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Is an agent still entitled to its indemnity when it commits a breach of contract during its notice period?

25 Feb 2011

Volvo Car Germany GmbH v. Autohof Weidensdorf GmbH (C-203/09, 28 October 2010)
Principals will find it even harder to avoid paying compensation to terminated agents under the Commercial Agents Regulations following a recent European Court decision.  The decision closes a potential loophole which had existed under English law. 

The decision concerned a referral from the German Supreme Court to the European Court of Justice  for a preliminary ruling.  The German Court asked the ECJ whether under the European Agents Directive, a principal can withhold an indemnity due to an agent in particular circumstances. The circumstances in question were where, after terminating the agency, the principal discovers that the agent committed a breach of contract during the notice period which if it had been discovered before termination, would have justified immediate termination of the agency by the principal.

What does the Directive say?
We all know the rules, but here is a refresher: article 17 of the Directive requires Member States to ensure that the agent is, after the termination of the agency contract, indemnified or compensated for damage in accordance with the Directive. 

The agent is entitled to an indemnity if and to the extent that:

  • he 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
  • the payment of the indemnity is equitable having regard to all the circumstances and, in particular, the commission lost by the agent on the business transacted with such customers.

Under Article 18 of the Directive, the indemnity is not payable where:

  • the principal has terminated the agency contract because of default attributable to the agent which would justify immediate termination of the agency contract under national law;
  • the agent has terminated the agency contract, unless such termination is justified by circumstances attributable to the principal or on grounds of age, infirmity or illness of the agent in consequence of which he cannot reasonably be required to continue his activities.

What does the German law say?
The Directive has been implemented in Germany via domestic legislation, in the same way as it has in Great Britain via the Commercial Agents (Council Directive) Regulations 1993. 

However, under German case law, the provisions relating to an agent’s indemnity entitlement extend further than other Member States in that they also apply to distributorship agreements. 

Under German case law, it is sufficient if a serious ground justifying immediate termination of the contract existed objectively when the decision was taken to terminate the contract and whether or not this ground was known to the principal at the time.  Accordingly, where the agent has failed, before the normal end of the contract, to perform his obligations in such a manner that termination without notice is justified, German case law permits a principal:

  • who has decided to terminate the contract at the end of the notice period to terminate that contract afresh, without notice, if he learned of the default during the notice period; or 
  • to rely on that default as a ground for refusing the pay the indemnity where the principal only learned of the default after the end of the notice period.

Facts of the Volvo case
A dealership agreement was entered into between Volvo Car (the principal) and Autohof Weidensdorf GmbH (“AHW”) (the dealer).  At the same time, the directors of AHW operated another company called Autovermietung Weidensdorf GbR (“AVW”).  AVW established an agreement with Volvo concerning special discounts for supplying brand-new Volvos.  Pursuant to this agreement, AVW purchased vehicles from AHW at the agreed discounted rates.  In return, AHW received allowances from Volvo.

In March 1997, Volvo gave notice to AHW to terminate the dealership agreement, the date of termination being 31 March 1999. 

Between April 1998 and July 1999, 28 vehicles which AVW had purchased from AHW were sold prematurely, contrary to the dealership agreement.  Volvo only became aware of this breach after the end of the dealership agreement.

AHW claimed that, under German agency law as it applied to dealership agreements, it was entitled to an indemnity and payment of various outstanding credit notes.  Volvo argued that AHW was precluded from receiving an indemnity.  It argued that AHW took allowances for which it was not entitled because, in collusion with AVW, it had not complied with the agreed minimum retention period under the dealership agreement.  Volvo submitted that AHW had therefore failed to comply with its obligations under the dealership agreement, which would have entitled Volvo to terminate the contract immediately.

The German Regional Court allowed AHW’s claim for the indemnity and credit notes, but the amount awarded was varied on appeal in the Higher Regional Court.  Volvo appealed again to the German Supreme Court.

Questions referred to the ECJ
The German Supreme Court referred the following questions for preliminary ruling to the ECJ:

  1. Does the Directive prevent national legislation from excluding an indemnity entitlement, when a serious ground for immediate termination of the agency because of the agent’s breach existed at the date of contractual termination but was not the cause of termination?
  2. Does the Directive prevent national legislation from excluding an indemnity entitlement where a serious ground for immediate termination of the agency because of the agent’s breach arises during the notice period but the principal only becomes of aware of the breach after the contract ended?

The ECJ’s findings

First question
The ECJ observed that AHW’s alleged breach occurred after notice of termination had been given in accordance with the dealership agreement and was only discovered after the agreement had ended.  The first question posed by the German Supreme Court related to a situation where, on the date of normal termination of the contract, there were grounds justifying immediate termination of the agency, which were not relied upon by the principal.  The ECJ therefore considered that the first question did not in any way reflect the facts in issue in this case and dismissed it as inadmissible.

Second question
In deciding on the second question, the ECJ placed strong emphasis on the wording used in the Directive, namely that an indemnity is not payable where the principal has terminated the contract ‘because of’ a breach attributable to the agent which would justify immediate termination of the contract.  This wording indicated to the ECJ that there was a requirement of a direct causal link between the breach attributable to the agent and the principal’s decision to terminate.

Further, given that the spirit of the Directive is to protect the agent’s rights, the right of the principal to withhold the indemnity should, according to the ECJ, be interpreted restrictively.  Essentially, the ECJ was not prepared to add grounds to the principal’s right to exclude which were not expressly provided for in the Directive.

For these reasons, the ECJ concluded that, the principal’s right to deprive an agent of an indemnity cannot be applied when the principal only becomes aware of the agent’s breach after the end of the agency.  It consequently followed that the agent cannot be deprived of the indemnity where the principal discovers the breach after having already given contractual notice to terminate the agency but before it comes to an end (that is during the notice period).  

Equitable in all the circumstances
Despite the above, the ECJ commented that, under Article 17 of the Directive, the agent is entitled to an indemnity if and to the extent that it is equitable having regard to all the circumstances.  The ECJ therefore warned parties that an agent’s conduct may be taken into account when assessing the fairness of the indemnity. 

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