The Czech Civil Code (Act 89/2012 Coll.), regulates agency agreements under obligations arising from mandate-type contracts in its fifth part (section 2430 et seq.). There are five types of mandate type contracts: Mandate, Brokerage, Undisclosed mandate, Forwarding and Commercial agency:
by a mandate contract, a mandatary undertakes to arrange a matter for the mandator. (Section 2430 et seq.);
by a brokerage contract, a broker undertakes to arrange the conclusion of a contract between the client and a third person, and a client undertakes to pay the broker a commission. If at the conclusion of a contract whereby one party undertakes to arrange for the other party the opportunity to conclude a contract with a third person, it is evident from the circumstances that remuneration will be required for the arrangement of such a contract, it is presumed that a brokerage contract has been concluded. (Section 2445 et seq.);
by a contract of undisclosed mandate, a mandatary undertakes to arrange, in his own name, a particular matter for an undisclosed mandator on the undisclosed mandator’s account, and an undisclosed mandator undertakes to remunerate him. (Section 2455 et seq.);
by a forwarding contract, a forwarder undertakes to arrange for a mandator, in the forwarder’s name and on the mandator’s account, the carriage of a consignment from a particular place to another particular place and, where applicable, also arrange or perform acts associated with the carriage, and a mandator undertakes to remunerate the forwarder. If it has been stipulated that a forwarder will arrange for a mandator the receipt of funds from a consignee or perform another act of collection before handing the consignment or a document allowing the disposal of the consignment over to the consignee, the provisions on documentary collection apply with the necessary modifications. (Section 2471 et seq.);
by a commercial agency contract, a commercial agent, as an independent entrepreneur, undertakes to pursue long-term activities for the principal aimed at facilitating the conclusion of a certain type of business transaction by the principal or negotiating business transactions in the name of the principal and on his account, and a principal undertakes to pay the commercial agent a commission. A commercial agency contract must be in writing. (Section 2483 et seq.) Commercial agency contract is the contract which is further described under the questions bellow.
What are the features of commercial agents and the differences from other intermediaries?
The commercial agent arranging the deal must meet the characteristics of an entrepreneur, i.e. one who carries on a business. Thus, the commercial agent carries out activities for the principal on his own account and responsibility, on a continuous basis for the purpose of making a profit.
The commercial agent is further characterized by its independency on other entrepreneurs and, outside the limits of the agency agreement, on the represented person. The agent's status as an entrepreneur distinguishes a commercial agency as a private commercial obligation from an employment relationship.
The commercial agency contract, as a contract of a principal type, has a special nature to the agency contract. In contrast to a contract of agency, its characteristic feature is its longevity. It is a continuous activity and a permanent business connection with an entity. The longevity of the relationship between the principal and the agent thus increases the agent's dependence on the principal. Whether a given contractual relationship is truly long-term always depends on the specific contractual arrangements.
Which formalities are needed for a foreign principal to appoint an agent in the Czech Republic?
The agent appointed must be an entrepreneur. The agency agreement must be in written form. In order for the agent to act legally on behalf of the principal (for example, to sign contracts on behalf of the principal), the principal must grant a written power of attorney.
How are the agent’s exclusivity rights regulated under Czeck law?
A commercial representation is automatically considered non-exclusive unless the contract stipulates the representation as exclusive. In the case of a non-exclusive representation, the principal may therefore also entrust other persons with the commercial representation and the commercial agent may carry out the activities he has undertaken vis-à-vis the principal for other persons or conclude transactions that are the subject of the commercial representation.
If the parties intend the agency as exclusive, they must do it expressly in the contract. The principal is then obliged not to use another agent in the specified territorial area and for the specified range of business, and the agent is not entitled to act as agent for other persons or to conclude business on his own account or on behalf of another person to that extent. Thus, the exclusivity may be mutually agreed upon for both parties, according to the territory to which it applies or according to the range of activities carried out by the commercial agent.
Is the agent entitled to commissions on online sales made by a foreign principal to customers in the Czech Republic?
The Czech Civil Code does not distinguish between online and offline business. In this case, the commercial agent is entitled to a commission.
So, what are the rules for the commercial agent’s remuneration?
If the amount of the commission has not been agreed upon, the commercial agent is entitled to a commission in the amount corresponding to the customary practice in the place of his activity with regard to the type of goods or services that are the subject of the business. If there are no such customs, the agent is entitled to a reasonable commission which takes into account all aspects relating to the business. Any part of the remuneration which varies according to the number or value of the transactions shall be considered as commission. A commercial agent shall be entitled to a commission on deals concluded during the term of the agency contract if the deal was concluded as a result of his activities or if the deal was concluded with a third party whom the agent had previously acquired as a customer for the deal of the same kind. The agent shall be entitled to a commission on deals concluded after the termination of the agency contract, depending, however, on the degree of involvement of the agent.
