The goodwill compensation for the Contracts Agent (the Commercial Agent) was introduced for the first time in the Egyptian legislation by the promulgation of the New Trade Law Nº. 17 for the year 1999 (hereinafter referred to as the ‘Commercial Code’), based on the fact that the Contracts Agency Agreement is concluded in the common interest of the two parties. Accordingly, if the contract is for an indefinite period, the Principal shall not terminate it without the occurrence of a fault by the Agent, otherwise, he shall compensate the later for the damage caused to him by the dismissal (Article 188 – Commercial Code). The same protection for the Contracts Agent applied, even if the contract were to be for a definite period and the Principal decided not to renew it at the expiry of its term. In such case, the Agent would have the right to a compensation to be determined by the judge even if there were an agreement to the contrary (Article 189 – Commercial Code, §1). In order to be entitled to the said compensation, the second Article of the same Paragraph sets two conditions: (1) The Agent shall not have committed an error or negligence in the course of execution of the contract and (2) the activity should have led to an apparent success.
Thirteen years later, and before even forming a real legal precedent in that matter, the Egyptian Supreme Constitutional Court puts an end to the goodwill compensation for the non-renewal of the Contracts Agency.
The case began when Debak Pharmaceuticals Company (the Agent) filed a case against El Nasr Pharmaceutical Company (the Principal), claiming the payment of ten million EGP as compensation for the non-renewal of its Contracts Agency Agreement dated 12/6/2001, which, according to the Agent, caused the Company material and moral damages.
During the proceedings, the Principal Company argued the unconstitutionality of the First Paragraph of Article 189. The Court, considering the seriousness of such motive and defense, authorized the Principal to raise the constitutional case.
Hence, the Plaintiff before the Constitutional Court requested the Court to rule the unconstitutionality of Article 189 of the Commercial Code, based on the following arguments:
On the one hand, the Plaintiff argued that being subject to the Public Sector Companies’ Law, Nº. 203 for the year 1991, its assets should be regarded as Public funds, and that the Agent’s entitlement for compensation for using its right affects negatively the Principal’s assets without cause, which constitutes a violation of Articles 29, 30 and 33, of the Constitution of 1971 concerning Public Property.
On the other hand, the Plaintiff argued that the impugned Article is in violation of the principle of equality guaranteed by Article 40 of the Constitution of 1971, as it granted the Agent the right for compensation in case of the non-renewal of his contract by the Principal, without giving the same entitlement to the later, not to mention that, restricting the Principal from using his non-renewal right to avoid being subject to compensation would transfer a definite period Agency Agreement to a perpetual one.
The Court addressed the first argument considering that, the Plaintiff being a Joint Stock Company, which manages its funds and assets according to the provisions of a Private Law, specifically, Companies Law Nº. 159 for the year 1981, should be as such a private person with private assets. Hence, such argument should be disregarded.
However, the Court reminded that the contractual freedom is a fundamental principle guaranteed by the Constitutional Declaration, issued on 30/3/2011, as a protection of personal liberty, in addition to being intimately related to the property right, which is in itself or any of the rights deviated therefrom, subject of the contract and a domain to exercise the will to contract. And whereas, in principle, a definite period contract should be considered to be terminated by the force of law upon the expiration of its term, giving back the parties as a consequence their full authorities on their property and their respective contractual freedom, nevertheless, the legislator made an exception to this principle, by promulgating an imperative rule restricting the Principal’s freedom to on one of two things; whether to renew or to compensate the Agent according to the conditions mentioned in the said Article, founding the Principal’s liability upon the legal grounds of the abuse of right as stipulated in Article 5 of the Civil Code.
However, the Court considered that the legislator deviated from the said Article by founding the principal’s liability on a presumed unlawful act by the later against the Agent, which is proven just by the non-renewal of the contract without any error or negligence committed by the Agent whom its activity have led to an apparent success in promoting the Principal’s goods or increasing his clientele.
As such, the Court considered that in this Article the legislator altered the rule of proof from its original object which is the ‘unlawful act’ to an irrelevant object which is the ‘non-renewal’ of the contract. The Court continues its reasoning by asserting that the legal presumption established by the impugned Article is not based on objective grounds. This is foreseen by the Court as it explains that initially, the Agent is bound to execute the Agreement without prejudice to his contractual obligations, and not to commit any wrongdoing in his duties as an Agent or otherwise he would be held liable. Also, the Agent is bound to execute the Agreement in good faith which should ultimately lead to the promotion of the Principal’s product or the increase of his clientele, being the main purpose of a Contracts Agency Agreement. Hence, the legal presumption laid by the legislator lacks logical connection with the above mentioned conditions.
Moreover, the Court takes into consideration Article 4 of the Egyptian Civil Code according to which ‘A person legitimately exercising his rights is not responsible for prejudice resulting thereby’, and that accordingly, the Principal in deciding the non-renewal of the Contract, is legitimately using his right. Consequently, the Court found the impugned Article to contain provisions restraining the Freedom of Choice, which is the essence of Contractual freedom, as well as constituting a breach of the balance between the parties in a Contracts Agency Agreement, which is an obligation that should be upheld by the legislator as stipulated by the norms of Justice guaranteed by the Constitutional Declaration in its Article 5, not to mention being a transgression against property right without justifiable cause or legitimate interest, and as such is in violation of Article 6 of the Constitutional Declaration protecting property right.
Therefore, the Egyptian Supreme Constitutional Court ruled by pronouncing the unconstitutionality of the impugned Article in its entirety, as well as the lapse of the First Provision of Article 190 of the Trade Law due to its intimate connection to the said Article.
Maged Ackad, agency, distribution and franchising Country Expert for Egypt.