The power of the principal to change the client portfolio of his agent

[:en]With Judgment of 2 July 2015, No 13580the Court of Cassation has ruled on a point that is very often the subject of dispute in contractual relations between agent and principal. The case was as follows: a principal, who had been assigned the power to change the customer portfolio of its agent during the course of the contractual relationship, used this clause, in order to effect a drastic reduction in the agent's customer portfolio of 88% (on this point see also Unilateral changes to the agency contract by the principal).

The Court, which was questioned on the legitimacy of such conduct, noted that although the principal is generically given the power to reduce the customer base of its agent, this power should, however, be exercised primarily for the purpose of adjusting the contract to the actual evolution of the relationship over time. Moreover, again according to the Supreme Court, this power must in any event be subject to limits and be exercised by the holder with fairness and good faith.

The appeal was essentially based on the allegation of breach and/or misapplication, by the principal, of theArticle 2 A.E.C. 2002 (collective economic agreements) and Article 2697 of the Civil Code. Paragraphs 3, 4 and 5 (relevant here) of Article 2 A.E.C. 2002 read as follows:

“Zone variations (territory, clientele, products) and the amount of commissions, except in minor cases (meaning reductions of up to five per cent of the value of the commissions accruing to the agent or representative in the calendar year preceding the variation, or in the twelve months preceding the variation if the preceding year has not been worked in full), may be implemented upon written notice to the agent or representative to be given at least two months in advance (or four months in advance in the case of agents and representatives engaged in business exclusively for one company), unless the parties agree in writing to a different commencement date.

If these changes are of such a magnitude as to appreciably alter the economic content of the relationship (appreciable variation being understood as reductions greater than twenty per cent of the value of the commissions accruing to the agent in the calendar year preceding the variation, or in the twelve months preceding the variation if the preceding year was not worked in full), the written notice shall not be less than that provided for the termination of the relationship.

If the agent or representative communicates, within 30 days, not to accept changes that significantly alter the economic content of the relationship, the communication of the principal shall constitute notice of termination of the relationship of agency or representation, at the initiative of the principal“.

It follows from reading this article, therefore, that the principal is conferred a potestative right, consisting in the possibility of decreasing his agent's clientele. In that case, if the agent communicates that it does not accept the decreases imposed on it by the principal, a just cause for terminationwhich allows the principal to terminate the contractual relationship without having to pay the agent the termination indemnity pursuant to Article 1751 of the Civil Code.

However, this potestative right is, according to settled case law, also subject to the general principles of our legal system, of fairness and good faithin the performance of the contractual relationship, governed precisely by Articles 1175, 1375 and 1749 of the Civil Code (cf. Cass. no. 9924/09).

Moreover, the Court itself referred to a guideline of its own (cf. Cass. 5467/2000), according to which, in general, in an agency contract, the granting to the principal of the power to amend certain clauses (in particular those relating to the territorial scope and the amount of the commission) should 'be justified by the need to better adapt the relationship to the needs of the parties as they have changed over time'.

The use of potestative powers, therefore, must not, however, result in a substantial circumvention of contractual obligations and must therefore be limited and subject to the principles of fairness and good faith.

The Court concluded, stating that in the present case, the principal essentially used and disguised its own potentative rightthe purpose of reducing, precisely, the clientele of its agent, in order to put the latter in a de facto situation impossible to accept and, therefore, with the purpose and function of having the contractual relationship terminated, without the obligation to pay the indemnity in lieu of notice arising.

Finally, it is recalled that the Court has already referred numerous times to the principle of acting in good faith pursuant to Article 1375 of the Civil Code. On other occasions it has, for example, considered contrary to this principle the conduct of the principal who had made a radical change in pricing policyso as to make it effectively impossible for the agent to operate (cf. Cass. Civ. 1995 No. 1142), the refusal unconditionally and systematically of make garlic course orders transmitted by the agent (Court of Cass. Civ. 1985 No. 6475), replace the agent during the notice period, at the same time informing the customers (Cass. Civ. 1991 No. 1032).[:de]With Judgment of 2 July 2015, No 13580the Court of Cassation has ruled on a point that is very often the subject of dispute in contractual relations between agent and principal. The case was as follows: a principal, who had been assigned the power to change the customer portfolio of its agent during the course of the contractual relationship, used this clause in order to make a drastic reduction in the agent's customer portfolio, amounting to 88%.

