In respect of a commercial agency, an agent can obtain exlusivity for a certain geographic sales area, or for a specific customer base. However, sometimes the agent may also have to compete with other agents of the same principal. In those cases the business may nevertheless have to pay goodwill compensation upon termination for all customers (i.e. also for existing customers). In practice, this legal clarification could lead to higher goodwill payments for agents.
The agent’s right to goodwill compensation upon termination
EU Member States agreed that under commercial agency contracts, agents in principle have a right to goodwill compensation if their commercial agency contract terminates (Article 17(2)(a) Directive 86/653/EC):
The commercial agent shall be entitled to compensation if and to the extent that: (1) he has brought new customers to the principal or transactions have significantly increased with existing customers as well as the business with such customers, the principal continues to derive substantial benefits, and (2) the payment of this compensation is equal, having regard to all the circumstances, the commission arising from transactions with such customers lost by the commercial agent.
As a financial ceiling, goodwill may not exceed the average annual remuneration received by the agent in the past. The average is calculated in principle over the preceding 5 years of the contract (Article 17(2)(b) Directive 86/653/EC).
The background to these stipulations is to protect the agent; usually the weaker party to a commercial agency contract.
In the Netherlands, the obligation of the principal to pay goodwill compensation to agents is laid down in statute, in the Dutch Civil Code (“BW“) (Article 7:442 BW).
What does ‘new customer’ mean?
It is evident from the quoted provision that in order to calculate goodwill, it is of great importance if the agent generated new customers. But what exactly is a ‘new customer’? A legal question that is commonly a topic in termination discussions and ensuing litigation, at least in the Dutch jurisdiction.
A recent ruling by Europe’s Supreme Court, the Court of Justice of the EU (“ECJ“), provides some clarity. At the request of a referring German court, the ECJ assessed the situation where an agent had no sales territory or a customer base of his own (i.e. did not have exclusivity). The agent had to compete with other agents of the same principal, a distributor of eyeglass frames, Marchon.
Marchon sells a range of eyeglass frames. Different styles, brands and collections. Its customers were opticians. In order to sell to these opticians, Marchon used agents. Each of them was responsible for selling frames of one or more eyeglass brands (i.e. the agents did not sell the full spectrum). Each agent therefore had to compete, within the same geographical area, with other Marchon agents.
The ECJ, based on the context of the Agency Directive and the objectives of the European legislatior, found that upon termination, an agent may claim goodwill compensation for customers who had previously already been registered as customers with the principal. In other words: under certain circumstances existing customers can be ‘new customers’ within the context of a complex commercial agency scheme and can therefore be used to calculate a higher goodwill compensation upon termination (ECJ 7 April 2016, judgment in Case C-315/14, ECLI:EU:C:2016:211 (Macron Germany)):
Customers who brought in a commercial agent for goods whose sale he has been entrusted with by the principal, must be regarded as new clients within the meaning of that provision, even if the customers already did business with the principal regarding other goods, when it was necessary for the sale of the first good through the agent in order to engage in a particular business relation, which is at the discretion of the court.
This legal development works to the advantage of agents if and when their commercial agency contract comes to an end. These agents will have a stronger negotiation position in the termination discussions. Depending on the circumstances in play, they may be able to claim higher goodwill compensation.
However, the Court does not leave the principals out in the cold completely. It accepts that it may be easier for the agent to sell new goods to companies or individuals who are already doing business with the principal. National courts are told to take that particular circumstance into account, when assessing the reasonableness of goodwill compensations (ECJ 7 April 2016, judgment in Case C-315/14, ECLI:EU:C:2016:211 (Macron Germany); cf. by analogy the judgment in case C-203/09, EU:.C:2010:647 (Volvo Car Germany), paragrapgh 44).
Under Dutch law, there are a number of limited exceptions to the obligation to compensate an agent for goodwill. A principal might even be able to avoid the need to pay goodwill altogether (Article 7:442(4) BW). In addition, the agent has to notify the principal that he in fact wants to receive goodwill compensation. The limitation period is one (1) year after termination of the commercial agency contract. If the agent fails to do so, he or she risks losing the right to goodwill (Article 7:442(3) BW).
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