Commercial Agents are key personalities in the distribution systems of many companies. Instead of appointing their own in-house sales staff more and more companies entrust their sales activities to independent commercial agents in order to sell their goods and services. On behalf of the principal commercial agents act as self-employed tradesmen and negotiate and solicit orders in the name and for the account of the principal. For every successful conclusion of a contract they receive a commission.
The cooperation between the commercial agent and the principal often lasts for many years. During that time the commercial agent usually puts a big effort into the development of a clientele which is of major importance for the principal.
Once the agency agreement is terminated the principal usually receives a considerable benefit from the developed clientele. On the other hand, the commercial agent suffers considerable loss of commission which a continuation of the agency agreement would have procured for him.
Under the EU directive 85/653 EEC and under German law the commercial agent can therefore claim an adequate compensation for the loss of commission as a result of the termination of his contractual relations with the principal. Whereas the principal often fears this compensation claim, the extent of such a claim is usually overestimated by the commercial agent. This article provides an overview of the legal requirements for a compensation claim and the rules for its calculation according to German law. The article also explains under which circumstances an authorized dealer can be entitled to a compensation in analogous application of agency law.
1. Statutory Provisions (Article 89b German Commercial Code)
The relationship between the commercial agent and his principal is governed by articles 84 - 92c HGB (German Commercial Code). These regulations are in accordance with the EU Directive 85/653 EEC from 18 December 1986 (EC Directive on Commercial Agents) which was implemented into German Law in January 1990.
According to article 89 b (1) HGB the commercial agent is entitled to claim a compensation after the termination of the agency agreement if and to the extent that
- the principal substantially benefits from the business relationships acquired by the agent even after the termination of the agency contract (article 89b (1) no.1 HGB),
- the agents loses claims for commission as a result of the termination of the agency contract, which in the case of continuance of the contractual relationship he would have had on the grounds of already signed or future contracts with clients acquired by him (article 89b (1) no.2 HGB) and
- the payment of compensation, in consideration of all circumstances, is just and equitable (article 89b (1) no.3 HGB).
2. Commercial Agents in the Sense of Article 84 HGB
According to article 89 b HGB the compensation claim only applies for commercial agents in the sense of article 84 (1) HGB. A commercial agent is a self-employed tradesman who is and acts as an independent contractor and is constantly entrusted by a principal with the procurement or conclusion of transactions in the name and for the account of the principal. However, if the commercial agent is only exercising a sideline activity article 89 b HGB is not applicable (article 92 b HGB).
3. Analogous Grant of Compensation to Authorized Dealers and Frachisees
For other distributors such as authorized dealers or franchisees the compensation claim pursuant to article 89 b HGB can only apply analogously. An authorized dealer is entitled to compensation in analogous application of agency law, if (1) the dealer was integrated into the distribution system of the principal likewise an agent and (2) the dealer was contractually obliged to provide information about the names of his customers to the principal, so that the principal can immediately after the termination benefit therefrom and continue to supply to these customers. The compensation which is granted to authorized dealers has certain particularities, especially concerning the calculation of the compensation claim.
4. Termination of the Contract
The compensation claim for the commercial agent arises with the termination of the agency agreement. Possible reasons for the termination are a time limitation of the contract or the cancellation of the agreement by one of the parties. In principle, the compensation claim exists regardless of the reasons for the termination. However, the compensation claim can be excluded accordant to article 89 b (3) HGB, if the commercial agent has terminated the contract, the principal has terminated the agreement with sufficient cause or if the principal and the commercial agent have agreed on a third party to enter into the agreement instead of the commercial agent (see below under exceptions).
5. Prerequisites for the Compensation Grant
(a) Benefits for the principal
The commercial agent is only entitled to claim a compensation under article 89 b (1) HGB if and in so far as the principal benefits substantially, even after the termination of the agreement, from the business relationships which have been acquired or extended significantly by the agent.
Business Relationships with New Clientele
A "business relationship" in the sense of article 89 b No. 1 HGB is far more than a simple customer contact. A business relationship requires a strong link to new regular clients that have been bond to the principal by the agent. A sufficient business link is only established if within a certain time period the principal may realistically count on follow-up orders by these clients. Although it is not necessary that the principal has already concluded further contracts with the clients, a realistic prospect of follow-up orders placed by regular clients within a clear period of time must exist.
Extension of Existing Business Relationships
According to article 89b (1) 2 HGB the compensatory claim is not only applicable for the acquisition of new clients, but also for the essential extension of existing business relationships if the commercial agent has significantly increased the volume of business with existing customers and the principal continues to derive substantial benefits from the business with such customers, measured either by quantity (same products) or quality (other products).
Clientele developed by the Commercial Agent
The commercial agent can only receive a compensation for lost commission in relation to further orders of new clients who were acquired by him. A customer is considered to be a new customer if he was not doing any business with the principal before the beginning of the agency agreement and if the first order of the customer was induced by the commercial agent. However, the commercial agent does not have to induce the customer to order alone. Joint causation of a customer order is sufficient even in case of an only minor participation of the commercial agent.
