Commercial Agents

From Max-EuP 2012

by Knut Benjamin Pißler

1. Object and goal

A commercial agent is defined by Art 1(2) of Dir 86/653 relating to self-employed commercial agents as a self-employed intermediary who has continuing authority to negotiate the sale or the purchase of goods on behalf of another person or to negotiate and conclude such transactions on behalf of and in the name of that principal. From an economic perspective a commercial agent is one of the three principal forms of distribution channels moving goods from the producer to the ultimate buyer. The distribution of products by wholesale or by retail is the most predominant form; commercial agents or distributors are important and often used; direct sales via self-owned outlets or travelling salesmen have become less common. Legally speaking, a commercial agent is integrated in the distribution (sales (forms of distribution)) of another entrepreneur’s products, a fact that distinguishes commercial agents from wholesalers or retailers. Unlike brokers, the integration of the commercial agent in the other business is permanent. However, he retains his legal independence, and in this regard the commercial agent is distinguished from an employee. Indeed, the delimitation between commercial agents and employees is one of the most difficult problems in the field of substantive law of commercial agents. Compared with employees, commercial agents have more freedom in conducting their business, but this freedom trades off with less legal protection. In practice, the types of commercial agents show great variety. They range from large distribution companies having considerable market power on whom producers are dependent (eg particular importers), across legally independent but economically dependent commercial agents, and on to commercial agents restricted to representing only one single entrepreneur who have quasi-employee status and a subsequent need for protection. Today, commercial agents are only one single form of existing marketing and distribution systems; the law of commercial agents is correspondingly part of the law governing distribution systems such as franchising and distribution agreements. However, the commercial agent and the rules stipulated for his protection serve as a model for related distribution systems.

The commercial agent industry is a relatively recent phenomenon which is firmly linked to the economic development in the second half of the 19th century. At that time industrialization and increasing foreign trade brought about the emergence of this new form of distribution. The growing division of labour between the stages of production and distribution gave rise to a supplementary trading stage between producers and ultimate buyers. A further factor was the extension of the demand markets through the construction and expansion of transportation networks, which opened up new and remote regions for the sale of products. In this situation the use of a permanent intermediary was necessary to ensure enhanced presence and customer service. The task of such an intermediary was initially accomplished by employees. However, this approach proved to be too expensive due to the large distribution areas and the broad range of products. Therefore, producers employed intermediaries who were stationed further away from the place of production; these intermediaries, representing multiple businesses, put the infrastructure that they had created at the producer’s disposal. The gradual transition from the payment of a remuneration to payment based on results led to a steady increase in the independence of the external representative with the result that they developed more and more as self-employed entrepreneurs bearing their own business risks. With the economic crises in the 1920s it became obvious that the commercial agent was—notwithstanding his legal status as a self-employed entrepreneur—extremely economically dependent on his principal. This dependency was even more apparent when the principals proceeded to contractually prohibit their agents from representing more than one single entrepreneur with the aim of tying the agent closer to the principal’s business. However, at that time no appropriate legal protection existed which could protect commercial agents from such economic dependence.

2. Trends of international legal development

In Germany and Austria the economic significance of the commercial agent and the necessity of establishing a corresponding legal framework were recognized early. Nevertheless, the Allgemeine Deutsche Handelsgesetzbuch (ADHGB) of 1891 only stipulated provisions on the commercial broker. Therefore commercial agency was still subject to the rules on contracts for work and services. It was not before the German Handelsgesetzbuch of 1897 that particular regulations for the commercial agency were seen as a necessity. However, shortly afterwards it became apparent that these new regulations were insufficient to improve the protection of the commercial agent from improper conduct of the principal. Thereafter, legal developments in Austria set the pace for legislative intervention and led to the enactment of the Handelsagentengesetz (later Handelsvertretergesetz) in 1921, which introduced some mandatory rules for the protection of the commercial agent. This legislation established for the first time an indemnity for the goodwill of the commercial agent, which later served as a model for the corresponding rule in Germany. However, it was not until after World War II that the drafting works were completed; the part on commercial agents of the Handelsgesetzbuch was enacted in 1953.

The characteristic feature of the German law of commercial agency is its socio-political focus: §§ 84 ff HGB contain several mandatory rules for the protection of the commercial agent since he is considered as the typically weaker party. These rules concern the termination of the agency contract, the non-competition clause after termination of the contract and the indemnity for goodwill. This particular protection is not limited to commercial agents who are limited to representing only one single entrepreneur, but is applicable to all types of commercial agents.

