Law or the Customs and Consumption Taxes Law, or any other offence involving immorality or dishonesty;
  • has never been declared bankrupt; and
  • is a high school graduate.

1.1.3 Individual/Corporate Entity

The Companies Law, Cap. 113 (the "Companies Law"), which closely resembles the English 1948 Companies Act, provides that a company registered in Cyprus under the Companies Law has capacity to enter into any contract or to do any act provided for in the company's memorandum. It is therefore possible for a corporate entity to enter into an agency agreement if its memorandum permits such activity.

Both individuals and corporate entities fall within the definition of a commercial agent. It is important to note that officers of companies or associations, partners, administrators appointed by the court, insolvency practitioners and liquidators are expressly excluded from the scope of the definition.

1.1.4 Duration

The term of an agency agreement may be fixed or indefinite. If the agreement is silent on the issue of duration, it will be deemed to have been entered into for an indefinite period and terminable on notice as specified in Articles 16-17 of the 1992 Law. An agency agreement concluded for a fixed term will expire at the end of the term. If a fixed- term commercial agency agreement continues to be performed by the parties after its expiration, it will be considered to have become a commercial agency agreement of an indefinite duration.

1.1.5 Sub-agents

The issue of sub-agents is dealt with in Articles 151-154 of the Contract Law. A sub-agent is defined as "a person competent to contract, employed by and acting under the control of the original agent in the business of the agency." If a sub-agent is properly appointed, the principal is, insofar as third parties are concerned, represented by the sub-agent and is bound by and accountable for his acts as if he were an agent originally appointed by the principal. The agent is responsible to the principal for the acts of the sub-agent and the sub-agent is responsible for his acts to the agent, but not to the principal except in case of fraud or willful wrongdoing.

Article 154 makes it clear that where an agent appoints a person to act as a sub-agent without authority from the principal, the agent will be liable for the sub-agent's acts both to the principal and to third persons. In that case, the principal is not represented by or liable for the acts of the sub-agent, nor is the sub-agent liable to the principal.

1.2 Exclusive/Non-Exclusive

In general, a principal may appoint an agent on an exclusive or a non- exclusive basis. Similarly, there is no general prohibition on agents acting for more than one principal. However, it is important to note that Article 3 of the 1992 Law places a commercial agent under a general duty to act according to the law and in good faith toward the principal and in the best interests of the principal. Therefore, in most circumstances it is unlikely that an agent may also act for a competitor of the principal.

In practice, the issue of exclusivity is generally dealt with in the agency agreement. Exclusivity rights may be granted:

  • in favor of the principal;
  • in favor of the agent; or
  • in favor of both agent and principal.

If the agreement is silent on this point, the agency will be deemed to be non-exclusive. Thus, the agent may act for other non-competing principals and the principal may appoint other agents.

1.3 Non-Compete

As stated previously, under the 1992 Law, the commercial agent is under an obligation, during the exercise of his duties, to act according to the law and in good faith toward the principal and to safeguard the principal's interests. Acting as an agent for two competing principals is generally likely to be inconsistent with this obligation. Equally, an agent placing himself in direct competition with his principal will breach this obligation. Article 9 of the 1986 Law renders commercial agents liable for up to six months' imprisonment or a fine, or both, if they breach any of the provisions of the law.

In practice, the issue is commonly dealt with via the inclusion of a "non-compete" clause in the agency agreement. Such a clause generally extends beyond the period of the agency agreement. A Cypriot court, however, will uphold such a clause only if it is consistent with Article 20 of the 1992 Law and the prohibition of contracts in restraint of trade contained in the Contract Law. In making its assessment, the court will have regard to matters such as the customer base or geographical territory referred to, the period of the prohibition (Article 20 of the 1992 Law restricts non-compete agreements to a maximum duration of two years), the type of goods included in the prohibition and the extent to which the agent's ability to earn an income is impaired.

1.4 Commission

1.4.1 Basic Principles

In cases of remuneration in the form of a commission, the 1992 Law sets out the circumstances in which a commercial agent is entitled to commission from commercial transactions contracted during and after expiration of the commercial agency agreement. An agent is entitled to commission during the agreement if:

  • the transaction was secured due to the involvement of the commercial agent;
  • the transaction was contracted with a third party which the commercial agent had secured earlier as a client for transactions of a similar kind; or
  • the agent was appointed to cover a particular geographical area or a particular group of people, and the transaction was contracted within the specified geographical area or with a person belonging to the specified group even if negotiations for the transaction were carried out by a person other than the commercial agent or a different agreement was contracted by the commercial agent.

