THE AGENCY CONTRACT “In the undetermined term free termination with notice” 

Luca Davini 
Lawyer in Milan and Turin


The clause regulating the duration of the relationship is undoubtedly one of the characteristic and essential elements of the international agency commercial contract, as well as for the distribution contract, with which it shares the peculiarities.

In particular, the agency contract (as well as the distribution contract) can be determined, with the provision of an expiry period, or an undetermined term. 

Undetermined term contracts 

The main difference between the two types of contracts lies in the possibility provided only in cases of undetermined term contract, in favour of each party, to withdraw from the relationship at any time, in compliance with the notice period indicated by law or in the contract, but only if this term is more favourable for the agent. 

Determined term contracts 

On the contrary, in determined term contracts, except in cases provided for by law or by the contract, of which we will discuss below, it is not possible for either party to unilaterally withdraw from the relationship before the agreed deadline. 

However, it should be borne in mind that, when the parties intend to renew a determined term contract several times, this practice does not involve the transformation of individual determined term contracts into a single undetermined term contract. 

In business practice, it often happens that principal and agent continue to perform each other’s obligations even beyond the terms of expiration of the contract, both in the event that the parties have expressly established the extension of the initial expiration time, and in the event that the parties “forget” the deadline, thus continuing to execute the contract. 

In these scenarios, contrary to what happens in the cases mentioned above of recurrence of the same determined term contract, the fixed-term contract is transformed into an indetermined term contract, with all the consequences of law. 

If, on the other hand, principal and agent have expressly agreed in the contract tacit renewal for the same or different period, this consequence does not occur and the contract therefore remains for a determined term.

For example, the parties may provide for an initial term of three years, with tacit renewal at the expiration with the renewal of one year, and so on for subsequent deadlines. In these cases, if one of the parties intends to exclude tacit renewal at the agreed deadline, it must notify the other party that it does not want automatic renovation within a period of notice from the agreed deadline, which must be expressly indicated in the contract. 

In undetermined term contracts, however, the party may withdraw at any time, always in compliance with the terms provided for by law, usually increasing (from one to six months) depending on the duration of the relationship, or the terms provided for in the contract if more favourable to the agent, without the need to provide any justification: this is the so-called ad nutum withdrawal. 

Withdrawal without formal requirements 

The communication of withdrawal is not subject to particular form requirements, therefore an oral communication is also considered valid, even if this method is not recommended for obvious reasons of certainty of proof of the communication of withdrawal.

As for the moment in which the withdrawal becomes effective, it will be necessary to refer to the date of receipt of the communication and not to the date of shipment. 

Without prejudice to the foregoing principles, the parties may withdraw from the contract before the agreed expiration, in cases of determined term contracts, or without respecting the terms of notice in cases of indetermined term contracts, if there is a serious breach of the other party that does not allow the continuation, even temporary, of the relationship. 

Termination for just cause  

This circumstance may occur in cases of termination for just cause or activation of the so-called express termination clause

The concept of just cause applies by analogy to what happens in the context of employment relationships, although it is necessary to carefully examine the seriousness of the non-performance through a work of adaptation to the context of the agency relationship. 

Just cause may, for example, be invoked by the principal in cases of: substantial inactivity of the agent that results in failure to visit the referring customers, appropriation of sums of money of the principal (for example, through unauthorized collection activities) or carrying out activities competing with the principal’s business. 

As for the hypothesis of dissolution for just cause on the initiative of the agent, the most frequent reasons are: non-payment of commissions, the sudden and unmotivated reduction of the area by the principal, the systematic refusal to carry out the orders transmitted by the agent. 

It should be noted that the withdrawal for just cause must be communicated promptly, without, however, being necessary to communicate at the same time the reasons for the withdrawal. Nevertheless, if in the notice of withdrawal the violations attributable to the other party are indicated, the assessment of just cause may not extend to other charges not contextually disputed. 

Express termination clause 

As an alternative to withdrawal for just cause, it is also possible to resort, both for indetermined term contracts and for determined term contracts, to the express termination clause, with which the parties contractually identify the reasons to be considered as serious enough to justify the termination of the contract, usually coinciding with those set out above with reference to termination for just cause. 

Compensation for damage 

In cases where the principal exercises the withdrawal without observing the notice period, except in the case of withdrawal for just cause, the agent acquires the right to compensation for damage, which in determined term contracts will be calculated with regard to the loss of income until the expiry of the relationship. 

In indetermined term contracts, on the other hand, such damage will usually correspond to the commissions that the agent allegedly earned during the remaining notice period in the form of the so-called non-notice indemnity, or, in the event that the agent provides proof of this, to a sum greater than the notice indemnity. 

Finally, it should be noted that even in the case of withdrawal of the agent, the principal accrues an equivalent right to be compensated for the loss of earnings until the end of the relationship, in the case of a determined term contract, or to receive payment of the substitutive compensation of notice or compensation for damage in the case of an undermined term contract. 

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2 thoughts on “THE AGENCY CONTRACT “In the undetermined term free termination with notice” 

  1. 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?

    1. 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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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?

VAI AL COMMENTO

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