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When the agent’s principal drives clients away

The Court of Justice of the European Union has ruled that a commercial agent may retain the right to a commission if the client intentionally refuses to perform the contract because the principal’s attitude has caused the client to lose confidence in the principal. The ruling also clarifies doubts surrounding the effect that partial non-performance of the contract has on the agent’s commission.

ERGO Poisťovňa a.s. v Barlíková, Court of Justice judgment of 17 May 2017 (Case C-48/16)

EU law and national law

Contracts of self-employed commercial agents are governed at the EU level by the Commercial Agents Directive (86/653/EEC), implemented into the laws of the individual member states, and thus the rulings by European courts are immediately relevant for interpretation and application of national regulations on agency agreements (in Poland, Art. 758–7649 of the Civil Code).

The directive leaves the parties great discretion in framing the rules for payment of fees to commercial agents, providing for a commission on contracts concluded with clients as only one option—although in practice this is clearly a very common solution. With respect to the right to a commission, the laws in force in the member states generally provide default solutions but permit the parties to modify them extensively. The few limitations on the freedom of the parties protect the agent against shifting of the entire risk of the client’s breach of the contract from the principal to the agent.

In particular, under Art. 10(2) of Directive 86/653/EEC (codified in Poland at Civil Code Art. 7613), “The commission shall become due at the latest when the third party has executed his part of the transaction or should have done so if the principal had executed his part of the transaction, as he should have.” Provisions less favourable to the agent are invalid, but it may be provided for example that the commission is payable earlier, e.g. from the date the contract with the client is concluded.

Meanwhile, Art. 11 of the directive provides, “The right to commission can be extinguished only if and to the extent that … it is established that the contract between the third party and the principal will not be executed … due to a reason for which the principal is not to blame.” (The Polish codification, in Civil Code Art. 7614, says “when it becomes obvious” that the contract will not be performed.) Clearly, this applies even more so in a case where the deadline for performance (e.g. paying insurance premiums) has passed and the performance was not made. In this instance as well, the contractual provisions cannot be less favourable to the agent, meaning that the right to a commission can only be uncoupled to a greater degree, or even entirely, from the performance of contracts by clients.

Background of dispute

The judgment of the Court of Justice in the ERGO case involved settlements with an agent by an insurer operating in Slovakia. The agent received a commission on every insurance policy concluded, stated as a percentage of the premiums paid by the client. In effect, the commission on each insurance policy was not a one-off payment but was payable over a longer period in regular instalments. The agency contract also provided that if the client ceased paying premiums after the first three months of the policy, the commission would be reduced proportionally.

After the agent sold a number of policies and received instalments of her commission for several months, the clients ceased paying premiums, which under Slovakian law resulted in automatic termination of their insurance contracts. The clients explained that they had abandoned the insurance (ceasing to pay the premiums being the practical equivalent of giving formal notice of termination) because they lost confidence in the insurer, which pestered them with numerous questions even after the contract was signed, nagged them about paying premiums that had already been paid, and the like.

Consequently, the insurer demanded that the agent refund a portion of the commissions, asserting that they were subject to proportional reduction because the clients had ceased paying the premiums. The agent refused, claiming that the clients’ decision was caused by the insurer’s actions.

The insurer sought payment in a Slovakian court. The national court applied to the Court of Justice for a preliminary ruling interpreting Art. 11 of Directive 86/653/EEC on extinguishment of the right to a commission.

When the client turns against the principal

The key issue the Court of Justice considered boiled down to the question of whether in examining the reasons for non-performance of the contract by the client, only the formal legal basis for termination of the contract should be considered, or the broader context, including the parties’ motives. This somewhat abstract way of framing the issue resulted from the circumstances of this case, where the immediate legal reason for termination of the insurance contracts was the clients’ voluntary and conscious decision to stop paying premiums, which would generally be considered a breach of contract for which the client, not the insurer, was to blame. In this sense it could be said that the reason for non-performance was not one for which the principal was to blame.

But the Court of Justice rejected this one-dimensional interpretation as contrary to the aims of the directive, which was mainly to protect the interests of commercial representatives (agents) as the weaker party in dealings with the principal.

The court held that “the concept of ‘a reason for which the principal is to blame’ … covers all the legal and factual circumstances for which the principal is to blame, which are the cause of the non-execution of that contract.” Consequently, while leaving this assessment in the specific case to the national court considering the claim, the Court of Justice let it be known that the principal bears the risk of non-performance of contracts by clients caused by its own behaviour, including termination of their contracts under whatever legal procedure.

Although the court did not address this directly, considering the logic behind the ruling it appears to be irrelevant whether the principal’s behaviour directly breached any specific terms of its contracts with clients. It is sufficient that the principal’s behaviour was the real reason for non-performance of the contract, for example because the clients lost confidence in the principal.

It is not hard to notice, however, that following this reasoning without any limitations would lead to far-reaching and unwarranted protection of agents, enabling them to retain a right to a commission even if the client refused to perform the contract for trivial reasons or on a mere pretext. Therefore some limit to the principal’s liability must exist. This may be developed further in the future case law, potentially by the Court of Justice itself.

Generally, it appears that this limit should be determined based on criteria such as the objective impropriety of the principal’s behaviour (contrary to generally accepted market standards or best practice) and the seriousness of these shortcomings.

Partial non-performance, partial refund of commission

In the ERGO case the Court of Justice also addressed the equally important issue of how partial non-performance of a contract by the client affects the agent’s right to a commission.

The literal wording of the directive (and the provisions implementing it in Polish law) seems to refer only to non-performance of the entire contract, which would lead to the conclusion that in the event of partial non-performance the agent retains the right to the full commission. But an argument could also be made to support the opposite understanding, based on the observation that the directive seems to refer to a loss of the right to the entire commission, and non-performance of the contract could be understood to cover any situation other than complete performance. Other interpretations might be reached somewhere between these two extremes. Discrepancies of this type can also be found in the interpretation of this mechanism as it functions in the Polish regulations, presented by different legal commentators, which demonstrates that this remains an open issue at the national level.

The Court of Justice took a Solomonic approach to this issue, holding that Art. 11 of the directive provides for loss of a commission also in the event of partial non-performance of the contract, but in that case the commission is reduced proportionally to the degree of non-performance by the client. The court pointed out in this respect that because an agency contract cannot provide for solutions less favourable to the agent than required by the directive, the contract could at most provide a disproportionately small reduction in the commission, as compared to the degree of non-performance of the contract. And as mentioned above, there is nothing preventing exclusion of this mechanism entirely, maintaining the agent’s right to a commission regardless of whether the principal’s contract with the client is performed.

Maciej Zych, Dispute Resolution & Arbitration practice, Wardyński & Partners