European Court of Justice Rules on Denial of Indemnity to a Commercial Agent

by Alain Cohen
Director, Ashby Cohen Solicitors, London

The European Court of
Justice (ECJ) has made
a ruling which clarifies
the circumstances
surrounding when a
principal can deny an
agent indemnity or
compensation on the
termination of an
agency agreement.

The ruling concerned a case which
involved the termination of a Volvo
dealership in Germany. Under German law,
a dealership of this kind is treated in the
same way as a commercial agency
agreement, and so is subject to the
Commercial Agents Directive.
Volvo terminated the dealership by giving
the required period of notice stipulated in
the contract.
However, upon termination of the
contract they refused to pay the dealer an
indemnity after they discovered that the
dealer had breached the terms of their
agreement during the notice period.

The breaches would have been sufficient
for Volvo to terminate the agreement
immediately, but they only found out
about the breaches after the contract had
already been terminated by notice.
In determining the case, the ECJ
considered Article 18(a) of the Directive,
which states that indemnity (or
compensation) need not be paid in
circumstances where the principal has
terminated the agency agreement
because of a default of the agent which
would justify immediate termination
under national law.
The ECJ found that Article 18(a) implied
that there has to be a direct causal link
between the breach of contract by the
agent and the principal’s decision to

Therefore in this case, as the
principal’s decision to terminate
the agency agreement was not
related to any breaches, the
indemnity should be paid.
However, principals should not that the
ECJ also suggested in its ruling that the
breaches of contract may be taken into
account when deciding if payment of the
indemnity was equitable, as is required by
Article 17(2)(a) of the Directive.

Agency agreement:

Ashby Cohen Solicitors Ltd
18 Hanover Street
London W1S 1YN
Tel: 0207 408 1338
Fax: 0207 491 0414

Disclaimer: This column does not contain legal advice and is for general guidance only. Agentbase, Ashby Cohen and the writer accept no liability in connection with the general guidance given in this column.

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