Commercial Agency Contracts in Croatia

The Civil Obligations Act (Zakon o obveznim odnosima, ZOO) transposed the relevant provisions of the European Directive 86/653/EEC on the coordination of the laws of the Member States relating to self-employed commercial agents (EU Directive) into Croatian law. Agency contracts are governed by the Articles 804. – 834. of ZOO. These Articles regulate the following:

• general provisions of the agency contracts,
• obligations of the agent,
• obligations of the principal,
• right of retention and fee to the agent,
• provision on the prohibition or restriction of the pursuit of business.

In case the Articles 804.- 834. of ZOO do not contain specific provisions, other provisions of ZOO apply, in particular the articles governing the conclusion of the contract, termination, interpretation of the contract clauses, damage claims due to the breach of contractual obligations, etc.

Additionally, principal and agent may freely regulate their mutual obligations, as long as these are compliant with the Constitution of the Republic of Croatia, compelling legal rules and the morals of the society.

Under an agency contract, the agent undertakes to negotiate contracts with third parties in the name and for the account of the principal and to, if so agreed, conclude contracts with third parties in the name and for the account of the principal, in exchange for a commission that the principal undertakes to pay to the agent for each contract concluded by him or concluded through his agency.

Key characteristics of the agency contract and the business relationship between agent and principal are:

• commercial agent is either a natural or a legal person appointed by the principal to act as an intermediary,
• the agent does not act in his own name and for his own account, but on behalf of the principal,
• the agent will use his own initiative to conclude transactions and to create business opportunities,
• there is no superiority or subordination relationship between the principal and the agent.

Difference between agency contracts and other intermediaries

Mandatary agent

A mandate contract is a contract obligating and empowering the mandatary to perform certain acts strictly in accordance with the instructions given by the mandator. If no instructions are given, the mandatary shall act with the diligence of an orderly and conscientious businessman and with reasonable host diligence in the best interests of the mandator. Disregarding the mandator’s instruction is only permitted either if fulfilment of the mandate in accordance with the given instructions would harm the interests of the mandator or with the mandator's approval. Mandatary is performing the contract obligations in the name and for the account of the mandator. Therefore, in case of a mandate contract, the autonomy of the mandator is subdued and there is a clear relationship of superiority and subordination between mandatary and mandator, which does not exist in the case of agency contracts.

Commission agent

The commission agent performs transactions in his own name but for the account of the principal and in accordance with the principal’s instructions or within the given boundaries. Consequently, when dealing with third parties, the commission agent acts as a contracting party himself, but everything obtained from the agency must be handed over to the principal. if conditions under which the commission agent concludes a certain transaction are less favourable than those stipulated by the mandate, he shall reimburse the principal for any difference and compensate him for any damage. Likewise, where the transaction is concluded under conditions more favourable than those stipulated by the mandate, any benefits achieved belong to the principle.

Broker

Under a brokerage contract, the broker undertakes to connect the principal with a person willing to negotiate with the principal about entering into a certain contract, in exchange for a commission that the principal undertakes to pay to the broker, should a contract be entered into. The broker usually seeks opportunities for negotiating contracts and acts as an intermediary between the principal and third parties. However, the broker has no authority to act in the name and for the account of the principal.

Distributor or dealer

Distributor or dealer is an independent agent who's entered into an agreement to offer and sell the products of another company but is not entitled to use the manufacturer's name as a part of his own business name. Depending on the agreement, the distributor may be limited to selling exclusively one manufacturer’s products or he may have the freedom to market several different product lines or services from various manufacturers. Distributor usually acts in his own name and for his own account and not for the account of the principal.

Employed sales representative

Employed sales representative enables conclusion of contracts on behalf of his employer. Such a business relation is governed by employment legal rules and hence subordinacy of the employed sales representative is emphasized. Instead of commission earned by the agent, employed sales representative will be compensated with fixed wage and a possible performance-based bonus.

According to the provisions of the ZOO, it is required for the agency contract to be drawn up and signed in a written form, hence verbal agreements between the parties do not constitute an agency contract. The agent may also require from the principal to issue him a special power of attorney as a proof of his status.

There are no specific registration obligations to be complied with in case of agency contracts.

