New Judgement of October 28 2010 on the interpretation of article 18 (a) of Council Directive 86/653/EEC

In a recent decision Volvo Car Germany GmbH v Autohof Weidensdorf GmbH (C-203/09), the European Court of Justice (hereinafter the “ECJ”) has given a preliminary ruling that Article 18 (a) of the Directive precludes a self-employed commercial agent from being deprived of his goodwill indemnity where the principal establishes a default by that agent which occurred after notice of termination of the contract was such as to justify immediate termination of the contract in question.

Despite its age, the Commercial Agents Directive 86/653/EEC (hereinafter the “Directive”) continues to be interpreted by the Court of Justice of the European Union. There has been a steady stream of decisions from the Court concerning the meaning of its provisions, in particular relating to the agent’s rights in connection with the termination of agency.

The preliminary ruling was given following questions of the German Bundesgerichtshof in a dispute between Volvo Car Germany GmbH and one of its dealers Autohof Weidensdorf GmbH (hereinafter “AHW”).

In the case at hand, a motor dealer’s agency agreement was properly terminated by Volvo giving two years’ notice. After the effective date of termination, AWH claimed a goodwill indemnity as provided for in § 89 b the German Handelsgesetzbuch.

However, during the notice period, the dealer had failed to comply with its contractual obligations under the dealership agreement. The dealer breached the terms of the aforementioned agreement.  Volvo only became aware of the breach after the termination of the dealership. As the breach would haven entitled Volvo to terminate the dealership immediately, had it know, Volvo refused to pay the dealer’s claim for a goodwill indemnity because AWH’s default during the notice period would have entitled Volvo to terminate the dealership with immediate effect under Article 17 of the Directive.

Volvo claimed that as it had grounds to terminate the dealership agreement it could rely on the exemption from the right to pay the Article 17 indemnity or compensation at Article 18 (a) of the Directive.

Article 18 (a) of the Directive states that the indemnity to which a commercial agent may become entitled after termination of the agency agreement according to Article 17 of the Directive, should not be payable where the principal has terminated the agency agreement because of default attributable to the commercial agent which would justify immediate termination of agency agreement under national law.

Although the case reached the ECJ, the decision turned upon the words “because of”. The ECJ determinate that the wording “because of” meant that there had to be a direct causal link between the breach by the agent and the principal’s decision to terminate the agency in order to distinguish the agent’s right to an indemnity or compensation. Any provision in the Directive restricting an agent’s right to termination had to be interpreted narrowly against the principal.

Additionally, the ECJ considered that Article 18 (a) must be interpreted restrictively as an exception to the agent’s entitlement to indemnity.

In the light of the foregoing, the ECJ ruled that Article 18 (a) of the Directive does not allow a commercial agent being deprived of his indemnity where the principal establishes a default by that agent which occurred after notice of termination was given but before the agreement expired and which would have justified immediate termination.

The ECJ added that the possibility cannot be ruled out that the agent’s conduct may be taken account in the assessment made to determine the fairness of an indemnity. Reference was made to the second indent of Article 17 (2) (a) of the Directive which rules that payment of any indemnity must be equitable having regarding all the circumstances.

In the case at hand, it clearly appears that that the termination of the agency was not linked to the breach. However, the ECJ did hint that in calculating the indemnity to which agent was entitled, the German Bundersgerichtshof that made reference to the Court of Justice could perhaps rely on the qualification to the right set out in Article 17 (2) (a) described above.