Corporate Law Newsletter I June, 2016 : calculation of goodwill indemnity: net income or gross income

Goodwill indemnity, provided for in the Agency Contract Law (Decree-Law 178/86, of 3 July, “Agency Contract Law”) as one of the possible effects of termination of such a contract, aims to compensate the agent’s efforts carried out for the entire duration of the contract, assuming the law that the principal will continue to benefit, after cancellation of the agency contract, from the clients brought in or developed by the agent.

It is a sui generis concept, specific to the contractual model implemented in the Portuguese legal system by the Agency Contract Law, as in other legal systems in the European Union, that emerged to reinforce the protection of the agent and which, as its name indicates, is due to the fact that the agency contract, by the way it operates, implies an increase in clients for the principal, clients that will remain even after the termination of the contract.

Goodwill indemnity, while not being compensation for damage in the traditional or classic sense, since it does not exactly presuppose the existence of actual damage or its measurement can be cumulated with other forms of compensation that  may  exist, namely compensation for termination without advance notice, or without sufficient advance notice, and compensation for breach of contract.

However, payment of goodwill indemnity on termination of the agency contract is not automatic and requires the following conditions to be cumulatively met: that (i) the agent has brought in new clients for the other party or has substantially increased the turnover with existing clients; (ii) the principal benefits considerably, after the termination of the  contract, from the  agent’s efforts and; (iii) the agent no longer receives any consideration for contracts negotiated or signed, after the termination of the agency, with clients brought in or whose business has been increased.

Legal theory, although with some dissenting voices (Fernando A. Ferreira Pinto, Contratos de Distribuição - Da tutela do distribuidor integrado em face da cessação do vínculo, Univ. Católica Editora, Lisboa, 2013, p. 724), and case law generally accept the application of the concept of goodwill indemnity to other commercial distribution contracts, such as concession contracts, provided the legal requirements described above are met.

As far as the calculation of goodwill indemnity is concerned, as it is not a true compensation for losses, only the regime provided for in the Agency Contract Law is applicable for its recognition and calculation, and not the general regime of the obligation to compensate.

Thus, according to that law, goodwill indemnity must be determined in an equitable manner, but can not exceed an amount equivalent to an annual compensation, calculated from the annual average of the payments received by the agent over the last five years of the duration of the contract or, if the duration of the contract was shorter, the average of the period in which it was in effect.

The calculation of the indemnity according to equitable criteria requires various factors to be considered, in particular, the duration of the contract, all the activity carried out by the agent or concessionaire, the volume of clients brought in and the investment made.

As regards determination of the method of calculation of the “annual average of the payments received”, case law of the Supreme Court of Justice has determined that this average must be calculated from the net profit of the agent  or  concessionaire,  as affirmed by the recent Judgment of the Supreme Court of 12 May 2016 (Case No. 2470/08.0TVLSB.L1.S1).

The Supreme Court of Justice claimed that the expression “consideration”, equivalent for the agent to earnings from their activity, as far as concession contracts are concerned, must be understood as “income received by the concessionaire in the exercise of their commercial activities”, in other words, net income, which is thus contrary to the claim of the appellant in that case, which claimed that “the consideration to be taken into account must be formed by its gross value, in other words, without deducting any expenses or taxes supported by the concessionaire”.

However, we cannot fail to note that there is case law (Judgments of the Supreme Court of Justice of 4 June 2009, case no. 99/05.TVLSB and of 15 May 2012, case no. 3170/2009) and legal theory (Fernando A. Ferreira Pinto, Contratos de Distribuição - Da tutela do distribuidor integrado em face da cessação do vínculo, Univ. Católica Editora, Lisboa, 2013, p. 664) that claim that the consideration to be taken into account must be formed by the gross value of the income.

Those who defend this position believe that the criterion of net profit is repelled by the nature of the goodwill indemnity, which, instead of indemnifying losses, acts as compensation for the income that the principal will continue to benefit from, after the termination of the contract, and which are the result of the activities carried out by the agent or concessionaire.

To conclude, although the recent Judgment of the Supreme Court of 12 May 2016 states that “there has been repeated guidance from the STJ that the annual average of the remuneration received be  calculated from the net profit of the concessionaire”, this position is not unanimous accepted in legal theory or in case law.