In Article 2.167 of the Civil Code of the Republic of Lithuania (hereinafter – the CC of the Republic of Lithuania) it is stated that, at the end of the contract between the commercial agent and the principal, the commercial agent has the right to compensation if, after the termination of the contract, the principal has a substantial benefit from business relations with customers which the commercial agent has found or with which the size of the principal business has considerably increased as a result of the commercial agent. However, in practice there are a number of questions regarding the calculation of the appropriate amount of compensation that should belong to a commercial agent, as well as the cases in which the commercial agent is entitled to compensation.
Right to compensation
The Supreme Court of Lithuania (hereinafter – SCL) has elucidated that for legal relations of commercial agency all of the following elements must be determined:
- the essential function of the commercial agent – to mediate or conclude contracts in the name and expenses of the principal;
- independence of the commercial agent;
- main activity criteria;
- the continuous nature of the commercial agent’s activities;
- remuneration of commercial agent activities.
However, it should be noted that SCL in one of its cases has indicated that Article 2.167 of the CC of the Republic of Lithuania may be applied by analogy to legal relationships which are essentially similar to a commercial agency in cases where the legal position of the representative is functionally and economically comparable to that of a commercial agent. Such a decision of the SCL means that, despite the fact that the contract itself does not meet all the features of a commercial agency, the commercial intermediary may exercise the right to compensation if it is established that the principal has substantial benefits from business relations with the customers found by the agent and such payment of compensation is in accordance with the principle of fairness.
When the right to compensation is divested
A commercial agent shall be divested of the right to compensation where:
- the contract has been terminated on the commercial agent’s initiative except in the cases where the commercial agent terminated a contract due to the unlawful actions of the principal or due to his illness, age or disability which prevent him from discharging his obligations properly;
- the contract has been terminated on the principal’s initiative where the commercial agent was at fault.;
- commercial agent, with principal’s consent transfers his rights and obligations stipulated in the agency contract to the other person.
It is important to note that the commercial agent loses the right to compensation if he does not notify the principal of his intention to exercise this right within one year of the termination of the contract.
Types of compensation
Lithuania, implementing Article 17 of Directive 86/653/EEC, applies two types of compensation to the commercial agent at the end of the commercial agency relationship:
- compensation for a substantial expansion of business relations with customers, which brings considerable benefits to the principal;
- or compensation for damages incurred by the commercial agent after the termination of the contract with the principal.
Upon termination of the contract between the commercial agent and the principal, the commercial agent has the right to a compensation referred to in paragraph 1, unless the parties have agreed that the commercial agent shall be entitled to damages at the end of the contract. Thus, it should be emphasized that the application of the type of compensation depends on the will of the parties in concluding the commercial agency agreement. It should be noted that the waiver of the right to compensation or damages is null and void.
Compensation calculation methodology
The principle of full indemnification applies to the calculation of damages, so the maximum amount of damages is not limited, unlike compensation. The calculation of compensation to a commercial agent in the case of compensation for a substantial expansion of business relations with customers, which brings considerable benefits to the principal, consists of the following three stages:
First stage: the benefit for principal received from doing business with customers found by the commercial agent is assessed. At this stage:
- the number of new customers and the increased volume of business transactions with existing customers are determined. When analysing the volume of business transactions with old customers, it is examined whether the increase in volume is such that it can be economically equivalent to the acquisition of a new customer;
- the total amount of commissions during the last twelve months of the agency agreement is calculated;
- probable period over which the principal will benefit in the future from the agent’s activities is assessed. The distribution of sales power must also be assessed, as the decision of certain customers to use the principal’s services may have been determined by the principal’s reputation, the quality of his services, but not by the actions of the agent.
Second stage: the purpose is to verify that the amount calculated has been correct in the light of all the circumstances of the case. At this stage, it must be borne in mind that compensation is not a sanction for the principal for terminating the contract between the parties, but a benefit obtained which the principal must share with the commercial agent and the following factors must be assessed:
- the importance of the commercial agent’s influence on the conclusion of transactions;
- the circumstances determining the termination of the commercial agency agreement, the period of validity of the commercial agency agreement;
- the social and economic situation of parties.
The latest practice of SCL that is reflected in the case No. e3K-3-8-695/2020 shows that, it is necessary to note that these provisions are intended in cases where the relationship between the parties is classified as purely commercial agency. In other cases where there is a mixed legal relationship between the parties, which has features other than commercial agency, the above-mentioned adjustment criteria may be not applied or applied in conjunction with criteria specific to other legal relationships.
Third stage: the amount of compensation received is compared with the maximum possible amount. In this stage:
– the amount of compensation received after the first two stages is compared with the maximum possible amount;
– the maximum possible amount is calculated in accordance with Paragraph 3 of Article 2.167 of the Civil Code of the Republic of Lithuania.
For more information or consultation on the activities of a commercial agent, the proper conclusion of a commercial agency agreement or the resolution of a dispute between a commercial agent and a principal, please contact the ECOVIS ProventusLaw team.