When providing services in Croatia, agent must comply with all general laws regulating business operations in Croatia.

In case of an agency contract with an international element, such may be governed by non-Croatian law as stipulated by Regulation (EC) No 593/2008 of the European Parliament and of the Council of 17 June 2008 (Regulation Rome I). International element exists, in particular, if the principal’s seat is located in the country different from the agent’s seat country.

In line with the Article 3. of Regulation Rome I, agency contracts are therefore primarily governed by law chosen by the parties either expressly or as clearly demonstrated by the terms of the contract or the circumstances of the case. The parties may also agree to apply the chosen law to the whole or only the part of the contract and they may agree to subject the contract to a law other than that which previously governed it. Nonetheless, by choosing the governing law the parties cannot avoid the application of compelling law of a country in which the relevant elements of the contract are located in. Likewise, application of compelling EU law may not be avoided by choosing the law of a country outside the EU.

In case that the law applicable to the contract has not been chosen by the parties, agency contract shall be governed by the law of the country where the service provider, meaning the commercial agent, has his habitual residence (Article 4.1 of Regulation Rome 1). However, if the contract is manifestly more closely connected with a different country, it should be governed by the law applicable to the territory where the services are being rendered.

Disputes arising from an international agency contract may be submitted to a foreign court jurisdiction or foreign arbitration.

In accordance with Article 27 of the Croatian Civil Procedures Act, courts in the Republic of Croatia will have jurisdiction over a trial when its jurisdiction over disputes with an international element is explicitly laid out in the Croatian law (e.g. Croatian Maritime Code) or international agreement (e.g. Regulation (EU) No 1215/2012 of the European Parliament and of the Council of 12 December 2012 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters, Regulation Brussels I recast). Pursuant to Articles 25 and 26 of Regulation Brussels I which has direct effect in Croatia, the parties may choose the jurisdiction of the courts of the Member State. The parties’ agreement on prorogation of jurisdiction is deemed exclusive if it is valid under the chosen Member State law and either in writing or in another proper form as stipulated by Article 25 of Regulation Brussels 1.

As for foreign arbitration, under Croatian Arbitration Act, dispute with an international element is such a dispute in which at least one party is a natural person with domicile or habitual residence abroad, or a legal person established under foreign law. Disputes with an international element, may be submitted to foreign arbitration, unless it is provided by law that a specific dispute may be submitted only to a national jurisdiction.

By including arbitration clause in their agency contract or concluding a separate arbitration agreement, parties should decide on the arbitration place, applicable rules, number of arbitrators and language of the arbitration.

Moreover, according to the New York Convention which has been adopted by Croatia, all written agreements under which the parties undertake to submit their dispute to arbitration are recognized, unless found null and void in accordance with substantive and procedural law applicable to the specific dispute.

Unless otherwise agreed, the agency contract is concluded for an indefinite period of time.

When a contract is concluded for a fixed term, it ends after such term has expired. Still, if the parties continue to perform their contractual obligations even after expiry of agreed term, it shall be deemed that they have renewed their contract for an indefinite period of time.

Cancellation of agency contract

In case of an agency contract concluded for an indefinite period, each party may cancel it by giving written notice to the other party, in accordance with the notice periods determined by the Civil Obligations Act. The length of the notice period depends on the duration of the contract and will be one month for each subsequent year that the contract has entered into and maximum of six months for contracts lasting for over five years. Agreeing upon a shorter notice period is not permitted and agreeing on longer one is as long as the notice period is equal for both parties.

Unless otherwise agreed by the parties, the period of notice shall start running on the first day of the month following the month of written notification to the other party of the cancellation and will end on the last day of the last month of the period of notice.

Termination of Contract

Each party may terminate agency contract concluded for an indefinite period without notice or terminate a fixed term contract before expiry of its term due to serious reasons that have to be indicated by the party, and particularly because of failure by the other party to fulfil its contractual obligations.

The right to terminate the contract may not be contractually excluded or limited by the parties.

In case the notice of termination of an agency contract concluded for an indefinite period has been given without indicating any serious reasons by the party, it shall be deemed as a cancellation of contract with a regular notice period.

Each contract party is entitled to damages compensation if the other party did not have a legitimate reason to terminate the contract.

