Termination of Commercial Agency Contract Due to Closure of Business Unit Resulting from Increased Energy Costs

30 March 2023 - Michael Fries

For some companies, the rise in energy prices due to the Ukraine war may result in one of their business lines no longer operating profitably and its closure becoming inevitable. In those cases where the goods produced in the affected business division are distributed by a commercial agent, the cessation of the production of goods necessarily entails the termination of the agency contract.

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By virtue of the doctrine of changed circumstances, a terminated commercial agent may be entitled to a customer base compensation upon termination of his/her contractual relationship, calculated on the basis of the average commissions received in the previous five contract years.

It is, however, highly debatable whether the company has to pay compensation to the agent even though the shut-down of the business unit and the associated termination of the agency contract were economically justified.

According to Spanish law, a commercial agent loses his/her right to compensation only if: a) the contractual relationship is terminated by him/herself, b) the company terminates the contract due to a breach of contract on the agent’s part or c) the commercial agent has assigned his/her rights and obligations under the agency contract to a third party.

Neither of these situations applies in the case of termination of an agency contract due to an economically justified closure of a business division. However, the granting of a compensation claim could be precluded by the fact that the termination was based on circumstances of force majeure. It could also be argued that there has been a frustration of contract.

Spanish law understands the concept of force majeure to mean events not regulated by law which either are not foreseeable or are foreseeable but cannot be avoided and for which no one can be held liable. Whether the outbreak of war and thus the increase in energy costs were unavoidable and thus perforce lead to the shut-down of the business unit, which, in turn, inevitably caused the termination of the agency agreement, must be examined on a case-by-case basis and, if necessary, proven in court.

The question if a commercial agent is entitled to compensation, however, can be resolved by a different approach. Even assuming that a commercial agent does not lose his/her claim to compensation for the reasons described above, this claim will, nevertheless, be reduced to zero due to the closure of the business unit and the associated cessation of the distribution of goods, as from that point in time the company is no longer able to derive economic benefits from the commercial agent’s distribution activities. A different interpretation would only apply if the company profitably transferred the customer base acquired by the commercial agent to a third party. In this regard, the situation would be comparable to an agent’s compensation claim in case of company insolvency.