END OF RELATIONSHIP: Two alternative models for the dissolution indemnity

Luca Davini
Lawyer in Milan and Turin


The dissolution indemnity is one of the most sensitive issues related to the international trade agency contract.

The main objective of European Directive 86/653/EEC was to harmonize the various national laws on payment of indemnity to the agent, essentially allowing Member States the possibility of choosing between two alternative solutions borrowed from German and French legislations, the so-called “German” model and the so-called “French” model.

In particular, Article 17 of the Directive allows States to choose between two alternatives:

– a “customer indemnity” inspired by the German model which grants the agent, who has brought clients to the principal from whom the principal continues to benefit after the termination of the relationship, a sum within the maximum limit of one year of commissions (Article 17, paragraph 2);

– a “reparation for injury” inspired by the French model that grants the agent a compensation equal to two years of commissions, by way of refreshment both of the earnings that it could have achieved in the event of continuation of the relationship, and of the expenses incurred in the execution of the contract (Article 17, paragraph 3). Most European States (including Italy) have adopted the German model, while a few others have been inspired by the French model (apart from France, only part of the United Kingdom and Ireland).

The German model

With reference to the German model transposed from the directive, it should be noted that compared to the original formulation, according to which the indemnity assumed a greater meritocratic connotation as it was recognized only in the case of new customers, the formula adopted by the EU also includes the case of business development with existing customers.

Another difference from the original German model concerns the method of counting the compensation: on the basis of the original model, it was necessary to calculate the losses suffered by the agent as a result of the termination of the relationship and, on the basis of the result obtained, to assess whether this amount was adequate to compensate the agent. According to the model introduced by the EU, however, this operation no longer forms the basis of the calculation but is merely an index to be taken into account for the purpose of reaching an equitable assessment of the indemnity.

The French model

It should first be noted that the injury repair referred to in the Directive does not relate to the concept of compensation for wrongful damage, but constitutes an effect of the lawful termination of the contract.

A second aspect from which the European legislation differs from the original French model consists in the express possibility of considering, for the purpose of quantifying the injury, all the sums paid by the agent for the execution of the relationship that have not been amortized due to the dissolution of the contract.

Indemnity calculation

A first question to be solved on the concrete methods of calculating the indemnity, consists in clarifying whether the national implementing rules, transposing the alternative solutions offered by the EU directive, should be interpreted or not on the basis of the national case law formed in Germany and France before the intervention of the Community legislator. Well, at first, also on the basis of the Report of the EU Commission on the implementation of the Directive, published in 1996, it seemed that this question should be answered positively.

Subsequently, however, also on the basis of the numerous objections raised by the majority doctrine, the Court of Justice expressly clarified, in the well-known judgment Honyvem (Court of Justice 23rd of March 2006, case C-465/04, Honyvem c. De Zotti) that … “within the scope laid down in Article 17 (2) of Directive 86/653, Member States enjoy a discretionary power which they are free to exercise, in particular, with regard to the equity criteria”.

As regards the United Kingdom, it should be noted that even in this case, at first, the case law of the British courts had conformed to the criteria set out in French case law before the enactment of the directive, except then developing an autonomous concept according to which, for the calculation of injury, reference must be made to “the value of the agency contract in the event of transfer to a hypothetical third party purchaser“(House of Lords, Londsdale v. Hallam [2207], Ukhl 32).

Consequently, in order to conclusively answer the initial question, it can be said that it is not necessary for the courts of the EU member states to comply with the jurisprudence of the States that inspired the criteria identified by the Directive in order to calculate the dissolution allowance due to the agent at the end of the relationship, since the courts can refer to the criterion of fairness and thus exercise their discretion for the purposes of the calculation.

Cases of loss of right

It should be noted that there are cases when the agent loses the right to indemnity payment, specifically:

– in case of resolution for just cause by the principal (in these cases, however, the gravity of the non-performance must be assessed in an extremely rigorous manner for the purpose of the loss of the right to indemnity, even in cases of express termination clause);

– in case of withdrawal of the agent;

– in case of assignment of the agency contract;

– in case of consensual termination (if the “indemnity issue” is defined in the context of the agreement);

– for causes independent of the will of the parties (for example, the failure of the principal).

Terms for indemnity

As regards the time limits for claiming the right of indemnity, Directive 86/653 provides that the agent loses that right if within one year of the termination of the relationship it fails to make the relevant request to the principal. Once the communication has been made within the year, the agent can assert his right within the limitation period established by the individual national regulations (for Italy 10 years).

The directive, with reference to the hypothesis of indemnity according to the German model, provides that the agent retains an independent right to compensation for any further damages, even in the case of payment of the indemnity, thus achieving coordination with the “French” indemnity, which incorporates this possible item of damage within the concept of injury reparation.

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Marcello

Dear Aurelia, the information you have provided are not sufficient for an answer which is subject to a professional engagement. In any case, we should study the provisions of the contract and identify governing law of the contract.If it does not provide anything on governing law then conflict law shall apply (in the most part of the countries likely the governing law will be the law of the country where the agent is domiciled). best regards Marcello Mantelli

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Aurelia

I signed a contract with a fashion agency but there were no termination clauses in the contract and decided to withdraw it before one week after signature so sent them an email but after 14 days they sent me an email and asserted that because i didnt withdraw in legal deadlines i have to perform the contract and pay whole money.Noboday told me about any deadlines and nothing was in the contract!! Why did they claim such a thing?

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