Depending on the type of business, the commercial agent usually acquires a lot of new customers for the principal during the term of the agency agreement. Normally, a stable business relationship cannot be established with all of those customers. Therefore, only those customers who have placed at least one additional order during the term of the agency agreement are taken into account for the calculation of the compensation claim. Concerning all other clients the principal cannot necessarily count on reorders and therefore does not have to pay any compensation for these customers, even if they were newly acquired by the commercial agent.
Substantial Benefits for the Principal
The substantial benefit for the principal is to be seen in the further utilisation of the business relationship with the clients acquired by the commercial agent, which implies a prospect of profit without the need to pay any commission to the agent. Concerning the prediction if and for how long clients will place reorders after the termination of the agency agreement, the specific particularities of the business sector as well as the experiences during the term of the agency contract have to be taken into account.
(b) Loss of Commission Payments
In order to claim compensation the commercial agent also has to prove the loss of commission payments in consequence of the termination of the agency agreement. While the principal stands to benefit from the business relationships even after the termination of the agency agreement, the commercial agent is usually deprived of the commission which proper continuation of the agency agreement would have procured for him. However, the commercial agent has to demonstrate in detail which regular customers would have placed additional follow-up orders and what he would have received out of this further business.
(c) Reasons of Equity
Even if the commercial agent can prove that all the above mentioned prerequisites are fulfilled, the commercial agent is only entitled to an indemnity if and to the extent that the payment of this indemnity is equitable, in regard to all the circumstances and, in particular, the commission lost by the commercial agent on the business transacted with such customers (article 89b (1) no.3 HGB). This regulation is an important corrective which can significantly reduce the compensation claim of the commercial agent.
All circumstances related to the contractual relationship between the commercial agent and his principal have to be taken into account, such as the duration of the contract, the economical and social situation of the parties, but also the possibility for a commercial agent who represents various principals to continue the use of the clientele with other principals.
(d) Exclusion of Compensation
Depending on the reason for the termination of the contact the compensation claim of the commercial agent is in certain cases excluded.
- Accordant to article 89b (3) No.1 HGB the commercial agent cannot claim compensation if he has terminated the contract himself, unless the principal has given sufficient cause for the agent to terminate the contract, i.e. if the principal breached his duties or the agent cannot be expected to continue his activity due to his age or illness.
- A compensatory claim is also excluded, if the principal has terminated the contract and the agent has given sufficient cause by misconduct to terminate the contract prematurely (article 89b (3) No.2 HGB). Such sufficient cause could arise from various contractual infringements committed by the agent, such as illegitimate competition or other serious contractual infringements.
- The agent's right to claim compensation is also excluded accordant to article 89b (3) No.3 HGB, if a third person enters into the contractual relation between the principal and the agent on the grounds of an agreement convened between the principal and the agent replacing the latter. Such agreement cannot be struck before the termination of the contractual relationship.
6. Binding Nature of the Claim & Enforceability
Provided that the requirements under article 89b HGB are fulfilled the commercial agent is basically entitled to claim compensation. This compensation claim cannot be excluded or limited in advance through a contractual arrangement or waiver. Therefore, even if the agency agreement expressly excludes a compensation claim for the commercial agent, the right to indemnity is compulsory and cannot be excluded or modified as long as the contract is still in force.
After the termination of the agency agreement the commercial agent must assert his claim for indemnity within a period of one year after the termination of the contract in order to avoid that his right to indemnity is precluded.
7. Calculation of the Compensation Claim
Concerning the specific amount of the compensation claim article 89 b HGB stipulates that the commercial agent is entitled to claim an "adequate compensation". The exact amount of the compensation has to be calculated in consideration of all circumstances on a case-by-case basis.
According to the jurisdiction of German courts an adequate compensation is calculated as follows:
First of all, the presumable losses of commission as well as the benefits for the principal are estimated for a certain period of time. The benefits for the principal have to be assessed on the basis of a turnover forecast which has to include all profits the principle will presumably generate with further business operations with customers acquired by the commercial agent.
The losses of the commercial agent are estimated on the basis of the commissions the agent received within the last twelve months before the termination of the contract. The amount resulting therefrom has to be reduced by those commissions that the commercial agent received due to orders from customers who were not acquired by him or with whom no further business can be expected. Furthermore, the calculated amount has to be reduced by the rate of customers who will usually terminate the business relationship with the principal within the period of forecast.
Finally the calculation of the compensation claim might have to be adjusted for reasons of equity.
The maximum amount of the compensation claim is limited to one annual commission based on the average amount of the remuneration of the agent during the last five years preceding the termination of the contract. Should the contractual relationship not have lasted for five years, the average annual amount is to be calculated on the basis of the actual duration of the contract (article 89 b (2) HGB).
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.