In France and Belgium the law of commercial agency remained unregulated for quite a long time. In both countries the Code civil of 1804 played an important role in solving legal problems with commercial agents (commis voyageur, later représentant de commerce), because the Code de commerce did not provide for rules in this regard. The commercial agency contract was classified within the service contracts (contrat de louage de service) or mandate contracts (mandat), whereby service contracts were defined by the subordination relationship (lien de subordination) between the service provider and the client. French law did not therefore distinguish between the self-employed commercial agent and the (employed) travelling salesman. Where the commercial agency contract was classified under mandate (mandat), it became apparent that the mandate in the Code civil is principally gratuitous and that the contract may be revoked at will by the principal. Therefore, French law was neither designed for a permanent contractual relationship between the representative and the principal nor for profit-making activities of the representative—characteristics which were contrary to the economic conception of com mercial agency. In 1937 the French legislature established a first legal basis for (non self-employed) commercial intermediaries by promulgating the statut professionel des voyageurs, représentants et placiers. 1958 saw the emergence of a décret that regulated the contractual relationships between the agent commercial and principal. It banned the unilateral right of withdrawal from the contract of the principal and stipulated a claim for damages in the case of unilateral revocation of the contract. However, these protective instruments only applied to commercial agents who were registered. This resulted in the fragmentation of the French law of commercial agents because non-registered commercial agents (agent non statutaire) did not fall under the statut professionel of 1937 but were instead subject to the rules of the Code civil.

The law of commercial agency in Belgium did not develop mandatory rules appropriate for protecting self-employed commercial intermediaries in their potentially weaker position vis-à-vis the principal.

In English law as well, no particular rules existed regarding the form of distribution labelled commercial agency in the continental European legal systems. This is due to the fact that the common law had not developed distinct rules regarding commercial agency, but applied the general rules on the legal concept of agency (representation). In doing so, the traditional perspective of English law towards agency contracts took the stance of granting the principal and the agent the right to arrange their legal relationship at their own discretion. Consequently, no mandatory rules were established for the protection of an agent acting in the capacity of a commercial agent. He was not deemed to be in need of protection. In fact, the opinion prevailed that such a (commercial) agent in his status as a self-employed entrepreneur was capable of adequately asserting his rights against the principal. Conversely, English agency law presumed the principal as being potentially jeopardized and therefore in need of protection against the agent. The English common law is more concerned with the situation in which the agent abuses the rights granted to him causing damages to the principal. Accordingly, the common law of agency established certain fiduciary duties of the agent with regard to the principal, whereas rules to protect the (commercial) agent were not created (no claim for payment of a commission, termination of agency contracts without previous notice permissible and no indemnity for goodwill).

3. Regulations in uniform law

Due to the fact that some European countries provided for mandatory rules for the protection of commercial agents (especially indemnity for goodwill) while other EU Member States put an emphasis on the freedom of contract and did not restrict the parties in the formulation of contracts, principals incurred different costs depending on which law was applicable to the respective commercial agency contract. Distortion of competition became apparent in cases of transnational transactions where the commercial agent represented the same principal in several Member States. For example, if a German principal uses a German commercial agent to represent him also in the Belgian market, this German principal competes with entrepreneurs in Belgium, whose contractual relations with commercial agents are subject to Belgian law. Since the Belgian law of commercial agency did not provide for indemnity for goodwill after the termination of a contract, there was a competitive disadvantage for the German principal due to the ‘more expensive’ German law of commercial agency. Aside from that, the disparity of competition was caused by the freedom of contract allowed in the conflict of laws. By choosing the law of another country, a foreign principal was able to circumvent mandatory rules for the protection of commercial agents in the country where business is conducted, but domestic principals were not allowed to do so.

It was against this background that the harmonization of commercial agency laws in the EU slowly gathered speed. Aiming to align the costs of entrepreneurs incurred by mandatory rules in certain Member States and to harmonize the standards in protecting the commercial agents provided for in these rules, Dir 86/653 relating to self-employed commercial agents was finally adopted on 18 December 1986.

The adoption of the directive was preceded by a 25-year long preparation phase, which was caused not least by fierce criticism articulated in England. Whilst a draft of the Directive of 1976 was clearly shaped/modelled after the German law of commercial agency, the adopted Dir 86/ 653 contains implementation options that allow the Member States to adhere to their own basic legal conceptions on commercial agency without abandoning the aim of harmonization. This is the case for the very relevant practical question of what rights are granted to an agent who is entrusted by the principal to cover a specific geographical area, and also for harmonizing the rules on indemnity for goodwill. Whereas the draft of the Directive of 1976 adopted the (German) concept of a commercial agent entrusted by the principal to cover a specific geographical area, Dir 86/653 gives the Member States the choice to opt for the conception of a commercial agent given the exclusive right to a specific geographical area, a conception which was originally found in most of the Member States (Art 7(2) Dir 86/653).

