in this judgment the European Court of justice has dealt with a rather peculiar question arising in the context of the interpretation of Article 17 of Directive 86/653/EEC of 18 December 1986 on self-employed commercial agents, i.e. the impact of “one-off” commission payments on the deter-mination of the goodwill indemnity provided by such Article.
The case brought before the Court of justice can be summarized as follows.
QT (agent) and 02 Czech Republic (principal) concluded an agency agreement for the offer and sale of telecommunication services and the supply of mobile telephones and other products.
The contract provided payment of a one-off commission for each individual contract concluded by the agent. With respect to further contracts with customers brought by the agent, the latter was entitled to commission only with respect to contracts negotiated by himself; contracts negotiated directly by the principal or by other agents of the principal did not entitle the agent to commission.
This contractual solution derogates Art. 7 of the Directive which entitles the agent to commission on transactions « … concluded with a third party whom he has previously acquired as a customer for transactions of the same kind». The Court of justice has clarified in a previous judgment (judgment of 13-10-2022, case C-64/21, Rigall v. Bank Handlowy) that the above rule is not mandatory by stating that:
« Article 7(1)(b) of Council Directive 86/653/EEC of 18 December 1986 on the coordination of the laws of the Member States relating to self-employed commercial agents must be interpreted as meaning that it is possible to derogate contractually from the right which that provision confers on an independent commercial agent to receive a commission in respect of a transaction entered into, during the term of the agency contract, with a third party whom that agent previously acquired as a customer for transactions of the same kind.»
When, after expiry of the agency contract, the agent brought a claim for payment of the goodwill indemnity before the district court of Prague, the principal objected that the one-off commission excluded the agent’s right to indemnity because this kind of remuneration: (a) did not provide «substantial benefits» to the principal, as required by Article 17 of the Directive, and: (b) did not imply a loss of commission by the agent, a condition which would be required by the same Article 17.
The district court of Prague and the Prague City Court on appeal, rejected the agent’s claim for goodwill indemnity and the agent brought the issue before the Supreme Court arguing that he was entitled to the goodwill indemnity notwithstanding the provision of a one-off commission, since this kind of remuneration did not exclude the agent’s right to indemnity, based on the future business that the agent could have brought in the hypothetical case of continuation of the contract with the principal.
On the contrary, the principal argued that the indemnity should be calculated on the basis of the «commission lost by the commercial agent» which « lost commission » should be the commission on contracts concluded before the end of the contract, but carried out after contract termination.
The issue was brought before the Supreme Court which decided to stay the proceedings and to refer the following questions to the Court of Justice for a preliminary ruling:
1) Must the expression “the commission lost by the commercial agent,” within the meaning of Article 17(2)(a), second indent, of [Directive 86/653], be interpreted to the effect that such commissions include commissions for the conclusion of contracts which a commercial agent would have entered into had the commercial agency [contract] endured, with the customers that he or she brought the principal or with which he or she significantly increased the volume of business?
2) If so, subject to what conditions does this conclusion apply to ‘one-off commissions’ for the conclusion of contract?’
- The first question: the meaning of the term “lost commission”.
The Court answered the first question by stating that:
Article 17(2)(a) of Council Directive 86/653/EEC of 18 December 1986 on the coordination of the laws of the Member States relating to self-employed commercial agents is to be interpreted as meaning that the commission which the commercial agent would have received in the event of a hypothetical continuation of the agency contract, in respect of transactions which would have been concluded after the termination of that agency contract with new customers which he or she brought to the principal before that termination, or with customers with which he or she significantly increased the volume of business before that termination, must be taken into account in determining the indemnity provided for in Article 17(2) of that directive.
Thus, the Court stated clearly that Article 17(2)(a) of Directive 86/653 refers to the commissions which the commercial agent would have received in the event of a hypothetical continuation of the agency contract, on contracts with the customer base developed before contract termination. The Court implicitly rejected the theory that the term “lost commission” should be referred to commissions on business promoted during the contract, but carried out after its termination, maintained by the principal.
