Introduction

Last month the European Court of Justice considered whether a sub-agent is entitled to a share of the goodwill indemnity which has been paid by the principal to the main agent on termination of the main agent’s agency agreement with its principal.

The ruling effectively puts clear water between the UK and EU laws in relation to the entitlements of sub-agents.

Facts

A German company, Poensgen (Principal) concluded a commercial agency agreement with Herios (Main Agent).

Under the agreement the Main Agent had the exclusive right to sell the Principal’s products in Belgium, France, and Luxembourg. The Main Agent subsequently appointed NY as its sub-agent (Sub-Agent) to promote and sell the Principal’s products in these countries.

The commercial agency agreement between the Principal and the Main Agent was terminated by the Principal and shortly after the Main Agent terminated its contract with the Sub-Agent . Subsequently the Sub-Agent became the commercial agent of the Principal.

The Principal paid the Main Agent a goodwill indemnity under the EU Agents Directive.

The Sub-Agent claimed against the Main Agent, arguing that it was entitled to a proportion of the indemnity payment as, under the Directive, the indemnity paid to the Main Agent was a “substantial benefit” derived from the customers that the Sub-Agent had brought.

Judgment

The European Court decided that an indemnity paid on termination to the Main Agent by Principal was a “substantial benefit” and therefore the Sub-Agent was entitled to a share of that indemnity from the Main Agent (that is, the Sub-Agent’s own principal) on termination of their sub-agency agreement.

However, in this case, given that the Sub-Agent continued its commercial agency business in relation to the same clients and for the same products – effectively replacing the Main Agent – the Sub-Agent’s entitlement to the indemnity was not fair – a key issue under the Directive.

In its judgment, the European Court, accepted that, in a situation where there is a principal, main agent, and sub-agent, there are two principal-agent relationships:

  • between the principal and main agent; and
  • between the main agent and sub-agent (where the main agent stands as the principal of the sub-agent).

Consequently, the European Court applied the entitlement to indemnity given by the EU Agents Directive to the sub-agent, as if it stood in the same position as the agent against the principal.

But in reaching its judgment the European Court simply ignored the starting point under the Directive for considering whether an indemnity payment was due from the Main Agent to the Sub-Agent in terms of whether the Main Agent would continue to derive substantial benefit from business undertaken with customers introduced by the Sub-Agent.

How does this compare with English law?

Some years ago the English Court of Appeal rejected the same argument. In that case the Court of Appeal considered the status of sub-agents and decided that a sub-agent does not have a right to compensation against the principal as there is no contractual relationship between the principal and sub-agent (read our article here for more information).

What does the difference in approaches between English law and EU law mean for principals, agents, and sub-agents?

Following Brexit, the European Court’s judgment is no longer binding on the UK Courts. However, principals, agents, and sub-agents may be affected by this judgment depending on where they are based.

For example, if the principal is based in the UK and the agent and sub-agent are based in the EU, the principles established by the European Court’s judgment could well be relevant.

In this situation it will also be necessary to consider the governing law of the agency and sub-agency agreements particularly where the agreements are governed by the law of an EU member state.

For example, if, in the above scenario, the agreement between the principal and the main agent is governed by English law but the agreement between the main agent and sub-agent is governed by the law of an EU member state – we anticipate that the principal would seek to rely on the English Court of Appeal’s earlier judgment, while the agent and sub-agent would seek to take advantage of the European Court’s recent judgment.

In such a situation it is possible that the agent would find itself as being the meat in the sandwich – particularly if the amount received from the principal under its agreement was proportionately smaller than the amount which it had to pay to the sub-agent under the sub-agency agreement.

Therefore, we expect to see more EU agents with sub-agents pursuing litigation against their UK and EU principals following the termination of their agency agreement given that their sub-agents may now have an entitlement to a proportion of any indemnity payment the agent receives.

Can this be applied to compensation payments?

The European Court’s judgment concerned the entitlement of an agent to an indemnity payment for the purposes of the EU Agents Directive.

However, it raises the question of how compensation payments on termination of the main agent’s agreement with its principal will be treated in similar circumstances. In some EU member states where compensation payments apply instead of indemnity payments, how will local courts treat the compensation payment? Will they follow the European Court’s judgment or, given that compensation is calculated in an entirely different way to an indemnity, will local courts adopt an approach similar to that of the English Court of Appeal?

Take home point

For principals, agents, and sub-agents it is critical to carefully consider the governing law which is stated in or otherwise applies to the agency agreement or sub-agency agreement in question as well as which country’s courts may decide disputes. A failure to do so may result in greater exposure for principals and agents or greater entitlements for agents and sub-agents respectively.