An agency contract is an agreement under which one party (the agent) acts as an intermediary for another party (the principal) in the conclusion of agreements for a limited or unlimited period, in return for a remuneration or commission.
At the end of such an agency relationship, the principal can, as a rule, continue to serve the customers it acquired through the agent. For this reason, the law stipulates that, at the end of an agency contract, the agent is in principle entitled to a commission, or ‘goodwill.’ The size of this commission is often a subject of disagreement between former principal and former agent.
With regard to the commission and the calculation of the benefit enjoyed by the principal following the termination of an agency contract, the Supreme Court of the Netherlands recently ruled that the burden of proof lies with the agent.
What was at issue?
In 2012, online travel website Prijsvrij and tour operator Corendon entered into an agency contract under which Prijsvrij, as Corendon’s agent, offered Corendon (the principal) package tours. In the following year, Corendon decided to make changes to its sales channels and no longer saw a role for Prijsvrij in this regard. It terminated the agency contract in July 2013, effective in late October.
When it appeared that the parties could not agree on the size of the commission it was to receive, Prijsvrij turned to the courts and demanded a commission amounting to € 471,961, a sum which had been calculated based on Prijsvrij’s average commission on Corendon tours over a period of twelve months.
The Subdistrict Court of Haarlem awarded Prijsvrij its claim. The Amsterdam Court of Appeal however threw a spanner in the works: in its view, Prijsvrij had failed to provide sufficient starting points for concluding that Corendon could derive any (long-term) benefit from the customers acquired through Prijsvrij at the end of the agency contract. Prijsvrij had, to be sure, pointed out that twenty-five per cent of its customers made repeated bookings, but had failed to provide insight into the degree to which travellers opted for Corendon when booking new tours. Further, the court of appeal found that, as Prijsvrij had not given Corendon a customer base that included customers’ contact details, it would be unable to derive benefit from these customers by means of marketing campaigns.
However, Prijsvrij did not resign itself to this judgement and lodged an appeal in cassation with the Supreme Court.
How does goodwill work again?
A commission is determined based on the so-called three-phase assessment:
- In the first phase, the benefit derived by the principal from the transactions with the customers provided by the agent is quantified;
- In the second phase, it is determined whether, in reasonableness, there are reasons for adjusting the sum determined in the first phase, in which regard all relevant circumstances are taken into consideration, especially the commission lost by the agent. This can lead either to an increase or a decrease in the commission;
- Finally, in the third phase, it is assessed whether the sum exceeds the statutory maximum for one year’s commission, based on the average for the past five years (or, in the event that the duration of the agreement was shorter than this: the average for that duration). In such a case, the commission is limited to the average annual remuneration.
In the T-Mobile judgement of 2012, the Supreme Court provided guidance for calculating the commission at the end of an agency contract, and found that, In view of the fact that the principal had been able to develop a relationship with customers acquired through the agent and that its relationship with existing customers had also been intensified by the agent, it was plausible that the the principal’s agreements with these customers continued to be of substantial benefit to it subsequent to the end of the agency contract. The benefits to the principal from the first phase indeed stemmed from the fact that, subsequent to the termination of the contract, it continued to be able to serve these customers without having to pay commission to the agent.
These benefits are determined based on the gross commission earned by the agent during the last twelve months of the contract in respect of the new customers and the intensified existing customers. This amount is in turn corrected on the basis of factors relating to (i) the duration of the benefit which the principal can be expected to derive from its transactions with the aforementioned customers; (ii) developments in the principal’s customer base and (iii) the accelerated receipt of commission income by the agent as a result of receiving a lump commission payment.
First determine the commission, and only then quantify it
In the case in question, the Supreme Court ruled that, before the quantification in the first phase can take place, the agent must demonstrate that the principal can still, to a relevant degree, expect new transactions with customers acquired through the agent, or with customers whose agreements the agent has expanded. Only after it has been established that the agent is indeed entitled to a commission, can quantification take place.
According to the Supreme Court, Prijsvrij failed sufficiently to make plausible that Corendon could still expect substantial benefits from either the new or the intensified contacts, as it failed to demonstrate that Corendon’s customers made their choices based on the tour operator itself and not its prices. Further, it found that Corendon could not realise a (marketing) advantage based on the customers of Prijsvrij, as it did not have their contact details. Finally, the Supreme Court also pointed out that solely the fact that customers of Prijsvrij could make repeat bookings with Corendon, was not sufficient for assuming that Corendon enjoyed the required (substantial) benefit due to the efforts of its former agent.
Awarders of contracts will be happy with this judgement by the Supreme Court. In contrast to what many had thought, it is not the case that, following the termination of an agency contract, the agent is automatically entitled to a commission. The agent must first be able to demonstrate that their former client will continue to be able to realise income from the customers whom the agent provided. Solely the fact that these customers could generate repeated turnover is not sufficient. As a result, a significant barrier to the use of agents has been removed.
You can read the full ruling (in Dutch) here.