Do I have to pay termination indemnity to my commercial agent?
Appointing a commercial agent is one of the most common ways to enter a new market. The appointment itself can be a rather straightforward and simple measure, perhaps a mere handshake or an exchange of letters. But this appearance of easiness can, however, be deceptive since commercial agency relationships 's particularly when combined with international elements 's involve a multitude of legal problems. Many of those problems may turn up only at the end of the life cycle of the agency relationship.
Agency laws of European Union member states have been harmonized with the EC directive on the coordination of the laws of the member states relating to self-employed commercial agents (86/653/EEC). According to the directive, member states should take measures necessary to ensure that the commercial agent is, after termination of the agency agreement, either indemnified or compensated for damage.
In Estonia, Latvia and Lithuania, a commercial agent is entitled to goodwill indemnity if he 's broadly speaking 's has been successful in significantly increasing the principal's business in a way that will benefit the latter even after termination of the agency agreement, provided, however, that the payment of indemnity is equitable.
In Estonia, the payment of indemnity does not preclude or restrict the right of a commercial agent to demand compensation for damage caused to the agent by the termination of agency agreement. Such damage is presumed to exist if the agent does not receive commission that the agent would have earned had the agency agreement continued, while at the same time the principal gained substantial benefits due to the activities of the commercial agent. Such damage is also presumed to exist if the agent was unable to amortize expenses that he incurred due to performance of the agency agreement and following the instructions provided by the principal.
A commercial agent is not entitled to indemnity when the principal has terminated the commercial agency agreement because the commercial agent has breached the agreement. A commercial agent also loses his right to indemnity when he himself terminates the agreement, except in the cases where termination is justified by circumstances attributable to the principal or on the grounds of agent's age or illness. The right to indemnity is also lost when the agent assigns the agreement to a third party without the principal's consent.
The amount of indemnity may not exceed the agent's average annual remuneration 's calculated from the average of the preceding five years 's or if the duration of the agreement was less than five years, calculated on the annual average of the entire period of the agreement. It is a common misconception among commercial agents that they are automatically entitled to one year's commission upon termination of the agency relationship. Annual average remuneration is, however, the maximum amount that in practice is very unlikely to be awarded by the courts should the parties be unable to agree on the amount of indemnity themselves.
An agreement according to which an agent waives his right to indemnity beforehand, is invalid. An attempt to avoid the obligation to pay indemnity by selecting a law of a country that does not know indemnity as a governing law of the agreement is also unlikely to succeed.
Although at first glance an agent's right to indemnity may appear to be a negative phenomenon to the principal, one should take into account that it has also a motivating effect on the agent. In order to earn the right to indemnity, a commercial agent has to increase the principal's business substantially, which means that the parties are in fact in a win-win situation. Instead of being concerned about payment of indemnity when entering a new market through a commercial agent, businessmen should be more concerned about the fact how to find an agent who will be able to earn indemnity.