Goodwill upon termination of an agency agreement

July 2022

When expanding activities for the sale of products or services abroad, it could be useful to use the assistance of a (commercial) agent. After all, the agent already has knowledge of the local market and a network there, which will benefit sales. The same applies vice versa for a foreign exporter who wants to enter the Dutch or European market. An important aspect of an agency agreement is that upon termination of an agency agreement the agent is entitled to goodwill. Disputes about goodwill regularly arise between agents and their principals.

Dutch law contains the following definition of an agency agreement:

A commercial agency agreement is an agreement whereby one party, the principal, instructs the other party, the commercial agent, and whereby the latter binds himself, to act as an intermediary in the conclusion of contracts for a fixed or an indeterminate period of time and against remuneration, and to conclude such contracts, as the case may be, in the name and for the account of the principal without being his subordinate (Article 7:428 (1) Dutch Civil Code (‘DCC’))

Financial compensation for generated extra turn-over

Irrespective of any potential right to claim damages, the commercial agent is entitled to goodwill at the end of the agency contract, if and when:

• he has brought in new customers for the principal or has significantly expanded the contracts with existing customers and the contracts with these customers still provide substantial benefits to the principal; and
• payment of such remuneration is fair having regard to all the circumstances and in particular to the lost commission in respect of the contracts with these customers.

Before termination of the agreement, parties are not allowed to agree that no goodwill shall be due. Such a clause in a contract will be null and void.

How to verify whether goodwill is due and what the amount of goodwill will be?

Three stages may be distinguished in order to establish whether goodwill will be due.

In the first phase, the benefits to the principal of transactions with customers introduced by the commercial agent must be quantified (Article 7:442 (1) (a) DCC). However, the Supreme Court in the case 'Prijsvrij.nl/Corendon' (ECLI:NL:HR:2017:935) has ruled that before the quantification of the benefit of the principal can be carried out, the agent must demonstrate that the principal can still expect new transactions from customers brought in by him, or from customers with whom he has extended the agreement, to a relevant extent. Thus, the burden of proof for establishing a right to goodwill rests with the agent. If such evidence can be provided, then basically the agent is entitled to a certain amount of goodwill.

In the second phase, it must be assessed whether there is reason to adjust the amount thus determined with a view to fairness, taking into account all the circumstances of the case and in particular the previous commission of the commercial agent; the application of the fairness principle may entail both an increase and a decrease in the amount determined in the first phase (Article 7:442 (1) (b) DCC).

In the third stage it is tested whether the amount resulting from the two previous calculation stages does not exceed the maximum amount referred to in paragraph 2 of Article 7:442 DCC: the amount of the goodwill shall not exceed that of one year's remuneration, calculated on the basis of the average of the last five years or, if the contract has lasted for a shorter period, on the basis of the average of the whole term of the contract. In practice, compensation is often based on this maximum.

Under which circumstances will no goodwill be due?

It is relevant to note that goodwill shall not be due if the contract has been terminated:

• by the principal under circumstances which render the commercial agent liable for damages pursuant to Article 7:439 (3) DCC;
• by the commercial agent, unless such termination is justified by circumstances attributable to the principal, or is justified by age, disability or illness of the commercial agent, on the grounds of which he cannot reasonably be expected to continue his work;
• by a commercial agent who, in accordance with an agreement with the principal, transfers his rights and obligations under the agency contract to a third party.

Time-bar

The right to goodwill lapses if the commercial agent has not notified the principal of his desire to claim goodwill within one year after the end of the contract.

Should you have any questions about the above, please do not hesitate to contact us.