Originally published in Ukrainian Law Firms 2006
The enlargement of the European Union and changing economic and political environments make the use of commercial intermediary agreements to trade across national boundaries increasingly important. Today, a manufacturer sells his products internationally in three ways: (1) by selling them from its origin country to a foreign country, dealing directly with customers through its own sales force or through independent sales forces in its country, (2) by entering into agency or distribution contracts with independent intermediaries in foreign countries, or (3) by creating its own foreign business to sell or even manufacture its products overseas. Intermediary companies e.g. commercial agents, sales representatives, distributors, exclusive importers as well as occasional intermediaries, brokers etc. help to start up businesses seeking to expand to large multinational corporations looking for a market, a particular product or service as well as large manufacturers to expand into a certain market. Therefore, the number of companies offering goods and services for cross border trade using third party relationships as a distribution mechanism is growing increasingly. The indicated third party relationships may be divided into two main groups: commercial agency and distribution.
The "reefs aspect" of any international agency or distribution contract is a foreign law, as almost every state has mandatory legal provisions in the area of agency and distribution contracts. Though many manufacturers specify that their national law will govern contracts with foreign agents or distributors, they can face, as soon as a dispute arises, the fact that most states do not recognize agency or distribution contract clauses providing the application of foreign law if that foreign law contradicts the public policy of their own state.
For example, almost all EU Member States require that an agent whose contract is not renewed be paid both an indemnity (that is, compensation for any market development of the manufacturer's product) and damages (to compensate, for example, for the agent's investment in the sales business if it has not been completely recouped). These payments are required not only regarding contracts with a definite ending date but also if contracts specify that the agency existed only for a limited term. No breach or improper termination by the manufacturer is relevant to that payment. These laws are mandatory in the countries where the agents have their place of business. Provisions that Ukrainian law will govern the rights and liabilities of the parties to agency contract with one party being an agent of EU Member States, and that the agent will not receive any compensation on no renewal of the contract, will not exempt a manufacturer from mandatory regulations. Besides, ignoring mandatory law can have even more serious legal consequences as national legislation can provide for penalizing a foreign manufacturer with monetary sanctions for including unenforceable provisions in their agency or distribution contracts.
In one practical situation, a German company (the principal) has concluded agency agreements with several commercial agents in Ukraine. The agency agreements were governed by German law and provide that the agent shall not have a right of indemnity or compensatory claim for loss of clientele after termination of the agency agreement. The said clause is based on § 89 b and § 92 c subsection 1 of the German Commercial Code — HGB1, which sets out that the compensatory claim cannot be excluded in advance, except for cases if the commercial agent works outside the European Union and outside the European Economic Communities.
"§ 89 b Compensatory Claim
(1) After termination of the contractual relationship the commercial agent has the right to demand against the principal a reasonable compensation if and as far as
1. even after the termination of the agency agreement the principal benefits considerably from the business connection with new customers which were canvassed by the commercial agent,
2. due to the termination of the agency agreement, the commercial agent loses his claim for commission he would have had if the agency agreement had been continued for past or future transactions with customers he canvassed, and
3. the payment of such compensation is, in the light of all the
relevant circumstances, fair and reasonable.
It is considered to be equivalent to the canvassing of a new
customer if the commercial agent has expanded the business
connection with a customer so substantially that commercially this
is equal to the canvassing of a new customer
...
(4) This claim may not be excluded in advance. It must be asserted within one year of termination of the contractual relationship."
Notwithstanding the said clause, after the termination of the agency agreements Ukrainian commercial agents demanded compensation referring to common practice in Germany to interpret § 92 c subsection 1 HGB restrictively i.e. to allow exclusion of a compensatory claim only in cases where the legislation of the country in which the agent works does not contain provisions similar to § 89 b HGB. Therefore, according to Ukrainian agents the enforceability of the "exclusion clause" shall depend on whether Ukrainian legislation contains agent protective provisions, which would be similar to § 89 b HGB, and Ukrainian legislation must be considered irrespective of the fact that the agency contract in question is governed by German law. In his turn the principal claimed that Ukrainian legislation contains no agent protective provisions similar to § 89 b HGB.
The problem becomes much more complicated taking into account the fact that the institution of commercial agency is a rather new one for Ukrainian legislation. In addition, Ukrainian courts have not established a firm practice of ruling and interpretation on the matter of payments to commercial agents. Provisions of the Commercial Code of Ukraine regulate the general issues regarding a commercial agency. Actually, Chapter 31 of the Commercial Code can be treated as being related to payments under agency agreements.
First of all, attention must be paid to Article 297 of the Commercial Code (Subject of Agency Agreement). It provides, in particular, that the agent agreement shall determine the rights and obligations of parties, terms and amount of fees of the commercial agent, sanctions applied in case of breach of the agreement by parties, other necessary provisions determined by parties. In fact, the said article neither deals directly with matters of compensatory claim in case of termination, nor does it clearly provide that a compensatory claim can or cannot be excluded in advance. Therefore, under certain circumstances, where Ukrainian law would be applicable to an agency agreement, the mentioned provision can be interpreted as one not depriving the parties of the right to agree upon exclusion of compensatory claims.
Article 303 of the Commercial Code concerns the issues of liability for violation of the agency agreement. In case of violation of the agent agreement by the principal, the commercial agent is entitled to receive the fee in the amount envisaged by the agent agreement and compensation of losses resulting from the failure to fulfill or improper fulfillment of the agreement by the other party. Notwithstanding the fact that the latter distinguish between fees due to the agent under agency agreement and compensation of damages suffered by the agent in case of violation of agreement y the principal, it shall not be treated as an institution similar to indemnities provided for by § 89 b HGB.
Thus, Ukrainian legislation does not provide for the institution of indemnity and does not contain provisions on the possibility of, and criteria for, the latter similar to those provided for by § 89 b HGB. Neither does Ukrainian legislation contain provisions, which would clearly provide that a compensatory claim can or cannot be excluded in advance. Therefore, Ukrainian law provides no exact answers to the issues raised.
The said example illustrates only one issue of third party relationships as a vertical distribution mechanism not regulated by Ukrainian legislation or court practice. However, any person who has ever worked as an agent or in distribution and franchising in Ukraine, will confirm the absence of law related to numerous matters in the field. Thus, the case described may be regarded as the "first robin" of numerous coming cases. Logic dictates that the gaps in legislative regulations and vague legislative provisions should be eliminated in the near future in order to enable the Ukrainian and foreign business community to use the advantages of third party relationships as a vertical distribution mechanism in domestic and cross border trade without any doubts as to the validity and enforceability of agreements which have been concluded.
Footnote
1. Deutsches Handelsgesetzbuch — German Commercial Code
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