An agent is entitled to commission after expiration of the agreement if:

  • the transaction is mainly due to the activity he developed himself during the term of the agreement; or
  • the order of the third party came to the commercial agent or the principal before the expiration of the agreement.

In all cases, the test is whether, as a matter of construction of the commercial agency agreement, the parties intended that the agent be paid commission after termination. The older authorities held that there must be clear and unequivocal words to entitle the agent to such commission, but this thinking has changed; it now appears that the normal rules for implying terms into a contract must be applied.

Commission may be shared between previous and present commercial agents if this is just and right under the circumstances. According to Article 11 of the 1992 Law, a right to commission exists in any of the following cases:

  • the principal has executed the agreement with the third party;
  • the principal should have executed the agreement; or
  • the third party has executed the agreement.

Importantly, the 1992 Law does not allow the parties to deviate from the statutory provisions relating to commission to the detriment of the commercial agent.

1.4.2 When Due and Payable?

The right to commission arises, at the latest, when the third party executes his part of the transaction or the part he should have executed if the principal had executed his part of the act. The commission must be paid at the latest by the last day of the month following the quarter during which the right in question accrued.

1.4.3 Extinction of Rights to Commission

The agent loses his right to commission if:

  • it is proved that the agreement between the third party and the principal will not be executed; and
  • the non-execution is not due to the principal's fault.

Where the agent's right to commission is lost, he must return any payment he has already received on account of commission. In estimating the amount of commission due, the principal must provide the commercial agent with an account of the commissions owed by the last day of the month following the quarter during which the relevant commission arose. This account should contain all substantial data which formed the basis for calculating the amount of the commission. Furthermore, the commercial agent is entitled to demand that all information be supplied to him, particularly an extract of the books which are at the disposal of the principal and which he needs in order to verify the amount of the commission owed.

1.4.4 Accounting and Audit

An agent is bound to render proper accounts to his principal on demand (Contract Law, Article 173). It is the duty of every agent to:

  • keep the money and property of his principal separate from his own and from that of other persons;
  • maintain at all times proper accounts of all his dealings and transactions in the course of his agency; and
  • produce for inspection, by the principal or a proper person appointed by the principal, all books and documents in his hands relating to the principal's affairs.

If an agent fails to keep proper accounts or pay his principal money or receives a secret profit or bribe, he is liable to his principal in an action to account for profits. In such an action, the agent will be allowed to deduct all reasonable expenses incurred on his principal's behalf, unless such deduction is contrary to the terms of the agency agreement.

An agent will usually be held to be bound by his own accounts; if they show that he has credited his principal with money received, the agent will be presumed to have received that money and will be liable for it to his principal. However, the agent will not be liable if the accounts show that the money has not, in fact, been received or if the principal's accounts show that the agent has not received the money.

If an account is agreed, the principal may sue on an account stated. This may be a mere acknowledgment of a debt, in which case the agent may show that no such debt in fact exists or that there is an account containing debts on both sides in which the parties have agreed that the debts of one must be offset against the debts of the other and only the balance must be paid.

1.5 Termination

1.5.1 Formal Requirements

Where the agency agreement is for a fixed term, it will normally specify that the agreement expires at the end of that fixed term.

Where the agency agreement is of an indefinite duration, Article 16 of the 1992 Law allows either party to terminate it by written notice.

Additionally, Article 17 stipulates that any party may terminate the agreement at any time on account of the failure of one of the parties to comply with all or any part of his obligations or due to exceptional circumstances.

1.5.2 Notice Period

The 1992 Law specifies that the period of notice which the terminating party is required to give is identical for both agent and principal. The prescribed period is one month for each year that the agency agreement has existed, up to a maximum of six months. The calculation of the notice period must take into account the duration of any previous fixed contract. The Law does not permit the parties to agree on a shorter period of notice. Agreement on a longer period is permissible, provided that the notice to be given by the principal is not shorter than that to be given by the commercial agent. Unless the parties have agreed otherwise, the expiration of the notice must coincide with the end of a calendar month.

In the event that the 1992 Law is inapplicable (for example, by reason of its narrow definition section), the Cypriot courts will apply the Contract Law and common law principles to determine what constitutes a reasonable period of notice. In applying these principles, a judge will, of course, exercise his discretion and much will depend on how he views the merits of the case as a whole.

The principle is that the question of length of notice depends on the facts existing on the date the notice is given. A weighty factor to be considered is the expense incurred in establishing and running an agency.

