Commercial agent in serious breach still entitled to goodwill indemnity

The 1986 Commercial Agents Directive (Article 18(a)) provides that no goodwill indemnity is payable to a commercial agent where the principal has terminated the contract “because of default attributable to the commercial agent which would justify immediate termination of the agency contract” .

Volvo Germany had an agreement with a dealer which provided for termination by giving a specified period of notice. Volvo gave notice as required. The dealer (AWH) claimed a goodwill indemnity. Volvo argued that a substantial breach on the part of AWH, which it had discovered after the notice had been given, meant that AWH was not entitled to a goodwill indemnity. The German Court referred the question to the ECJ.

The ECJ held that words “because of” in Reg 18(a) meant that for the agent to be deprived of his right to an indemnity, there had to be a direct causal link between the agent’s default and the principal’s decision to terminate the contract. So if the principal became aware of the agent’s default after giving notice of termination on some other basis, the agent retained his entitlement to an indemnity. The ECJ softened the blow for Volvo somewhat by pointing out that under Article 17(2)(a) of the Directive, the agent is entitled to an indemnity only “if and to the extent that the payment of that indemnity is equitable having regard to all the circumstances.” The agent’s conduct could therefore be taken into account in the assessment of the fairness of the indemnity award.

There are two anomalies here:

• why should an agent who is entitled to compensation rather than an indemnity (which is the default position in the UK) not be at risk of having his award reduced on grounds of fairness in the same way;
• how come a Volvo dealer (i.e. a re-seller, aka a distributor) was regarded as a commercial agent? The answer, it seems, is that under German law the Agency Directive is applied by analogy to dealers.  Whether that’s permissible is another story … more to follow on that subject shortly.

Case C-203/09 – Volvo Car Germany GmbH v Autohof Weidensdorf GmbH (ECJ First Chamber 28/10/2010)