EU Directive on self-employed commercial agents: an unnecessary interference with business relations or a justifiable financial protection of agents?

Commercial agents: a downtrodden race?

“Commercial agents are a downtrodden race, and need and should be afforded protection against their principals,” said Lord Justice Staughton, wryly explaining his view on the background of Directive 86/653/EEC on self-employed commercial agents (the “Directive“).

In fact, commercial agents often build up strong and lasting business relationships for their principals. Business relationships established by the agent may far outlive the relations between an agent and the principal. That is to say that the principal makes a profit from the agent’s work long after the agent is gone. We should therefore revisit Lord Justice Straughton’s remark and examine whether commercial agents deserve financial protection against termination.

The Directive is implemented into Hungarian law by the Civil Code, which contains various provisions to financially protect agents against the termination of their agency contracts. In other words, the Civil Code offers to sweeten the termination of an agent’s contract.

The first sweetening: pipeline commission

Probably the least controversial measure to protect agents’ interests is the so-called pipeline commission. The expression means that the agent is entitled to receive the normal commission for a transaction that the agent prepared, but which only materialised after the termination of the agent’s contract.

To receive the pipeline commission, the transaction must materialise within a reasonable period of time after the termination of the agency contract. Generally, three months from the termination is considered a reasonable period. Nonetheless, what is considered a reasonable period of time may vary depending on the industry or the complexity of a given project. For example, in the Tigana v Decoro case, the English courts held that in view of the realities of the leather furniture business, even nine months from termination was a reasonable period for awarding pipeline commission to an agent.

Indemnity or compensation

Under the Directive, an indemnity or compensation is payable to the agent if the agency contract is terminated. Interestingly, the Directive regulates two parallel methods to protect agents: the German “indemnity” model and the French “compensation” model.

Under the German indemnity model, an agent may receive one year’s remuneration calculated as the average of the preceding five years or, if the contract goes back less than five years, based on the average of the period in question. The agent is entitled to the indemnity if he has brought the principal new customers or has significantly increased the volume of business with existing customers.

The Directive does not specify the calculation of the compensation; instead it stipulates that the agent is entitled to compensation for the damage he suffers as a result of the termination of his relations with the principal. Practically, agents may receive compensation equalling the commissions of the last two years or the average of the last three years’ commissions multiplied by two.

Member States could choose if they want to implement the German indemnity model or the French compensation model. Hungarian legislators decided to implement the German indemnity model. Uniquely in the EU, both systems were implemented in Great Britain, where, unless the parties agree differently, compensation applies by default.

The second sweetening: indemnity

The indemnity rules of the Hungarian Civil Code basically protect the agent against any termination of the agency contract. The only cases when an agent may not be entitled to an indemnity is when the principal terminates the contract due to the agent’s default and when the agent transfers his business with the principal’s agreement to a third person. Consequently, the agent is entitled to indemnity if the agency contract is mutually terminated.

What’s more, the indemnity is due to the agent even if he himself has terminated the agency contract because of his age or illness. In Abbot v Condici Limited, the English courts found that the age of 65 is “embedded as a retirement milestone” and it is therefore reasonable for the agent to terminate the contract at that age. Nonetheless, the prevailing retirement age of the given country should be considered when assessing if the agent is entitled to the indemnity.

A second question also arises in connection with termination on the grounds of age, as both individuals and companies may be commercial agents. So can an agent who performs his work as a company terminate the agency contract on the grounds of age? To answer that question, we should return to a basic principal of Hungarian law: legal persons have the same rights as natural persons, unless a right, due to its nature, may only pertain to natural persons. As the concept of age does not apply to legal persons, it can be inferred that companies may not quit due to age. Accordingly, only natural persons should be entitled to an indemnity in case of termination on the grounds of age.

Directive 86/653/EEC on self-employed commercial agents is implemented into Hungarian law by the Civil Code, which contains various provisions to financially protect agents against the termination of their agency contracts. In other words, the Civil Code offers to sweeten the termination of an agent’s contract.