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Terminating an Agency agreement by the Principal

dinsdag 17 december 2019

An agency agreement (“Agency Agreement”) may be terminated with or without cause and below you will find a practicable explanation on which steps need to be considered. Please note that terminating an Agency Agreement may be done through the Cantonal Courts or by taking extra-judicial steps as set out in article 6:265 of the DCC.

The EC directive (86/653/EEG) is implemented in the Netherlands in articles 7:428 to 7:455 of the Dutch Civil Code (“DCC”), which is mostly compulsory law, which means that deviation by agreement is generally not possible and that these provisions are overriding.

This article will only address the situation where the Principal terminates or rescinds the Agency Agreement. My next article will address the situation of the Agent.

Definition Agency agreement

First of all, you need to check whether the Agency Agreement falls within the definition of article 7:442 DCC which is applicable to agency agreements. An agency agreement is an agreement whereby one party (the Principal) and the other party (the Agent) agree that the Agent will negotiate contracts for the sale of goods/services of the Principal.  The Agent negotiates the contracts between the Principal and the Customer and receives a certain amount of commission for each contract concluded. The commission is generally a percentage of the value of the contract that is entered into between the Principal and the Customer.

If the agreement you are confronted with falls within the definition referred to above, then please continue carry reading. If you are not sure, then please contact Madelon van Breemen on the details set out below.

Termination

Termination can be done in several ways with several effects:

  1. Is the Principal terminating because of an urgent reason under article 7:439 DCC, then termination can be done through the courts or by way of an extra-judicial notice. Examples of an urgent reason are the insolvency of the agent, breach of the non-compete or fraud. Either way the party that is terminating the agreement is not liable for damages;

  2. Is the Principal terminating because of a breach of contract, then the breach needs to be material. This can be done by the courts or by extra-judicial notice;

Is the Principal terminating the agreement because of unforeseen circumstances. Unforeseen circumstances could for example be if the circumstances of either party has changed to the extent that it is no longer reasonable for the agreement to continue. This can only be done by the Cantonal Courts under article 7:440 DCC etc. or the Civil Court under article 6:258 DCC.

Notice period

  1. Article 7:437 DCC states the notice period that needs to be complied with. If an incorrect notice period is given, the Principal may be subject to pay damages. The notice period depends on whether there is a contractual provision for termination in the contract or not. In the event that the Cantonal Court is involved, the court will rescind the contract without a notice period, but when the contract is terminated extra-judicially in accordance with article 6:265 DCC then a set procedure needs to be followed very carefully for the termination to be effective.

The legal compulsory notice period for termination is one month for the first year, two for the second and thereafter three months when parties have agreed upon a notice period. If the agency agreement is for indefinite term and there are no provisions regarding termination notice, the minimum notice period is 4 months.

Damages

In some instances of termination the other party, in this case the agent, may be liable to pay damages. Damages are payable when the agent can be blamed for the reason for termination. This is further set out in article 7:445 DCC etc.).

Goodwill compensation

An agent is afforded special protection under the DCC and it is quite likely that upon termination the Principal may have to pay goodwill compensation for the loss of commission of the agent. In most cases the Principal has to pay goodwill compensation upon termination and the amount of the goodwill compensation to be paid is dependent on a number of factors as set out in article 7:442 (1) (a) DCC, being:

  1. The amount of the goodwill compensation is generally maximized to one year’s commission based on the average of the last 5 years. This amount is generally the gross amount;

  2. The commission relates to new customers that the agent has introduced or to considerable expansion of the current customer orders;

  3. The amount under 1. can be adjusted so that is reasonable based on the facts. This adjustment can mean an increase or a decrease of the amount referred under 1.

To conclude, there are many different options available for the Principal to terminate the Agency Agreement. As you can see from the above, the laws relating to agency need to be followed correctly in order to avoid the situation where the agency agreement is not terminated properly or where damages are payable for incorrect termination.

Please contact Madelon van Breemen on (+31) (0) 10 2092756 or at vanbreemen@lvh-advocaten.nl for further information

Madelon van Breemen

International business to business contracting

+31 (0)10 209 27 65
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