Indemnity – when is it due and in what amount? | In Principle

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Indemnity – when is it due and in what amount?

Disputes concerning indemnity arise under an agency agreement. This payment does not become due automatically, as there are certain requirements. This payment is due on the basis of equity and is intended to give an agent a share in the profits they help to generate.

An agent can seek an indemnity provided that all four of the following conditions are fulfilled:

  • In the course of the agency relationship the agent finds new customers or causes a significant increase in business from current customers,
  • The principal continues to benefit significantly from contracts with those customers,
  • There is a causal link between the benefits derived by the principal and the agent’s activities,
  • The agent is due the indemnity from the point of view of the principle of equity.

It is up to the agent to demonstrate that the four conditions have been met and to prove the level of the indemnity sought.

Finding new customers or causing increased business from current customers

To determine whether an agent found new customers or caused a significant increase in business from current customers, the number of contracts yielding subsequent benefits signed by the agent with new customers and the agent’s work input have to be ascertained. Gaining new customers means successfully entering into more contracts with customers gained by the agent, and subsequently entering into a commercial relationship with those customers leading to further orders being placed over the next few years. Customers inherited from the agent’s predecessor or passed on by the principal are not new customers.

Under Art. 7643(1) of the Civil Code, gaining new customers also includes a significant increase in business with present customers. Increased business resulting from a general upturn in the economy is not sufficient grounds for paying an indemnity. The increase in business must be significant and must take the form of significant expansion of and more intense commercial relationships with present customers. This has to lead directly to increased business.

Significant benefits

Benefits derived by the principal will not be sufficient grounds for paying the indemnity unless the benefits are significant.

A court is required to examine whether the agent’s activities led to a substantial improvement in the financial standing of the principal. Although the view taken in legal literature of the question of “significant benefits” is quite a flexible one, one of the criteria applied is the number of customers maintained by the principal, and the level of benefits derived in that regard once the relationship with the agent ends.

In a judgment issued on 27 January 2012 in case I CSK 211/11 the Polish Supreme Court stated that “when seeking an indemnity a former agent is required to demonstrate the elements that make up the level of the “significant benefits” for the principal, attained due to the activities of the agent as an intermediary, and not the specific level of those benefits”.

A court is also required to consider the role played by the principal itself in generating the benefits. This is because establishing a commercial relationship and maintaining it can depend on a number of factors unrelated to the former agent. The principal could have undertaken marketing measures to find new customers and maintain relationships with present customers. In addition, as a commercial representative, an agent frequently uses marketing and sales aids and customer lists supplied by the principal. The principal might also make appointments for agents with potential customers, and provide agents with contact details of current or potential customers and market forecasts. Where new customers were gained or relationships with current customers maintained due to the parties’ combined efforts, as a rule no indemnity is due.

The effort on the part of the principal aimed at maintaining customers following the agent’s departure is also important. Maintaining commercial relationships with customers once the relationship with the agent ends may prove to be possible only or largely due to increased marketing and promotional measures on the part of the principal, demonstrating that revenue from sales of products to those customers are a result of the sales activities of the principal, and not the agent.

Causal link between customers gained by the agent and benefits

This is not a requirement expressly specified in the regulations, but it is an important factor. To receive an indemnity it is not sufficient to demonstrate that the principal benefits from relationships with customers gained or served by the agent. It is important to demonstrate a link between the customer’s activities and the benefits currently being derived. This is because the purpose of an indemnity is to give an agent “a share in the profits the agent generated”. If these benefits are generated by a different person such as the principal or a different agent, the former agent is not entitled to additional payments.

The principle of equity

Apart from demonstrating the facts described above, an agent seeking an indemnity must also show a court that it is just to pay an indemnity in the case in question. A court has a great deal of discretion when deciding whether this additional payment is due. In practice, the history of the cooperation between the parties and the circumstances in which the relationship ended are examined.

If while the agency relationship existed the agent received remuneration for their activities appropriate for the work input and level of responsibility, there may be no need to pay an indemnity. The circumstances as regards the allocation of economic risk between the parties should support payment of the indemnity. If there was an agency contract between the parties, the question of whether the risk connected with winning customers was borne solely by the agent, or whether the principal bore this risk as well, should be examined.

When evaluating whether there is just reason to pay an indemnity, a court also has to consider the circumstances in which the agency relationship ended. If it was objectively justified to serve notice of termination of the contract and the notice period was observed, then there is no doubt as to the loyalty of the principal and the grounds for payment of an indemnity.

Calculating the indemnity

The requirement to prove the amount of the indemnity due to a former agent is also an important question. Courts have repeatedly clarified that the average yearly pay over the last five years of the agency contract is not the amount of the indemnity, it is the upper limit. The Civil Code does not specify the procedure for calculating the indemnity. The relevant criteria have been defined in case law.

In the Turgay Semen case, the Court of Justice of the European Union clarified three steps for calculating an indemnity:

  • The first is determining the scale of benefits derived by the principal from transactions with customers obtained by the agent;
  • The second step is examination of whether the amount obtained due to the criteria listed above is aligned with the principle of equity, taking into consideration all of the facts of the case, in particular the commissions charged by the commercial representative,
  • The third step is adjustment of the amount of the indemnity in view of the upper limit. This is only relevant if the amount reached in the first two steps exceeds this limit.

According to case law, above all the same grounds that determine that the payment is due should be applied when calculating the indemnity. Among other things, the number of contracts concluded, continued, or renewed while the agency contract was in force and the agent’s work input, aimed at generating subsequent, more significant benefits, of which the agent is deprived due to termination of the contract, have to be considered. Also, when calculating this amount, the basis should not be gross remuneration, but the agent’s income after deduction of the costs of their activities.

Marta Kozłowska, Łukasz Lasek, Dispute Resolution and Arbitration practice, Wardyński & Partners