Special rules apply in the case of an exclusivity agreement. The principal may make the deal by himself despite the exclusivity agreed, but the agent will be entitled to a commission.
Can the agent be bound by a non-competition covenant during and after the agency agreement termination?
Non-competition clause is valid, according to the Czech law, providing that the commercial agent is compensated by the principal. The non-compete clause can only apply to the activity that was the subject of the commercial representation or to an activity that would be competitive with the business of the principal. The competition clause can be agreed upon for a maximum of two years.
Is it possible for an international agency agreement to be governed by a foreign law?
Yes, the choice of applicable law is determined by a conflict of laws rule (the European Rome I Regulation). The applicable law is the law of the state under which the contract was concluded, unless the parties choose the law themselves. The parties may choose the law of any EU Member State as well as the law of any third (non-European) state. The application of the applicable law may be affected by mandatory rules. These rules apply regardless of the designated applicable law.
Is it possible to submit any disputes arising from an international agency agreement to a foreign jurisdiction or to foreign arbitrations?
Yes, this is possible if there is a valid arbitration clause in the contract. The dispute can also be resolved in a foreign jurisdiction.
Recognition in the Czech Republic of a judicial or arbitral order issued abroad
A foreign arbitration order is an order that has been issued in an arbitration proceeding abroad. Enforcement under the Brussels I bis Regulation is now automatic, i.e. without a declaration of enforceability (Article 39). Enforcement is governed by the law of the EU Member State in which the judgment is to be enforced. A judgment given in one EU Member State is therefore recognized in the other EU Member States without any special procedure. It also provides that a foreign judgment recognized in other Member State is given the same legal effects as a judgment in the Member State of issue. In the case of a judgment issued by a court of another State, a declaration of enforceability will have to be applied for, which is usually only a formal requirement.
How to terminate an agency agreement in the Czech Republic
According to the Czech Civil Code, agency agreement can be terminated by notice, withdrawal of the contracting party, agreement of the parties, or on the expiry of the period for which it was agreed.
Termination of the contract on expiry of the period for which it was agreed
The parties may agree that the commercial agency shall be established for a definite or indefinite period. If the parties do not agree on the duration of the contract, the contract shall be for an indefinite period. Where the contract is established for a temporary purpose, the agency shall be for a fixed period. If the period for which the contract is concluded expires and the parties continue to be bound by it, it shall be considered to have been concluded for an indefinite period. Upon expiry of the agreed period for which the agency was established, the rights and obligations under the contract shall be extinguished. Section 2509 has dispositive character. The parties to a commercial agency agreement may derogate from this provision by agreement.
Termination of the contract by notice
A contract of indefinite duration may be terminated by notice. The period of notice shall be one month in the first year of the contract, two months in the second year of the contract and three months in the third and subsequent years of the contract. The parties may not agree on shorter notice periods. If the parties agree on longer notice periods, the notice period for the principal may not be shorter than the notice period for the agent.
In the case of an exclusive agency agreement, a fixed-term contract may be terminated if the volume of business in the last twelve months has not reached the volume specified in the contract. Section 2512 has a dispositive character.
The agent may terminate the contract without notice if an exclusive dealership has been agreed and the principal uses another agent for the same type of business/territory. Section 2513 has a dispositive character.
The principal may terminate the contract without notice if an exclusive agency has been agreed and the commercial agent carries out the same activity to which the principal is committed for someone else. Section 2513 has a dispositive character.
Other ways to terminate a contract
A contract may also be terminated by rescission by either party for material breach of the contract by the other party. Of course, both parties may also agree to terminate the contract.
Termination indemnity for agency contracts under Czech law
Czech law provides for a situation where a party terminates a contract without a legal reason. In such circumstances, the agent is entitled to a special remuneration if he has acquired new customers or significantly developed the business of the principal. Provision 2514 of the Civil Code is mandatory and cannot be derogated from to the disadvantage of the agent.
On the other hand, compensation is not payable if the agent has terminated the contract or assigned the agency contract to a third party, or if the principal has terminated the contract for breach of the agent's duties.
May a commercial agent in the Czeck Republic be considered as a “permanent establishment” of a foreign principal company from a tax law point of view?
Yes, the commercial agent can be considered as a "permanent establishment. According to Section 22 of the Income Tax Act, a non-resident taxpayer has a permanent establishment in the Czech Republic if the commercial agent is authorized to conclude contracts on behalf and when these contracts are binding for the represented non-resident taxpayer.