In a recent ruling the Northern Norrland Court of Appeal had to consider two interesting questions regarding commercial agents:
- What type of commercial relationship falls within the Commercial Agents Act's definition?
- Can the act's mandatory provisions regarding severance compensation be applied by analogy in a case where the act does not directly apply?
A dispute arose between a large sales companies operating in the food industry and a large commercial bakery.
The parties had concluded an agreement in which the sales company had been appointed sole agent in Sweden for the sale of a range of the bakery's products.
When the bakery terminated the contract after approximately six years, the sales company claimed that it was entitled to severance pay under the Commercial Agents Act, since it had introduced new customers to the bakery and significantly increased its trade with existing customers – a development from which the bakery benefitted significantly.
The bakery disputed the claim and argued that the sales company was not to be regarded as a commercial agent and that it had no right to severance compensation.
The court first had to consider whether the act was directly applicable to the parties' agreement – that is, if the sales company as a 'commercial agent' under the act's definition, on the bakery's behalf, had independently promoted the sale or purchase of goods through fulfilling orders or concluding contracts in the bakery's name.
In accordance with established Swedish practice, the parties' definition in the agreement (ie, 'sole agent') was considered to carry no weight. Furthermore, the terms of the agreement were found to be so vague that no real conclusion regarding the commercial relationship could be drawn.
The parties themselves essentially agreed that the arrangement was as follows:
- Under the contract, the sales company received commission on all sales made to the bakery's end customers (eg, hotels, restaurants, schools and hospitals).
- However, the bulk of purchases were made by end customers placing orders directly with wholesalers. Wholesalers purchased the bakery's goods and held separate stock; wholesaler purchases were not directly related to individual orders from end customers. In other words, the sales company's real task was to convince wholesalers to include the bakery's goods on their product lists and in their marketing material.
- The sales company also focused on end customers and could offer an incentive discount which customers could redeem in their purchases from wholesalers. The wholesalers, in turn, invoiced the sales company for the discount and the sales company reclaimed the cost from the bakery.
According to the parties, a similar system is standard throughout the Swedish food industry.
The sales company's problem was that it neither fulfilled orders nor concluded contracts with end customers in the bakery's name. However, the sales company argued that the wholesale market should be ignored because, as the food industry works in the above-mentioned way, it would be impossible to achieve a 'normal' commercial agency relationship in this industry.
The court found that the sales company was not involved in any kind of agreement except for one which stipulated that end customers could redeem a discount which was paid for by the bakery.
Furthermore, the bakery had not been the direct seller, since sales went through wholesalers which made independent purchases from the bakery and kept their own stock; as the court of appeals stated, the sales company had not fulfilled orders and the bakery had not sold directly. Had the sales company been engaged in marketing to end customers and had it received commission on sales from this activity, the court of appeal found that it would still be a stretch to consider the act to have applied directly to the parties' relationship.
The second question that arose was whether the provisions for severance compensation could apply by analogy in a situation such as the one at hand.
The court of appeal held that the act may be broadened by analogy to a wider scope than the law formally allows. However, it noted that the provisions for severance pay are a mandatory exception to the contractual freedom that exists in commercial relationships. Severance compensation is intended to:
- reimburse the commercial agent for the value given to the principal in the form of established customer relationships; and
- compensate the commercial agent for investments that may become useless to it after cancellation.
The court of appeal referred to a 2008 Supreme Court case that concerned an analogy of the act's provisions regarding severance compensation (for further details please see "Mandatory notice period for termination of a distributorship"). According to the court, the difference was that the agreement in the 2008 case contained a clause regarding severance pay, but such a provision was lacking in the present case.
Furthermore, the sales company could not rebut the bakery's claim that, in the negotiations preceding the conclusion of the contract, it had focused not on severance compensation, but rather on achieving an extensive notice period and a high sales commission – and had been satisfied in this regard. According to the court of appeal, the high sales commission could be seen as a means to ensure that the bakery would not make any unjust enrichment at the sales company's expense; the extensive period of notice was viewed as an equivalent way to ensure an income or investment protection for a transitional period.
Against this background, the court of appeal found no merit for an application by analogy of the provisions regarding severance compensation.
At first glance, it seems clear that no severance compensation should be paid to the sales company since, as the court of appeal stated, the sales company had not fulfilled orders and the bakery had not sold directly to end customers. However, there was some merit in the sales company's argument that the market did not allow for a normal commercial agency relationship and that the sales company actually operated in a situation just as worthy of protection as a commercial agent. It argued that the bakery had experienced an undeniable increase in revenue thanks to the company's sales effort.
Although not reflected in the court of appeal's reasoning, it is not unreasonable to assume that the outcome could have been different if there had been some indication that the sales company had not chosen to ensure a high commission and an extensive notice period, likely with the knowledge that it could not rely on severance compensation. The court perhaps took account of the fact that the sales company would have been overcompensated if it had also been paid severance compensation.
Until otherwise litigated, the right to severance compensation requires either a direct commercial agent situation or an agreement between parties to such a right, regardless of the type of commercial relationship into which they enter.
The court of appeal's judgment has been appealed. The Supreme Court has as yet to consider whether to give leave to appeal. A reasonable estimate is that leave will likely be denied, but the Supreme Court's decision will be interesting regardless.
For further information on this topic please contact Bo Thomaeus at Gärde Wesslau Advokatbyrå by telephone (+46 8 587 240 00), fax (+46 8 587 240 01) or email ([email protected]).