Among the commercial distribution contracts, the agency contract is one of the most widely used by companies that want to distribute their products or services in Spain without setting up a company or a subsidiary. The termination of this contract, however, may be subject to the so-called customer compensation.
Law 12/1992, of 27 May 1992, on Agency Contracts (LCA) regulates the agency contract in Spain. Article 1 of the Law defines an agency contract as a contract whereby a natural or legal person (the agent), engages continuously vis-à-vis another (the entrepreneur), for remuneration, to promote, or to promote and conclude, commercial acts or transactions on behalf of and in the entrepreneur’s name, as an independent intermediary, without assuming, unless otherwise agreed, the risk and chance of such transactions.
When drafting an agency contract, besides the commercial terms, it is important to bear in mind that the application of the LCA is mandatory, unless the relevant regulations state otherwise. The LCA rules governing the indemnities provided in favour of the agent in case of termination of the agency contract are mandatory. These are the customer compensation and the compensation for damages.
Customer compensation is the most characteristic feature of the agency contract and is mandatory. Agreements between the parties cannot limit or eliminate it.
Article 28 of the LCA states that, upon the termination of an agency contract, even by death or declaration of the agent’s death, the agent is entitled to customer compensation if during the duration of the contract he/she:
- Brought in new customers, or
- Significantly increased business with existing customers.
Provided that, in either case:
- The agent’s activity during the term of the contract was likely to continue to produce substantial advantages, and
- It is equitably appropriate:
- For the existence of agreements limiting competition,
- For the commissions lost by the agent, or
- Other circumstances.
These requirements must be interpreted according to the circumstances of each case. Case law contemplates, for example:
- The effort made by the agent
- The difficulty of bringing in new customers, or
- The entrepreneur’s prestige before the agent started working.
Quantification of the customer compensation
There is no formula for calculating customer compensation, and each specific case will undergo an analysis on a case-by-case basis. In the words of the Supreme Court, it is a matter of making an equity judgement.
The LCA only stipulates that such compensation may not exceed the average annual amount of the remuneration received by the agent during the last five years or its entire duration if it is less than five years.
Any contractual clause limiting the amount of such compensation shall be void and with no effect.
Cases of the non-existence of the right to indemnity
Article 30 of the LCA lists some instances that do not entitle the agent to compensation:
- When the entrepreneur has terminated the contract because of a breach of the statutory or contractual obligations by the agent
- When the agent has terminated the contract, unless the termination relies on circumstances attributable to the entrepreneur, or on the age, disability or infirmity of the agent and he/she cannot reasonably be required to continue his/her activities
- When the agent has assigned his rights and obligations under the agency contract to a third party (with the entrepreneur’s consent).
According to article 31 of the LCA, the action and the right of the agent to claim customer compensation or indemnity for damages are time-barred after one year from the termination of the contract.
This article is not considered legal advice