Legal February 2011

LEGAL UPDATE: CASE REPORT

Volvo Car Germany GmbH v Autohof Weidensdorf GmbH Case C-203/09.

The European Court of Justice has found that Agents are entitled to compensation or an indemnity even if they commit a serious contractual breach during their notice period.

By Thom Vaughan of E.A.D. Solicitors L.L.P. and Adrian Pym of RSM Tenon

The European Court of Justice has boldly found that a commercial agent is entitled to payment of an indemnity under the European Commercial Agents Directive even if the agent commits a breach after notice of termination is given but before the termination becomes effective. This is so even if the breach would have justified immediate termination of the contract by the principal if it had been committed before notice of termination was given.

As is widely known, commercial agents are entitled to either an indemnity payment or compensation for the loss of their agency on termination of their agency agreement. However, this protection is excluded where the principal has terminated the agency contract because of a serious contractual breach by the commercial agent that would justify immediate termination of the agency contract.

In the present case the Agent entered into a dealership agreement with V for the sale of its vehicles. The agreement provided for a period of two years' notice to bring the agreement to an end. V went ahead and served notice to terminate the agreement in accordance with this provision; however, during this notice period the Agent sold V's vehicles to a related company at a discount.

This company resold the cars in clear breach of the terms of the agreement and had V discovered the breach in time they would have been entitled to terminate the agreement with immediate effect under German law.

The German court referred to the European Court of Justice the question of whether the Agent remained entitled to an indemnity despite its contractual breach and the court held that he was so entitled. The court pointed out that in order for the principal's liability to pay compensation or indemnity to be excluded, termination must have occurred "because of" the commercial agent's default. In this case termination had occurred in accordance with the terms of the agreement rather than because of the Agent's breach. The

Agent was accordingly entitled to payment of an indemnity.

The fact that V was not aware of the breach until after termination did not prevent the court from interpreting Article 18 strictly, thereby protecting the Agent in accordance with the objectives of the legislation. From an Agent's point of view this is an excellent outcome and an example of the E u r o p e a n C o u r t s t a n d i n g u p f o r t h e "downtrodden race".

However, it must be borne in mind that this type of breach may result in a reduced indemnity payment because of the requirement arising from Regulation 17 that "the payment of this indemnity [must be] equitable having regard to all the circumstances". It is unclear how this type of event will feed into calculation of an indemnity; however, it is unlikely to affect compensation payments.

The practical relevance of this finding is that if a commercial agent does commit a serious contractual breach during the notice period then he remains entitled to payment of an indemnity or compensation; however, if the principal discovers the breach then the Agent's authority to continue acting can be removed thereby preventing accrual of further commissions.

It is also possible that a court may do its best to "find against" the Agent if it is left decidedly unimpressed by the Agent's conduct during the notice period; this will, of course, depend on the nature and seriousness of the breach.

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