What's an agency agreement?
An agency agreement is an agreement in which the principal (the manufacturer/client) instructs the commercial agent and commits the principal to provide intermediary services for a fixed or indefinite period of time and against remuneration in the formation of contracts, and to conclude such services in the name of and for the account of the principal, without being subordinate to the principal (section 7:428 of the Dutch Civil Code). The agent thus mediates on behalf of the principal in the formation of contracts and obtains a commission for that purpose. The legal relationship between the principal and the commercial agent is usually laid down in an agency agreement. Drawing up an agency contract is custom work.
Characteristics of an agency contract
- No contract is concluded between the commercial agent and the buyer (the commercial agent is an intermediary). The commercial agent mediates in the formation of an agreement and sometimes represents "in the name of";
- The principal determines the price and other conditions of sale himself. He has a legal relationship not only with his commercial agent but also with all customers;
- The commercial agent is not subordinate to the principal;
- The commercial agent works for the account and risk of the principal;
- A certain degree of permanence (steady intended relationship).
Points for attention Agency agreement
Form
An agency agreement is free of form. However, a written agreement is preferable from the point of view of evidence, but even in the absence of a written agreement, a judge can judge on the basis of the facts that there is an agency contract after all. Article 7:428 paragraph 3 of the Dutch Civil Code does provide that each of the parties is obliged to provide the other party with a written agency contract at its request. Even if the parties give a different title to the agreement (e.g. cooperation agreement) but do have the aforementioned characteristics of an agency agreement, this should be considered an agency agreement. In that case the (mandatory) legal provisions of the Dutch Commercial Agency Act are applicable.
Commission
Pursuant to Section 7:431(1) of the Dutch Civil Code, the commercial agent is entitled to commission for contracts concluded during the term of the agency contract:
- through his intervention (there must be actual mediation);
- with someone he had previously brought in for such an agreement;
- with someone who belongs to the assigned clientele or is established in the assigned territory (exclusivity).
It is important to lay down in agency agreements in which situations and under which conditions the commission is payable. The parties are free to agree on the amount of the commission.
Exclusivity
If the commercial agent has been assigned a clientele and/or a territory, this shall be exclusive, unless it has been expressly agreed that this is not the case (Article 7:431 paragraph 1 (c) of the Dutch Civil Code). It is therefore important (from the principal's point of view) to explicitly state in an agency agreement that there is no exclusivity.
Competition clause
The non-competition clause provided for in Section 7:443 of the Dutch Civil Code, which contains rules of mandatory law, restricts the commercial agent's freedom to work after the end of the agency contract. The clause is only valid if it
- has been agreed in writing;
- for a maximum period of two years;
- relates to the type of goods or services for which the commercial agent was acting;
- on the clientele assigned to him; and
- the area assigned to him.
At the request of the commercial agent, the Subdistrict Court may nullify the non-competition clause in whole or in part at such time as the clause unreasonably prejudices the commercial agent in relation to the principal's interest to be protected. In a number of specified cases the principal cannot derive any rights from a non-competition clause, e.g. if the statutory period of notice has not been observed at the time of termination of the agency contract or if termination is due to an urgent cause attributable to the principal. From the point of view of the principal it is therefore advisable to include an appropriate non-competition clause in the agency contract.
Customer fee
An important feature of agency contracts is also the right to a client fee (in practice also referred to as a goodwill fee) which the commercial agent has under circumstances at the end of the agency contract. Pursuant to Section 7:442 of Book 7 of the Dutch Civil Code, a commercial agent is entitled to a client fee at the end of the agency contract if the agency contract is terminated:
- the commercial agent has introduced new customers to the principal or has substantially extended the agreements with existing customers (customer increase and turnover increase);
- the agreements with these customers still bring substantial benefits to the principal (permanence; the principal's ability to make use of the customer base built up by the commercial agent after termination of the agency agreement is, in principle, his business).