As to the termination of the agency contract, Dir 86/653 also stipulates two options for the implementation in the Member States: on the one hand an indemnity for the goodwill of the commercial agent, which by and large follows the German approach (Art 17(2) Dir 86/653), and on the other hand compensation for the damage the commercial agent suffers as a result of the termination of his relations with the principal (Art 17 (3) Dir 86/653). In accordance with Art 17(6) Dir 86/653, the European Commission in 1996 published a report on the implementation of the rules on the termination of the agency contract (COM (96) 364 final). In the report the Commission observed that only France, the United Kingdom and Ireland have opted for the compensation of damages, while all other Member States have chosen the indemnity for goodwill alternative. However, the United Kingdom has permitted the parties to choose the indemnity option, but if they fail to do so, the agent will be entitled to compensation. In practice, such a choice of the parties occurs rarely. Furthermore, the Commission noticed that prior to the implementation of Dir 86/653 in the United Kingdom, principals terminated their agency contracts and generally re-negotiated new contracts. There were also occasions where new agency contracts were not entered into or the agent was taken on as employee.

On reference by the Court of Appeal of England and Wales (Civil Division) the Court of Justice decided in a much-discussed judgment that the regime established by Dir 86/653 for the protection of the commercial agent after termination of the contract is mandatory in nature and that these rules cannot be evaded by the simple expedient of a choice-of-law clause (Case C-381/98 – Ingmar GB Ltd v Eaton Leonard Technologies Inc [2000] ECR I-9305). Therefore, whenever the commercial agent is conducting business in one of the Member States of the EU, the rules on the protection of the commercial agent apply even if the parties have chosen the law of a country outside the EU (eg the law of California as in the case decided by the Court of Justice). According to the court this understanding follows from the purpose of the regime established in Dir 86/653, namely to protect the freedom of establishment—for all commercial agents—as well as the operation of undistorted competition in the internal market, to eliminate restrictions on the carrying-on of activities by commercial agents, to make the conditions of competition within the Union uniform and to increase the security of commercial transactions.

Regarding the termination of the agency contract and the requirements for an agreement restricting the business activities of a commercial agent following termination of the agency contract, Dir 86/653 establishes a minimum standard of protection of the commercial agent but leaves it to the Member States to stipulate a higher standard (Arts 15, 16 and 20 Dir 86/653).

4. Unitary law

In the Draft Common Frame of Reference (DCFR) it is proposed that the law of commercial agency be unified as one part of the law of distribution. Certain rules inherent to all forms of distribution (sales (forms of distribution)) such as pre-contractual information duties, requirements to give notice prior to terminating the contract and indemnity for goodwill are stipulated in general rules applying to all of the concerned contracts. The influence of Dir 86/653 and, more specifically, the rules on the termination of agency contracts in Germany are quite apparent: the DCFR provides only for indemnity for goodwill and, in general, not for compensation for damages.

Literature

Ole Lando, ‘The EEC draft directive relating to self-employed commercial agents’ (1980) 44 RabelsZ 1; Jürgen Basedow, ‘Das Vertretungsrecht im Spiegel konkurrierender Harmonisierungsentwürfe’ (1981) 45 RabelsZ 196; Commission of the European Communities, ‘Report on the Application of Article 17 of the Council Directive on the Co-ordination of the Laws of the Member States Relating to Self-employed Commercial Agents (86/653/EEC)’ (1996) (COM (96) 364 final); Till Fock, Die europäische Handelsvertreter-Richtlinie (2001); Roland Hagemeister, Der Handelsvertreter im englischen Recht und seine Ansprüche bei Beendigung des Vertretervertrags (2003); Klaus J Hopt, Handelsvertreterrecht (3rd edn, 2003); Michael Martinek, Franz-Jörg Semler and Stefan Habermeier, Handbuch des Vertriebsrechts (2nd edn, 2003); Martin W Hesselink, Jacobien W Rutgers, Odavia Bueno Díaz, Manola Scotton and Muriel Veldman, Principles of European Law Commercial Agency, Franchise and Distribution Contracts (2006).

Retrieved from Commercial Agents – Max-EuP 2012 on 29 June 2022.

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