In order to better understand this issue, we should analyze the origin of the notion of «lost commissions» within the context of the original German rule on the indemnity, on which the provision of Art. 17(2)(a) had been based, although with some important modifications, especially regarding the issue in question.
According to the wording introduced in Article 17(2)(a) of Directive 86/653 the commercial agent is entitled to the goodwill 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 this indemnity is equitable having regard to all the circumstances and, in particular, the commission lost by the commercial agent on the business transacted with such customers.
Thus, the conditions provided by the Directive for granting the indemnity are:
- that the agent brought new customers to the principal (or substantially developed business with existing customers);
- that the principal continues to derive substantial benefits from such customers, and
- that the payment of the indemnity is equitable having regard to all circumstances, including the agent’s lost commission.
It is important to underline that the Directive introduced a substantial modification with respect to the German goodwill indemnity which inspired Article 17(2). In fact, the version of the indemnity (§ 89b of the code of commerce, HGB) in force at the time when the Directive was enacted differed substantially on the issue of the «lost commission». In the context of Art. 89b then in force the lost commissions were a necessary condition, and the loss of future commissions in the hypothetical case of continuation of the agency was an additional condition for the right to indemnity and its calculation. In other words, the indemnity was due if and to the extent that the agent, as a consequence of the termination, would have lost commission on contracts concluded before termination and on future contracts that he would have brought if the contract had continued.
This constitutes a substantial difference with respect to the Directive, in the context of which the commissions lost by the agent has become only one of the criteria for deciding whether the payment of the indemnity can be considered to be equitable.
The central role of the «lost commission» in the context of the original version of § 89b HGB has brought German Courts to develop a quite complicated calculation system, based on the hypothetical commissions the agent could have earned in the years following contract termination.
In the year 2009, § 89b HGB has been adapted to the Directive: in the text now in force the lost commissions have become simply one of the circumstances that can be taken into account for determining the equitable amount of the indemnity. However, the Courts continue to apply the calculation criteria developed under the previous rule.
It is probably due to the German case-law, based on the original wording of § 89b, that the Czech lower Courts were brought (wrongly) to believe that the “lost commission” should be the commission on business transmitted before contract termination, but carried out after the end of the contract, without considering that § 89b, in its original version, refers not only to the commission on contracts concluded before termination, but also to future transactions that the agent would have brought if the contract had continued.
And, in fact, in the Directive the two issues (contracts concluded before termination but carried out later on one side and contracts which would hypothetically be concluded if the contract had not been terminated, are clearly distinguished and are governed by different provisions: Art. 17 regarding the calculation of the goodwill indemnity, and Art. 8 regarding contracts concluded after termination, but attributable to the agent’s commercial efforts during the period covered by the agency contract.
There can consequently be no doubt that the notion of «lost commissions» mentioned in Art. 17 of the Directive refers exclusively to transactions which are likely to be concluded by the agent in the hypothetical case of continuation of the agency contract.
The Court of justice confirmed clearly this view by stating in par 60 of the judgment that in determining the indemnity due to the agent, the lost commission to be taken into account is:
« … the commission which the commercial agent would have received in the event of a hypothetical continuation of the agency contract, in respect of transactions which would have been concluded after the termination of that agency contract with new customers which he or she brought to the principal before that termination, or with customers with which he or she significantly increased the volume of business before that termination».
- The second question: the impact of one-off commissions on the calculation of the indemnity.
If the agent has no right to commission on future business with customers brought by him, he would not be entitled to commission on such business in the hypothetical case of a continuation of the relationship. The customers for which the agent received the one-off commission would definitively belong to the principal, with the exclusion of any payment of commission to the agent.
However, this is not the situation which is likely to exist in case of continuation of the contract in the case brought before the Court.
In fact, we must consider that under the contract between QT and 2002 Czech Republic the agent’s right to commission is excluded only for direct deals entered into by the principal without the agent’s intervention, but not for successive contracts promoted by the agent which would in any case give rise to a commission in favor of the agent.
It is thus reasonable to assume that, in the hypothetical case of a continuation of the contract, the agent would continue to promote business with the existing customers and receive a commission on such business and that there would still be space for «lost commissions» to be taken in account when determining of the amount of the goodwill indemnity.