Entitlement to a customer indemnity lapses as soon as the commercial agent has not notified the principal that he is seeking such an indemnity within one year of the end of the agency contract at the latest. Apart from the aforementioned case, the goodwill fee cannot be waived, as the provision is mandatory, according to Section 7:442 of the Dutch Civil Code. The amount of the customer fee depends on a number of circumstances. First of all, it is important that the customer fee is never higher than the remuneration over one year. The aforementioned remuneration is determined by calculating the average of the remunerations in the five preceding years. If the agency contract has lasted less than five years, the average of the past years is taken. The fact that the remuneration is never higher than the remuneration over one year does not mean that the remuneration is always equal to this average remuneration. In its judgment of November 2012, the Supreme Court ruled that the indemnity must be calculated by means of a three-stage rocket. First of all, the benefits arising from transactions with customers introduced by the agent must be identified. Next, it will be assessed whether there is reason to adjust the amount determined on the basis of step 1 with a view to fairness, all circumstances of the case and the commission foregone by the agent. Fairness may involve either an increase or a decrease in the amount determined in the first step. Finally, it is checked that the amount calculated does not exceed the maximum amount (the average fee over one year).
In a more recent judgment, the Supreme Court ruled that there is an entry-level condition; since the judgment on 19 May 2017, the agent must from now on first demonstrate that the principal still benefits from the customers introduced by the agent. Only when the agent has demonstrated the aforementioned plausibility will the calculation of the remuneration in accordance with the aforementioned three-stage penalty be taken into account.
Drawing up a clause in an agency agreement relating to the right to a goodwill payment is therefore tailor-made and deserves special attention because both the statutory regulations and the regulations arising from case law must be taken into account.
Duration and termination
An agency contract entered into for an indefinite period or for a definite period with the right of early termination may be terminated by the agent and the principal with due observance of the agreed notice periods. Under the law these may not be less than one month in the first year of the agency contract, two months in the second year and three months in subsequent years. If the parties agree longer periods in the agency contract, they may not be shorter for the principal than for the commercial agent.
If the parties have not agreed on a notice period in the agency contract then the specific provisions for notice of termination set out in Article 7:437 of the Dutch Civil Code apply, namely at least 4 months, plus one month after 3 years of term or more and 2 months after 6 years of term or more.
Termination terminates the agency contract. None of the parties can claim fulfilment. The party who terminates the agency contract without observing its term or without observing the statutory or agreed notice period (and without the other party's consent) shall be liable to pay damages, unless termination occurs for an urgent reason immediately notified to the other party.
In addition, an agency contract shall be terminated by:
- death of the commercial agent or the principal (Section 7:438 of the Dutch Civil Code);
- termination for an urgent reason (Section 7:439 of the Dutch Civil Code);
- dissolution by the Subdistrict Court (Section 7:440 of the Dutch Civil Code).
These statutory provisions must be taken into account when drawing up and terminating agency contracts.
Applicable law
A final but certainly not unimportant aspect of the agency contract is the question of what law applies to the relationship between the agent and the principal. The main rule is that the agency contract is governed by the law in force in the country in which the agent is or has been established. In the agency contract the parties may agree that the contract shall be governed by a different legal system.
Furthermore, a Directive (Directive 86/653/EEC) is applicable in Europe which aims to harmonise the individual laws of the Member States with regard to commercial agency contracts. This Directive is of great importance for all agency contracts within the European Union. Indeed, the Directive contains mandatory provisions applicable to all activities taking place on European territory. The application of American law to an agreement between a European Agent and an American principal would nullify the European Commission's protection structure. To prevent this, the Court of Justice has decided to give the Directive mandatory effect. A European agent can therefore at all times invoke European law if non-European law has been chosen in the agency contract.
Another important ruling emphasising the importance of applicable law is the so-called UNAMAR ruling. The effect of this ruling is that a Dutch principal who appoints a Belgian agent and makes a choice of law in favour of Dutch law does not have to subject the principal to the more extensive protection of the agent under Belgian law, unless it is decided by the Belgian court that the higher protection of the Belgian agent serves a fundamental national interest. The latter is not easily plausible, according to the European Court. The main rule is therefore still that the agency contract is, in principle, governed solely by the law laid down in the contract. In order to avoid misunderstandings, it is of the utmost importance to include the applicable law in the contract in as clear a manner as possible so as to avoid disputes about it and so that you know where you stand.
Please contact us
If you (as a commercial agent or principal) would like support in drawing up and negotiating a workable and legally clear agency contract or in the event of disputes about or termination of an agency contract, please feel free to contact us.