1.5.3 Liability of Principal on Termination Pipeline commissions

Following termination of the agency, the principal is obliged to pay the agent commissions that became due and payable prior to termination where termination of the agreement occurred before the due date for the payment of commission to the agent. The agent would also be entitled to commission from a transaction where the order of a third party reached the principal or the agent before the termination of the agency agreement. It is important to note that it is the order date rather than the date of the sale contract which is important.

Post-termination

In all cases, the test is whether, as a matter of construction of the agency contract, the parties intended that the agent be paid commission after termination.

Article 9 of the 1992 Law provides that if an agency agreement falls within the scope of the 1992 Law, the commercial agent is entitled to receive commission from commercial transactions concluded after termination of the agreement if:

  • the transaction is mainly attributable to the commercial agent's efforts during the period covered by the agency agreement and the transaction was entered into within a reasonable period after expiration of the agreement; or
  • as stated above, the order of the third party was placed either with the commercial agent or with the principal before expiration of the agency agreement.

Termination payment

Under Article 18 of the 1992 Law, the commercial agent is entitled to a termination payment in the form of an indemnity if and to the extent that:

  • he has introduced new customers to the principal 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 is fair and equitable, having regard to all the circumstances and, in particular, the commissions lost by the commercial agent from the business transacted with such customers.

The circumstances include the application or otherwise of a restraint of trade clause. The amount of the termination payment is capped at a sum equal to one year's remuneration calculated on the commercial agent's average annual remuneration over the preceding five years and, if the contract goes back less than five years, the payment is calculated on the average for the period in question. The award of such a termination payment does not prevent the commercial agent from also claiming damages for loss suffered.

The 1992 Law also entitles agents to be compensated for the damage1 suffered as a result of the termination of their relations with the principal and, in particular, when the termination takes place in circumstances which have:

  • deprived the commercial agent of the commission which proper performance of the agency contract would have procured for him while providing the principal with substantial benefits linked to the commercial agent's activities; or prevented the commercial agent from amortizing the costs and expenses that he incurred during the performance of the agency contract at the principal's behest.

The 1992 Law does not allow the parties to agree on a deviation from these provisions to the detriment of the commercial agent. It also sets out the circumstances in which the termination payment and damages are not due, namely, where:

  • the principal terminates the commercial agency agreement due to the agent's fault, which will justify, according to the law, mediate termination;
  • the commercial agent terminates the agreement, unless the termination is due to the fault of the principal or is justified due to the age, physical capacity or ailment of the agent, as a result of which it is not reasonable to request him to continue his activities; or
  • after agreement with the principal, the commercial agent assigns to a third party the rights and obligations which he has undertaken by virtue of the commercial agency agreement.

1.6 Limitation Periods

The agent loses the right to claim the indemnity and damages unless he notifies the principal within one year following termination of the agreement, of his intention to pursue his claims.

1.7 Tax Issues

Being based on the OECD Model, Cyprus's double taxation agreements generally provide that if an enterprise has a representative in the territory of a country that has, and habitually exercises, authority to conclude contracts in the name of the enterprise, the enterprise concerned is deemed to have a permanent establishment in respect of any activities that the person undertakes for it. However, there is an exemption for an independent broker or agent who represents the enterprise in the ordinary course of business. Care needs to be taken when drafting agreements so as not to risk inadvertently creating a permanent establishment, with potentially unfavorable consequences.

2. Distribution Agreements

2.1 General

2.1.1 Law Applicable

There are no statutory provisions that govern relationships involving distributors. In general, a distributorship agreement between a supplier and its distributor is governed by the principles of Articles 142-198 of the Contract Law, which reflect common law principles. Thus, the parties to a distributorship agreement have the freedom to agree on the contractual terms which will govern their relationship, provided that such terms do not contravene rules of public policy, EU and Cyprus competition law and any other mandatory Cyprus laws, including those relating to trademarks and intellectual property rights.

2.1.2 Formal Requirements

A distribution agreement is not subject to any formal requirement. It may be created via:

  • explicit oral or written agreement, or
  • the actual conduct of the parties implying the existence of an agreement.

It is advisable that the parties to the agreement document it fully, to avoid uncertainty in case of a later dispute.

2.1.3 Individual/Corporate Entity

A distributor may be an individual, a partnership or a corporate entity. Where the distributor is an individual, the supplier should take care to ensure that the relationship does not inadvertently constitute an employer/employee relationship.

2.1.4 Duration of Agreement

In Cyprus, the term of a distributorship agreement is to be agreed by the relevant parties. Where no agreement on term is made, the law assumes that the agreement is for an indefinite period and may be terminated by either party giving reasonable notice.

