What about goodwill/customer compensation on termination of agency agreement?

We are regularly asked what an agent's rights are when an agency agreement ends. One of the rights concerns the agent's right to a customer fee, also known as goodwill compensation. It is the right of the agent to receive financial compensation upon termination of the agency contract. The right to this compensation is regulated in Europe.  

In Europe, EU member states are bound by The European Agency Directive (86/653 EEC) (''the Directive''). The Directive contains general rules for agency that are incorporated into national legislation in each member state. The European legislator wanted to minimize the differences between member states in order to promote interstate trade. The Directive allows the freedom to implement the rules more broadly in national law. For example with regard to the subjects for which an agency contract can be concluded (in the Netherlands also for services and not only the purchase and sale of goods), or with regard to competition clauses that can be imposed on the commercial agent. Within Europe, a certain "minimum level" of protection exists under the Directive.

The European right to compensation at the end of the agency contract

The Directive contains a regulation on compensation to which agents are entitled upon termination of the agency contract. This article provides - in brief - that upon termination of the agency contract, the agent must be financially compensated for the disadvantage resulting for him from the termination of the agency contract.

The agent is entitled to compensation only if:

• he has brought the principal new customers or significantly increased the transactions with the existing customers and the transactions with these customers still provide substantial benefits to the principal, and
• the payment of this remuneration is fair in view of all the circumstances, in particular the commission resulting from the transactions with these customers, which is lost to the commercial agent.

On the amount of the remuneration, Article 17 of the Directive provides that it may not exceed a figure corresponding to an annual remuneration calculated, on the basis of the annual average of the remuneration received by the commercial agent over the last five years or, if the contract has lasted less than five years, calculated on the average of that period.

There is another form of compensation under the Directive under circumstances, namely the right to compensation for the loss caused to him as a result of the termination of his relations with the principal.

This disadvantage arises in particular from the termination of the contract under circumstances where:

• the commercial agent does not receive the commissions that he would have received in the normal performance of the contract, as a result of which the principal enjoys a substantial advantage from the commercial agent's activities;
• and/or the commercial agent is unable to cover the costs and expenses he has incurred on the advice of the principal for the performance of the contract.

The agent must notify the principal of his entitlement to the said fees within one year of the termination of the agreement.

The agent is not always entitled to compensation or recovery under Article 17. In fact, Article 18 provides that compensation or restoration under Article 17, is not due:

(a) if the principal has terminated the contract because of a circumstance attributable to the commercial agent which under domestic law gives rise to termination of the contract without notice;

(b) where the commercial agent has terminated the contract, unless such termination is justified by circumstances attributable to the principal or is justified by the commercial agent's age, disability or illness on the basis of which he can no longer reasonably be expected to continue his activities;

(c) if the commercial agent, in accordance with an agreement with the principal, assigns his rights and obligations under the agency agreement to a third party.

Contractually, the parties may not derogate from these articles to the detriment of the agent. This is stated in Article 19 of the Directive.

The legal situation in the Netherlands (and Belgium) is in line with the Directive as regards the agent's rights to compensation at the end of the contract.

The agent's right to a goodwill/customer fee in the Netherlands

The rules in the Netherlands are almost identical to what is provided in the Directive. Article 7:442 Civil Code reads:

Article 7:442 Civil Code

1. Notwithstanding the right to claim damages, the commercial agent shall be entitled at the termination of the agency contract to a compensation, customer compensation, to the extent that:

• he has brought new customers to the principal or has substantially increased the agreements with existing customers and the agreements with these customers still provide substantial benefits to the principal, and
• the payment of this fee is fair, considering all the circumstances, in particular the lost commission from the agreements with these customers.

2. The amount of compensation shall not exceed that of one year's remuneration, calculated on the average of the last five years or, if the contract has lasted for a shorter period, on the average of its entire duration.
3. The right to remuneration shall lapse if the commercial agent has not notified the principal no later than one year after the end of the contract that he requires remuneration.
4. The fee shall not be due if the agreement has been terminated:

• by the principal under circumstances that render the commercial agent liable for damages pursuant to section 439(3);
• by the commercial agent, unless such termination is justified by circumstances imputable to the principal, or is justified by age, disability or illness of the commercial agent, on the basis of which he can no longer reasonably be required to continue his activities;
• by the commercial agent transferring his rights and obligations under the agency contract to a third party in accordance with an agreement with the principal.

Deviation in agency contract not possible

It is not possible to deviate from article 442 BW before the end of the agency contract. So contractually, the right to the "goodwill compensation" cannot be excluded. In practice, however, discussions sometimes arise about the indebtedness and the amount of the goodwill/customer compensation upon termination of the agency agreement.

Our expertise

Our ICT law attorneys are particularly specialized in agency agreements relating to software and technological products and services. However, we can also advise you as principal or agent on the content of an agency agreement for more traditional products or services. We can also assist you if legal proceedings are necessary.