Terminating Dutch agency contracts (2): Rights and entitlements of the principalWednesday, 10 August 2016
Commercial agency is prone to conflict over termination fees. In the Netherlands, statute strictly regulates the rights and entitlements of the agent in the course of termination. What rights does the principal have under Dutch law?
There is an impression that many parties operating under a commercial agency contract are not adequately informed about the financial possibilites upon termination. This in turn leads to loss of opportunity. Elswhere, we presented an overview on compensation for commercial agent, depending on the circumstances, upon termination of an agency agreement. In practice, we also encounter cases where the principal forgets to claim rights and entitlements his legal rights. This post sets out what a principal might be able to claim upon termination under Dutch law.
Dutch legislation on termination of a commercial agency contract originates from EU law and is written in favour of the commercial agent. Generally speaking, it is the commercial agent that must be protected against undue termination. This idea permeates the EU Commercial Agency Directive, as implemented by Dutch law. However, application of statutory law does not always lead to the principal being liable. Sometimes it is the other way around.
Avoid unnecessary claims
As a general rule, the principal (whether it be a producer, supplier or distributor) should try to avoid having to pay termination fees or goodwill compensation. The following provides guidance on how to avoid liability and other claims as much as possible:
- The commercial agent in principle is entitled to commission for orders. Even if the order ultimately does not lead to an agreement, or if the customer does not pay. The principal can escape this duty to pay. In order to do so, under Dutch law, the principal must inform its agent within a reasonable period of time that the order is not accepted, or that it was accepted with reservations (e.g. the order will only be accepted if paid in full). This possibility to refuse compensation should be agreed upon in advance and in writing (Article 7:432 (1) BW).
- Always terminate the agency contract in a regular way. Let the term expire and confirm in writing that it will not be prolonged. Or terminate the agency contract as agreed upon. Normally, notice should be given against the final day of the month, subject to the contractual notice period. If parties did not agree upon a contractual notice period, the statutory notice period applies (Article 7:437 BW). If one fails to respect the relevant notice period (e.g. termination with immediate effect), liability for fixed or full damages may arise (Article 7: 439 and 7:441 BW). We will go into more detail in a further post on this topic.
- Check how much goodwill actually remains. In principle, the commercial agent is entitled to goodwill for new customers or contracts with existing customers that he has expanded. Goodwill compensation can amount to (a maximum of) 1 year worth of commission or provision. However, the principal may be able to avoid goodwill payments in case: (a) it is not clear if there are still advantages to be gained with the new or expanded customers, (b) if the commercial agent has violated his duties, (c) if the agent has terminated himself, or (d) if rights are being transferred to a third party (Article 7:442 BW).
- Agree on non-exclusivity. The commercial agent in principle is entitled to commission or provision for any contract concluded during the agency, if it originates from his exclusive territory or customer range. However, a principal may be able to avoid these payments if it was agreed that the agent does not have geographic or customer exclusivity (Article 7:431 (1)C BW).
- Make sure that an agent remains active. Also in case of argument. If an agent remains available for work but the principal refuses to make us of this availability, or to a far lesser extent than normally, the agent may be able to claim ‘normal’ commission or provision. This should be avoided by keeping the agent active, even in case of a termination dispute (Article 7:435 BW).
- Redistribute commission on subsequent agents. The commericial agent in principle is entitled to commission for an agreement concluded after his agency contract, if that agent, in short, contributed significantly to the order being placed. If the subsequent agent also contributed, it may be fairer to divide commission between both agents. This provides no net profit for the principal. However, paid out commission can be directed to the current agent, providing an incentive for future sales (Article 7:431 (3) BW).
- Check if claims have not expired and are not lapsed. Most of the agent’s legal protection under Dutch law lapses or expires after 1 year. After that period, the commerical agent cannot enforce most claims anymore, unless he has interrupted the limitation period by relevant legal actions (Article 7:444 and 7:442 (3) BW).
Even the principal can sometimes claim damages
Aside from preventing claims being brought, the principal can sometimes turn things around and claim damages itself from its (former) agent. Usually, this is only possible in two instances where there is gross violations on the part of the agent:
- An agent who terminates a commercial agency contract (1) prematurely, or (2) without respecting the relevant notice period, and (3) without the principal’s consent, may become liable for damages. However, if the agent has a compelling reason for termination, and immediately communicated this reason to the principal, he may avoid becoming liable (Article 7:439 (1) BW).
- An agent who, based on his behaviour, forces the principal to terminate a commercial agency contract for ‘compelling reasons’, may also become liable for damages. In this regard, ‘compelling reasons’ should be understood to be circumstances of such a nature that it cannot reasonably be expected from the terminating party to continue the contract any longer, even if only temporarily (Article 7:439 (2) BW).
If one of these situations occurs, the law provides two options for the principal to claim damages from its (former) agent. Full compensation (Article 7:441 (3) CC) or liquidated damages (Article 7:441 (1) BW). The latter is conveniently fixed. It comprises compensation that should have been paid out, in case a hypothetical notice period is observed, during the remainder of the contract. With regards to a commercial agency contract of 6 years, for example, the fixed damages are likely to include 6 months worth of commission and other remuneration.
Check out our other contributions on terminating agency under Dutch law
- Rights & entitlements of the commercial agent
- Rights & entitlements of the principal business
- How best to terminate commercial agency agreements?
- Damages in addition to goodwill
- Claiming goodwill for existing customers