The termination compensation due to the agent is treated differently depending on whether it is a commercial agent or an agent of common interest.
(a) The commercial agency agreement
Principle of termination indemnity
If the contract is subject to French law, compensation will be ruled by Article L 134-12 of the Commercial Code (and art. 17.3 of the 1986 Directive). No provision to the contrary may preclude the principle of such compensation or limit in advance its amount.
The indemnity is due upon the end of the contract (case law does not distinguish between the end of an indefinite duration contract and the term of a fixed term contract, even if this seems contrary to the text of the 1986 Directive). The compensation is not due in the following limited cases:
- the commercial agent has terminated his contract, unless this purpose is justified by a prior fault of the principal (eg. non-payment of commissions) or is due to age, infirmity, illness or death of the agent;
- the end of the contract is caused by the serious fault of the commercial agent ;
- the commercial agent has assigned his contract-with the consent of the principal-to a third party.
It should be noted that the exception of infirmity, age, sickness or death concerns only the commercial agent, natural person who has contracted with the principal. This possibility disappears when the commercial agent is a company that contracts with the principal.
If the commercial agent refuses to renew his contract when the principal proposes it to him, the end-of-contract indemnity will not be due. In fact, the Court of cassation refuses to grant termination compensation to an agent who refuses to renew his contract when the principal offers it to him (Cass.com., June 29, 2010, n°09-68.160).
Regarding sub-agents’ termination compensation, the ECJ ruled that the compensation normally due by the agent to his sub-agents could be disregarded, in the name of fairness, in particular in case the sub-agent continues his activity with the principal. This principle of fairness and a more rigorous reading of the 1986 Directive (art. 17.3) should also lead to the conclusion that an agent whose sub-agent directly continues the relationship with its (former) principal cannot include the part that should accrue to its own sub-agent in the basis of its termination compensation requested from the principal.
The commercial agent's right to compensation becomes void if he does not claim it by any means (usually by registered letter with acknowledgment of receipt) within one year of the end of his contract. This period of foreclosure is independent, under French law, of the stature of limitation period which is five years from the end of the contract, and which is interrupted by a judicial proceeding.
Serious breach excludes the termination indemnity
Serious misconduct is strictly interpreted by case-law as a fault of such gravity which prevents the maintenance of the contractual relationship.
The French Supreme Court considers that a serious misconduct can be:
- failure of the agent to inform the principal of his change of shareholder, or of his change of manager;
- violation of non-compete undertaking;
- breach of duty of loyalty by the agent (Cass.com., June 29, 2022, n°20-13.228);
- failure to perform the contract in a professional manner by neglecting to prospect for customers (Cass.com., July 10, 2007, n°06-13.975) ;
- being paid a double commission to the detriment of the principal (Cass.com. September 20, 2016, n°15-12.994).
Thus, all violations of a contract are not automatically considered to be serious misconducts. For example, non-compliance with a turnover objective generated by the agent is not in itself a serious fault, but it is the case of a violation of a non-competition commitment, abandon of the mission or disparagement the principal. Even if courts consider not to be bound by a contractual definition of serious misconduct, it could be useful to specify what breach could authorize the principal to terminate the contract for a so-called serious fault. The definition of serious misconduct also leads the court to consider that if the principal has granted (for the sake of conciliation, compliance to contract or weakness) a prior notice of termination, the fault giving rise to this termination may not deemed to be serious misconduct. In other words, terminate for serious misconduct implies to terminate without notice.
Principal must really be very careful in the management of the termination of the agency agreement as regards the timing of termination and its notification.
First, the fault of the commercial agent must be invoked by the principal in the termination letter sent to the agent. Recent case law (November 16, 2022, n°21-17.423) has specified that a gross negligence of the agent not mentioned by the principal in his letter of termination cannot be invoked later to deny the right to compensation. So, even the discovery after the notification of termination, of misconduct committed by the agent cannot deprive the latter of his right to compensation, as it is the termination letter somehow locks in the grounds invoked by the principal and thus the conditions for awarding or denying compensation.
Second, a court of appeal also decided that if the agent notifies, first, the end of the contract, proving that this termination is justified by a previous fault of the principal, his right to compensation at the end of the contract will be acquired, even though the principal succeeds afterwards in proving that the agent had committed a serious fault (but principal will be entitled for damages). This caselaw to give a real tactical premium to the one who takes, first, the formal initiative to notify the end of the agency agreement.
Amount of termination indemnity
While the 1986 EC Directive and Article L. 134-12 of the French Commercial Code clearly establish a principle of compensation for the damage suffered by the commercial agent, french case-law very broadly sets the quantum of the compensation at a quasi-lump sum of two years of gross remuneration paid to the agent calculated on the average of the last 36 months preceding the actual end of the contract without requiring the agent to prove the reality of its damage, or the causal link between the end of the agreement and his damage. If the contract lasted less than two years, the compensation will be prorata temporis. The basis of compensation is in fact all the sums paid to the agent, including the remuneration for ancillary services (and even reimbursement of expenses). Case-law also does not traditionally distinguish between commissions paid for transactions with pre-existing clients and those that did not exist; but it could be advisable to attach to the contract the list of pre-existing customers and their turnover to characterize a possible failure of the agent. Indeed it seems that some courts do not want to stick to this 2-year lump sum and want to assess the real loss suffered by the agent. For instance, the Poitiers Court of Appeal ruled that “the termination indemnity is intended to compensate the sales agent for the loss of future income from the exploitation of the clientele. As the quantum of the indemnity is not regulated, the amount should be determined on the basis of the specific circumstances of the case, even if there is a recognized practice of awarding the equivalent of two years' commission, which is not binding on the court” (Poitiers Court of Appeal, Dec. 12 2023, n°23/00726). Recently, the Versailles Court of Appeal ruled that the compensation based on two years' commission should not be paid to the commercial agent when the principal himself has provided the base of clientele (Versailles, January 11, 2024).
If a fault or breach of the agent is not considered to be a serious misconduct, it may however constitute a fault incurring the responsibility of the agent and authorizing the principal to claim for damages which can then be offset with the end of contract compensation. The Court of Cassation recently reiterated this point : when the principal proves a serious fault committed by the agent, this serious fault not only excludes the right to termination compensation, but also authorizes the principal to claim for damages against the agent to compensate him for the prejudice it has suffered; at the very least, if the fault is not serious, the damages awarded will be offset against the agent's compensation (October 19, 2022, ch. com. N°21-20. 680, aff. VG Sport).
Although the principal cannot validly limit the amount of compensation in advance, it may use another way : the contract may stipulate that the provision by the principal of his own clients data base for the benefit of the commercial agent, will give rise to a remuneration of the principal, which is not payable by the agent at the time of the conclusion of the agreement or at the time of transfer of clients data base but which is postponed at the end of the agreement. In this case, this sum will offset (totally or partially) the amount of the end of contract compensation claimed by the agent. Case law has validated this practice on several occasions. For example, in 2012 the Court of cassation ruled that this type of clause is valid if its purpose is not to limit the amount of the termination indemnity (Cass.com., Feb 21, 2012, n°11-13.395). More recently, court of appeal ruled that this type of clause is lawful under the common law rules and does not preclude the public policy status of the commercial agency contract (Pau Court of Appeal, Nov 23. 2021, n°19/03937).
(b) The agent of common interest
The agent of common interest is also entitled to compensation but his rights are more limited or even precarious. Above all, this right to compensation is not public policy and can therefore be excluded or modified by the contract. The end-of-contract compensation will not be due to this agent if the contract is terminated for just cause. The concept of serious fault is not required here. The amount of compensation is generally calculated in the same way as for the commercial agent.