An agency contract is a contract in which one party (the commercial agent) acts as an intermediary for the other party (the principal) in the negotiation of contracts, for a definite or indefinite period of time, for remuneration. The remuneration is in practice usually called commission and consists of a percentage of the value of the contracts the commercial agent negotiated.
The agency contract is a so-called nominate contract. This means that special legal requirements apply to this type of contract, as set out in Article 428 through 445 of Book 7 of the Dutch Civil Code. Among other things, these special requirements pertain to the termination of agency contracts. This article discusses the possibility of giving notice of termination of an agency contract, the applicable notice period, the obligation to compensate loss suffered by the commercial agent in the event of an unlawful termination and the so-called goodwill indemnity the commercial agent in certain circumstances is entitled to upon termination of the agency contract.
The termination of an agency contract
If an agency contract is entered into for an indefinite period of time (or a definite period of time with the right of early termination) and the parties have not made arrangements in that contract regarding the notice period, the agency contract may be terminated with due observance of the following statutory notice periods. If the contract has run for less than three years a notice period of four months has to be observed, if the contract has run for three to six years a notice period of five months applies and if the contract has continued for more than six years a notice period of six months is applicable.
Also if the parties did make arrangements regarding the notice period, the agreed notice period is subject to certain statutory requirements that must be adhered to. The agreed notice period in the first year is at least one month, in the second year at least two months and in subsequent years at least three months.
Indemnity in the event of unlawful termination
If the principal terminates the agency contract without observing the statutory notice period, he will owe the commercial agent indemnity. The indemnity is usually fixed at the commission the commercial agent would have received if the statutory notice period (for example four months) would have been observed and is in principle calculated based on the commission the commercial agent received during the twelve months immediately preceding the termination. However, the indemnity amount may be adjusted upwards or downwards if there are founded reasons for this. Instead of this fixed indemnity the commercial agent may also claim the actual loss suffered. In that case the commercial agent must prove he actually suffered this loss, which is not necessary for the fixed indemnity.
Goodwill indemnity in the event of termination
Even if the agency contract is terminated with due observance of the appropriate notice period, the principal may owe indemnity to the commercial agent. This indemnity is called ‘clientele indemnity’ or ‘goodwill indemnity’. The commercial agent is entitled to this indemnity if: (i) the commercial agent has brought the principal new customers or has significantly increased the volume of business with existing customers and the principal continues to derive substantial benefits from the business with such customers, and (ii) the payment of this indemnity is equitable having regard to all the circumstances. The goodwill indemnity amounts to a maximum of one year commission and is calculated on the commission received in the past five years.
An agency contract can usually be terminated, also if the parties have not made any agreements at all with regard to the duration of the contract or the termination thereof. In the event of termination the statutory notice periods must be observed. If these notice periods are not observed, the principal is liable for compensation towards the commercial agent. Finally, also if the statutory notice period has been observed, the principal may owe goodwill indemnity to the commercial agent. As the financial stakes are high, we advise you to seek legal advice when drafting or terminating the agency contract.