Unfounded termination by one party will entitle the other party to terminate a contract concluded for an indefinite period without observing the notice period, and to terminate a fixed term contract before expiry of its term.

In accordance with article 830. of ZOO, after the agency contract has ended the agent is entitled to a special termination fee if during the course of the contract he has acquired new clients for the principal or has made a significant contribution in terms of increasing the principal's business with the existing clients, and the principal has derived significant benefits from such clients even after the contract has ended.

When determining the amount of such termination fee, account shall be taken of the commission paid to the agent for contracts concluded after the end of the contractual relation with the principal as well as a possible prohibition or restriction imposed on his pursuit of the business following the end of his contractual relation with the principal. The amount of special termination fee may not exceed the amount of the average annual commission in the last five years, and in case of a contractual relation with a duration of less than five years, the amount of average annual commission during the term of the contract.

Reasons for which the right to special fee can be excluded

The principal shall not be obligated to pay a special fee to the agent in following cases:

• the agency contract was cancelled or terminated by the agent, unless the reason for the cancellation or termination lies with the principal or if he terminated or cancelled the contract because his age or health issues prevent him from further maintaining the contractual relationship,
• the agency contract was terminated by the principal because of faulty behaviour on the part of the agent,
• the agent has transferred the agency contract to another person, in accordance with the agreement with the principal,
• the agent failed to notify the principal of his intention to demand the special termination fee and damages compensation within a year from termination.
  

Contractual provision on the prohibition or restriction of the pursuit of business

The parties may agree to prohibit the agent from pursuing, after the end of the agency contract, either fully or in part, the business of agency for another principal. Such a contractual stipulation shall be valid only if it was made in a written form and if it is related either to the same territory, the same persons or the same goods as the current agency contract.

In case the agency contract ended for reasons attributable to the principal, such a contractual provision shall bind the agent only if the principal agrees to paying him two kind of fees one of which is a termination fee and the other is a monthly fee payable during the whole period of prohibition or restriction of other business pursuits in accordance with such stipulation. The amount of the monthly fees equals the average monthly amount of commission the agent was entitled to in the past five years, or where the duration of the contract was less than five years, the amount equals the average monthly amount of commission he was entitled to during the term of the contract.

The contractual provision prohibiting or restricting the pursuit of the future business may bind the agent for a maximum period of two years following the end of the current agency contract.

The agent who terminated the contract on account of faulty behaviour on the principal's part, is entitled to notify the principal by means of a written declaration, within one month from the date of termination of the contract, that he will not respect the provision on the prohibition or restriction of the pursuit of his business.

Right of retention by the agent

To ensure payment of his claims under the agency contract, the agent has the right to retain the sums collected for the principal under his authorization and the items of the principal which he received either from the principal or from some other person in connection with the contract.

Expenses

The agent may not claim compensation for general cost and regular operating expenses incurred in the course of business, unless otherwise agreed by the parties. But he is entitled to reimbursement of special expenses incurred on behalf of the principal or on his order or instructions.

Performing duties for another principal

Without prior approval from the principal, the agent is forbidden from conducting and executing the same type of services in the same territory for another principal.

Confidentiality obligations of the agent

The agent is obligated to protect any business, professional and other confidential information of the principal of which he becomes aware in connection with the work he is entrusted by the principal. Confidentiality obligation of the agent will outlive the cancelation or termination of the agency contract. Additionally, agent is liable to the principal if he uses or reveals confidential information about the principal and its business to third parties.

Commission

The amount of commission agent is entitled to for conducting services for the principal may be freely determined by the contracting parties.

If the amount of commission is not determined by the contract, the agent is entitled to the amount of commission commonly paid for such type of services in the place where the agent carried out the services for the principal. If the agent acted through his agency for the principal in different places, he is entitled to a commission commonly paid in the place of his domicile or headquarters.

Where it is not possible to determine the amount of commission commonly paid, the agent will be entitled to the amount of commission that would be equitable, given the circumstances of the case, and particularly the number and the value of transactions performed by the agent for the principal and their demanding nature and the scope of the agent’s efforts.

Special commission

When the agent has under the authorization from the principal collected a principal’s claim from the third person, he is entitled to a special commission out of the amount collected.