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A commercial agent’s entitlement to indemnity: can this really be excluded?

A commercial agent’s entitlement to indemnity: can this really be excluded?

In Europe, commercial agent legislation is based on a uniform European directive (86/653/EEC) and is therefore largely harmonised and enshrined in law. The Directive provides for mandatory implementation by national law of some provisions in the respective national law, i.e. principal and commercial agent cannot deviate from this. Contractual agreements to the contrary are void. One of the mandatory provisions is the infamous entitlement to indemnity on termination of the commercial agency by the principal.

Purely German business relationship
In a purely German business relationship, i.e. agent and principal have their registered offices in Germany and the contractual territory is in Germany, it is impossible to contractually exclude the entitlement to indemnity. This also applies in a purely Dutch relationship. Prevailing opinion is that this cannot be circumvented by agreeing the applicability of a different law that does not recognise an entitlement to indemnity either.
This can, however, be possible in cross-border situations under certain circumstances.

Activity outside of the EU/EEA
Where commercial agent agreements are concerned, deviation from the mandatory legal provisions is possible if the commercial agent exercises its activities outside the EU or EEA and the commercial agency agreement is subject to German law. It is not a question of the commercial agent’s branch offices/registered office, but where it exercises its occupation. A commercial agent with registered office in Germany that exercises its occupation in the USA does not come under the protection of the mandatory commercial agent provisions, so the entitlement to indemnity can be excluded. A German principal that concluded a commercial agency agreement with a commercial agent domiciled in Germany for the contractual territory of Algeria can thus exclude the commercial agent indemnity entitlement.

Activity inside and outside of the EU/EEA
If the commercial agent exercises its activities both inside and outside the EEA on the basis of an agreement, the prevailing opinion is that mandatory German commercial agent legislation and thus the indemnity entitlement cannot be excluded. From a practical point of view it is therefore recommended to reach separate agreements for the various locations where activities are exercised. For locations outside the EEA, the indemnity entitlement could therefore be excluded if expressly agreed. It is further recommended to not only declare German law applicable to the agreements, but also to agree Germany as the exclusive jurisdiction. Otherwise the situation could arise that a foreign court deems the indemnity entitlement exclusion to be inadmissible on the basis of its legal system.

Exclusion of the indemnity entitlement through choice of law
Another opportunity to exclude the indemnity entitlement consists of choosing a foreign law that does not recognise the indemnity entitlement or where the indemnity entitlement is optional. This is, however, limited by an ECJ judgment (the Ingmar judgment).
The judgment was based on the following facts: a commercial agent with registered office in Great Britain was entrusted with selling goods in the contractual territory of Great Britain, in other words an EEA Member State, by a company with registered office in California. In the commercial agency agreement, Californian law was declared applicable, which law does not provide for an indemnity entitlement. The case was submitted to the ECJ for a ruling and the latter ruled that an entrepreneur with registered office in a country outside the EEA, whose commercial agent has its registered office in the EEA and exercises its activities in the EEA, could not circumvent the mandatory provisions of the commercial agent directive with regard to an entitlement to indemnification or compensation through a choice of law clause. In this case, the indemnity entitlement could not, therefore, be circumvented by a choice of law.

It is the same if the commercial agent has its registered office outside of the EEA but exercises its activities within the EEA. If the commercial agent exercises its activities within the Community, the commercial agent’s indemnity entitlement is immune to choice of law. The parties may choose the law of a third-party state; if this legal system does not, however, recognise any mandatory indemnity entitlement that corresponds to the commercial agent directive’s minimum standard, then the commercial agent is still entitled to indemnity.

Summary
In a business relationship in which both parties have their registered office in the EEA and (at least part of) the contractual territory also lies in the EEA, contractual exclusion of a commercial agent’s entitlement to indemnity is impossible.

If the commercial agent exercises its activities exclusively outside the EEA in a country that does not recognise indemnity entitlement and if German law is declared to be applicable to the agreement, the indemnity entitlement can be excluded.

By Susanne Hermsen

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