Contract Termination and Client Compensation

VolverThe variety of commercial contracts for which the termination regime dictates the application of client compensation, its relevance in the corporate world and the increasing number of lawsuits that the Litigation and Arbitration Law of Belzuz Abogados, S.L.P., Portugal has been working with, justifies our attention.

This compensation aims at recompensating the agent for the benefits or advantages that the principal will continue to obtain with the clients gained or retained by the agent, after contract termination.

The need to protect the commercial agent at contract termination as well as the fact that the counterparty will keep on enjoying the benefits of the work developed by the agent after such termination justify this compensation obligation.

Considering that usually the benefits of any terminated contractual relationship do not lead to any compensation obligation, we are clearly talking about a special situation that becomes particularly relevant to our Legal Framework given the high number of contracts that are subject to this obligation.

In fact, such compensation has been deemed applicable to agency contracts under its own legislation and equally required in other types of atypical contracts whenever the analogy of situations so justifies.

This way, and regardless of the risks that this type of application by analogy may bring, the regime of goodwill compensation expressly established for agency contracts has been equally applied, although with the required adaptations, to atypical commercial concession, distribution, mediation and franchise contracts.

Agency contracts are governed by Decree-Law 178/86 of July 3, as amended by Decree-Law 118/93 of April 13, 2004 that has transposed the EU Directive 86/653/EEC of December 18 to the Portuguese legislation aiming at standardising European legislations.

This is a bilateral, burdensome contract that gives rise to mutual obligations for both parties, and whose main consequence after termination is the client compensation, consensually characterised by the legal doctrine and jurisprudence as a compensation in favour of the agent following contract termination.

And this compensation is due irrespective of the way the contract is terminated or the duration of the contract, even if it was entered into for a definite or indefinite period and adds up to any other compensations that may arise from contract termination.

Contracts are terminated by reasons attributable to the agent constitute the only situation where this compensation does not apply.

Strictly speaking, this is not a real compensation, as it does not depend on the agent proving any damages caused. In this case, the agent is not indemnified but compensated for the benefits that the counterparty will keep on enjoying and that are essentially the result of agent activity developed until contract termination. It is in fact understood that it is not inclusively necessary that such benefits have already occurred, being only necessary that they may come to occur.

This compensation is expressly laid down by article 33 of DL 178/86, in the wording given by DL 118/93 of 13.04, and considering the purpose of these provisions, this standard is unanimously understood as mandatory, i.e., cannot be waived even if that is the intention of the parties.

Its attribution only depends on cumulatively meeting the requirements established by the above provisions, that are: (i) the agent has gained new clients for the counterparty or has substantially increased turnover with existing clients; (ii) the counterparty will benefit considerably from the activity developed by the agent after contract termination; (iii) the agent is no longer receiving any consideration for negotiated or ended contracts with the clients in (i), after contract termination.

This way, the attribution of the goodwill compensation is not simply justified by any addition to clients or any benefit arising therefrom to the principal. It has to be a relevant addition and corresponding benefit.

Such compensation is calculated according to article 34 of the aforementioned DL, which refers to fairness and to the determination of a maximum compensation limit that takes as a starting point the average annual remunerations gained over the last five years, balanced by fairness.

This means that the determination of this client compensation does not depend on the specific ascertainment of turnover as it is subject to a fair judgement that must be kept between the limits established by article 34 of DL 178/86 in the wording given by DL 118/93.

Lastly, it is worth to highlight that the agents, under the penalty of extinction of their respective right, must communicate to the principal within one year after contract termination their intention to receive such compensation and, if required, lodge a judicial claim in the year following such communication.

 Teresa Lopes Ferreira Teresa Lopes Ferreira 

Litigation and Arbitration Law department | Portugal

 

Belzuz Abogados SLP

This publication contains general information not constitute a professional opinion or legal advice. © Belzuz SLP, all rights are reserved. Exploitation, reproduction, distribution, public communication and transformation all or part of this work, without written permission is prohibited Belzuz, SLP.

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