This implies that the problem of determining the impact of «lost commissions» for the calculation of the indemnity would still exist and the «lost commissions» should be considered (together with all other circumstances) when determining the amount of the indemnity. Only in the extreme (and quite unlikely case where no commission at all would be due on future contracts with customers brought by the agent), there would be no commission at all lost by the agent.
The advocate general Čapeta touched this issue by stating that:
« … only if the contractually agreed commission payments were one-off commission payments of a kind that the agent was already remunerated the future benefits that the principal would continue to receive from the customer base created by the agent, they would not represent lost commission. That, however, does not mean that the agent is not entitled to the payment of an indemnity, given that lost commission is only one element in determining the equitable nature of that payment.
At the same time the advocate general submits that even in the absence of commissions lost by the agent, he would nevertheless be entitled to the indemnity on the basis of the other circumstances to be considered in determining the equitable nature of the payment of the indemnity.
The Court of Justice confirmed this view by stating in general terms that Art. 17(2)(a) requires that the amount of the indemnity be calculated taking into account all the circumstances of the case and only «in particular» the commission lost by the agent and that the «commission lost» by the agent is only one factor, among others to be taken into account in assessing the equitable nature of the indemnity.
In other words, even in the extreme case where the agent would not lose any commission, because in the hypothetical case of a continuation of the relationship all future business with the customers brought by the agent during the contract would already have been paid by the principal before its termination (a situation that might in theory arise if all future business would be concluded by the principal without the agent’s intervention) the agent would nevertheless be entitled to the goodwill indemnity on business with customers brought by the agent, because the lost commission is not a necessary condition for the calculation of the indemnity.
This is the basic difference between the original German provision and the Directive, and this is the reason why German law had to be amended in order to comply with the Directive.
Of course, the impact of commissions lost by the agent, may be relevant for the calculation of the indemnity, but its actual importance will be considered by the Courts when determining the equitable amount to be granted to the agent.
- Conclusions: the criteria for determining the amount of the indemnity
The QT/Czech Republic judgment of the European Court has confirmed that the loss of commissions by the agent is only one of the elements to be considered when determining the amount of the goodwill indemnity under Article 17(2) of the Directive and that its importance should not be overestimated. In fact, even in the extreme case where there would have been no loss of commissions at all, this would not prevent the agent’s entitlement to the indemnity, although impacting on the determination of its amount.
This point is important because in the past it has been suggested that, when applying the provision of the Directive based on the German system, one should take into consideration the method of calculation developed by the Courts of that country. Thus, in its Report on the application of the Directive 86/653/EEC presented on 27 July 1997, the EU Commission seemed to suggest that the calculation system developed by the German Courts should be preferred for the determination of the amount of the indemnity.
Now, as we have seen above, this calculation system was originally based on a provision (the original text of § 89b HGB) where the «lost commissions» were one of the conditions required for entitling the agent to the indemnity. This explains the choice of the German Courts to take the lost commissions as the basis for determining the amount of the indemnity.
But, since this option has not been included in the Directive, by reducing the lost commissions to a one of the criteria which may be taken in consideration, there is no reason to follow the calculation procedure developed by German case-law, which is quite complicated and burdensome.
And, in fact in most countries which have opted for the «German» indemnity, Courts tend to follow a more flexible approach when exercising their discretion in fixing ad amount of the indemnity considered to be equitable, on the basis of all the relevant circumstances: duration of the contract; Impact of the image of the principal; etc..
We can therefore conclude that the QT/Czech Republic judgment constitutes a further confirmation that the theory according to which Courts of the Member States which adopted «German Indemnity» should not be bound by the calculation system developed in that country.
The fact that Courts may take into consideration, when calculating the equitable amount of the indemnity, a great variety of elements makes it less easy to foresee the possible outcome of a claim for the indemnity with respect to the amount granted. It is therefore important to examine in each country the amounts granted by the Courts (as percentage of the maximum amount of one year commission) and the reasons invoked in support of the choice made.
Fabio Bortolotti, Chair IDI