Under the European Union’s Commercial Agents Directive, agents are entitled to be indemnified or compensated on termination of their agency agreements, except in some limited situations such as when the agreement is terminated by the principal due to a serious breach by the agent. This amounts to large monetary payments, even if the principal has done nothing wrong.
In this case, Volvo gave notice of termination to a German business that, under German law, was to be treated as if it was an agent under the Commercial Agents Directive. Volvo later discovered that the agent had committed a serious breach that would have justified immediate termination of the agreement had the principal discovered it before terminating.
The European Court of Justice has ruled that an agent was still entitled to be paid an indemnity in this case, despite the serious breach, as the right for the principal not to pay the indemnity only applied if the principal actually terminated for serious breach – and not could have terminated.
Although this case seems unfair, the agent in this case may not get much indemnity here. That is because the level of the indemnity is determined by what is equitable in the circumstances. Nevertheless, this ruling does still go to show just what an unfair law the Commercial Agents Directive is for law-abiding principals – having to pay out large sums on termination of a relationship if they have done nothing wrong, and this may apply even if the agent has done wrong. This is even more likely to be the case if – as is the case with many UK agency situations – the agent is entitled to receive compensation rather than indemnity. That is because the requirement for agents to get only what is equitable in the circumstances applies just to indemnity rather than compensation. Anyone thinking that the Commercial Agents Directive is an unfair law would have even more grounds to think that after this case.