2.2 Exclusive/Non-Exclusive

A distributor may be appointed on either an exclusive or a non- exclusive basis. Equally, exclusivity may be agreed in favor of the supplier. In each case, however, care must be taken not to breach w. Article 6(2) of the Protection of Competition Laws of 2008 and 2014 prohibits abuse or exploitation by one or more related undertakings involving economic dependence is prohibited when this exploitation is exercised toward a client, supplier, producer, agent, distributor or commercial co-operator, even when this involves a specific type of product or service without an equivalent alternative.

2.3 Termination

2.3.1 Formal Requirements

Cypriot law does not stipulate any specific formalities to be followed in order to terminate a distributorship agreement. General principles of contract law apply. The parties are free to contract in relation to termination provisions and are able to agree on all relevant terms, such as the circumstances in which termination may be effected and the required notice period. It is important to note that the courts will set aside a contract or a provision of a contract which they consider to be unduly onerous.

2.3.2 Notice Period

Cypriot law does not stipulate the notice period which must be applied to a distribution agreement, but leaves it to the contracting parties to decide. The Contract Law provides that, where there is an express or implied contract that the distribution agreement must continue for any particular period, the parties are obliged to give reasonable notice of termination to each other and, unless they do so, any resulting damage to one must be made good by the other. The courts will apply the Contract Law and common law principles to determine what constitutes a reasonable period of notice. In applying these principles, a judge will, of course, exercise his discretion and much will depend on how he views the merits of the case as a whole. Under common law, the judge must have regard to a number of relevant factors, including:

  • the length of time the distribution agreement has been in existence;
  • the percentage of the distributor's business which is attributable to the agreement;
  • the strength of the relationship between the distributor and customers;
  • the time it will take for the distributor to reposition itself in the market; and
  • the time it will take the supplier to secure and adjust to a new distributor.

The length of notice period deemed reasonable will likely increase in line with the degree of dependency of one party to the agreement on the other party.

2.3.3 Liability of Supplier on Termination

In contrast to an agent, a distributor has no automatic legal right to be indemnified upon termination of the distribution agreement. The distributor could, however, be entitled to damages arising from loss of profit if the agreement is terminated other than in a manner specified in the distribution agreement or if the court decides that termination occurred without reasonable notice on the part of the supplier. The distributor could also claim damages in respect of any outstanding breaches of contract on the part of the supplier which existed at the time of termination. There is also recourse to action if the supplier fails to honor any post-termination obligations stipulated in the original agreement.

2.3.4 Return of Products

This will normally be dealt with in the distribution agreement. Cypriot law does not have a provision for the compulsory buyback of unsold products from the distributor nor does it place any obligation on the distributor to return unsold stock to the supplier. In practice, however, fixed-price buyback clauses are a common feature of most as they tend to be mutually beneficial. It is not in the interest of the supplier to see its goods "dumped" on the market at a low price. Equally, the former distributor will not wish to have its working capital tied up in the stock of an ex-partner, particularly if it has formed a link with a new supplier.

2.4 Limitation Periods

Article 3 of Law 66 (I) of 2012, which governs limitation periods generally, provides that the limitation period for a claim commences from the day of completion of the basis of the claim, defined in Article 2 as all events that give rise to an actionable right. Furthermore, Article 4 stipulates that, unless otherwise provided by law, no proceedings may be issued after 10 years have passed from the day of completion. Article 7 sets a general limitation period of six years for actions based on contractual claims. However, for proceedings concerning a contract or a quasi-contract relating to an agreed or reasonable remuneration of a contractor or other independent professional, the limitation period is three years.

2.5 Tax Issues

Being based on the OECD Model, Cyprus's double taxation agreements generally provide that if an enterprise has a representative in the territory of a country that has, and habitually exercises, authority to conclude contracts in the name of the enterprise, the enterprise concerned is deemed to have a permanent establishment in respect of any activities that the person undertakes for it. However, there is an exemption for an independent broker or agent who represents the enterprise in the ordinary course of business. Care needs to be taken when drafting agreements so as not to risk inadvertently creating a permanent establishment, with potentially unfavorable consequences.

Footnote

1 Article 17(1) of the Agency Directive expressly entitles an agent to receive an indemnity in accordance with Article 17(2) or to receive compensation for damage in accordance with Article 17(3) of the Directive. An agent is entitled to claim for damages over and above any Article 17(2) indemnity payment as long as such damages fall within Article 17(2)(c), but not if they fall within the meaning of compensation for damage as set out in Article 17(3). Interestingly in this particular country chapter, the language used to describe the type of the damages available (in addition to the indemnity payment) appears to be based on the language used in Article 17(3), and not 17(2)(c) of the Directive.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions