It has been a debatable issue for many years as to whether a Commercial Agent terminated during any trial or probationary period would be entitled to bring a claim for indemnity or compensation if they were terminated. The European Court of Justice decided this month that Commercial Agents' rights are protected even if the termination of the Agent's contract occurs during the trial period.
The case began in France concerning an Agent selling 25 houses per year on behalf of the Principal. The contract had an initial twelve month trial period. Either party was allowed to terminate the contract, subject to notice being given. The Agent was terminated six months after commencement of the contract as the Agent had only made one sale in five months. The Agent had failed to fulfil the terms of the contract target. In France the definition of Commercial Agents is extended beyond that in the UK to cover certain services including the sale of houses. Agents selling some services are protected in several EU countries including France and Germany. The UK Commercial Agents (Council Directive) Regulations 1993 only applies to Agents selling goods.
The Agent sought compensation for the loss resulting from termination of the agency contract from the Principal.
Under French Law an Agent is entitled to compensation as opposed to an indemnity payment. Most of the EU member states allow an Agent to claim an indemnity which is based on the maximum of the annual average commissions over the last five years of the Agency or shorter period if appropriate. It is subject to deductions for inherited business. In the UK an Agent can be entitled to an indemnity if it is written into the Agency Contract in the UK. Indemnity is different from compensation in that it is based upon the Agent introducing new customers to the Principal or significantly increasing the volume of business with existing customers of the Principal enabling the Principal to continue to derive substantial benefits from the business with those customers. In the absence of an Agency Contract or no indemnity clause in the Contract, the Agent is entitled to compensation. Compensation is based upon a valuation of the Agency.
Compensation is based upon the damage an Agent suffers as a result of the termination of his Agency where termination deprives the Agent of the commission which performance of the Contract would have procured for him whilst providing the Principal with substantial benefits. The Agent may also be able to claim for costs and expenses that he has incurred in the performance of the Contract on the Principal's direction if the Agent is unable to amortise the costs and expenses he incurred.
The Court's view
The French Court of Causation asked the Court of Justice for a decision on whether an Agent that is terminated during the trial period would be entitled to claim indemnity or compensation.
The EU Directive which led to the UK Commercial Agents (Council Directive) Regulations 1993 does not regulate the provision of a trial period. A trial period falls within the scope of the freedom of contract of the parties and is not prohibited by the Directive or Regulations.
The European Court of Justice decided that the Agent cannot be denied the indemnity or compensation on the sole ground that the termination of the Agency Contract occurred during the trial period provided the conditions for the award or the indemnity or compensation set out in the Directive are satisfied. Based upon the wording of the Directive, the indemnity and compensation rules laid down by the Directive are not intended to penalise termination of the Contract but to indemnify the Commercial Agent for his past services from which the Principal will continue to benefit beyond the termination of the Agency or for the costs and expenses he has incurred in providing those services.
This decision will be welcome to Commercial Agents provided they have either introduced new customers or increased sales for the Principal bringing the Principal substantial benefit during the trial period. It will not assist Agents who have achieved no benefit for the Principal nor incurred any expenses they are unable to amortise.
Principals need to be careful in ensuring they provide a list of any existing customers accounts and the turnovers for each account at the commencement of the Agency so it can be clear what business an Agent inherits before commences his trial period. Setting minimum performance obligations or targets are commonly used by Principals to justify termination during the period of the Agency without any risk of paying compensation or indemnity. These terms will continue to be used.
However, Principals who are relying on terminating Agents during a trial period and not having to pay anything need to be wary of this in the light of this decision as there is now no doubt there is no bar to an Agent claiming compensation and loss of any costs and expenses or indemnity upon termination. This is very different from employment law where employees can be at risk of rightful termination of their employment at the end of their probationary period if they do not fulfil the requirements of their employment.
Terminating the employment of a Sales Representative at the end of the probationary period will not be a problem if no sales have been achieved or new customers obtained.