The Court, which was questioned on the legitimacy of such conduct, noted that although the principal is generically given the power to reduce the customer base of its agent, this power should, however, be exercised primarily for the purpose of adjusting the contract to the actual evolution of the relationship over time. Moreover, again according to the Supreme Court, this power must in any event be subject to limits and be exercised by the holder with fairness and good faith.

The appeal was essentially based on the allegation of breach and/or misapplication, by the principal, of theArticle 2 A.E.C. 2002 (collective economic agreements) and Article 2697 of the Civil Code. Paragraphs 3, 4 and 5 (relevant here) of Article 2 A.E.C. 2002 read as follows:

“Zone variations (territory, clientele, products) and the amount of commissions, except in minor cases (meaning reductions of up to five per cent of the value of the commissions accruing to the agent or representative in the calendar year preceding the variation, or in the twelve months preceding the variation if the preceding year has not been worked in full), may be implemented upon written notice to the agent or representative to be given at least two months in advance (or four months in advance in the case of agents and representatives engaged in business exclusively for one company), unless the parties agree in writing to a different commencement date.

If these changes are of such a magnitude as to appreciably alter the economic content of the relationship (appreciable variation being understood as reductions greater than twenty per cent of the value of the commissions accruing to the agent in the calendar year preceding the variation, or in the twelve months preceding the variation if the preceding year was not worked in full), the written notice shall not be less than that provided for the termination of the relationship.

If the agent or representative communicates, within 30 days, not to accept changes that significantly alter the economic content of the relationship, the communication of the principal shall constitute notice of termination of the relationship of agency or representation, at the initiative of the principal“.

It follows from reading this article, therefore, that the principal is conferred a potestative right, consisting in the possibility of decreasing his agent's clientele. In that case, if the agent communicates that it does not accept the decreases imposed on it by the principal, a just cause for terminationwhich allows the principal to terminate the contractual relationship without having to pay the agent the termination indemnity pursuant to Article 1751 of the Civil Code.

However, this potestative right is, according to settled case law, also subject to the general principles of our legal system, of fairness and good faithin the performance of the contractual relationship, governed precisely by Articles 1175, 1375 and 1749 of the Civil Code (see Court of Cassation No. 9924/09).

Moreover, the same Court referred to its own orientation (see Court of Cassation 5467/2000), according to which, in general, in an agency contract, the granting to the principal of the power to amend certain clauses (in particular those relating to the territorial scope and the amount of the commission), should "be justified by the need to better adapt the relationship to the needs of the parties, as they have changed in the course of time".

The use of potestative powers, therefore, must not, however, result in a substantial circumvention of contractual obligations and must therefore be limited and subject to the principles of fairness and good faith.

The Court concluded, stating that in the present case, the principal essentially used and disguised its own potentative rightthe purpose of reducing, precisely, the clientele of its agent, in order to put the latter in a de facto situation impossible to accept and, therefore, with the purpose and function of having the contractual relationship terminated, without the obligation to pay the indemnity in lieu of notice arising.

Finally, it is recalled that the Court has already referred numerous times to the principle of acting in good faith pursuant to Article 1375 of the Civil Code. On other occasions it has, for example, considered contrary to this principle the conduct of the principal who had made a radical change in pricing policyso as to make it effectively impossible for the agent to operate (cf. Cass. Civ. 1995 No. 1142), the refusal unconditionally and systematically of make garlic course orders transmitted by the agent (Civil Cass. 1985 No. 6475), replace the agent during the notice period, at the same time informing the customers (Civil Cass. 1991 No. 1032).[:en]With Judgment of 2 July 2015, No 13580the Court of Cassation has ruled on a point that is very often the subject of dispute in contractual relations between agent and principal. The case was as follows: a principal, who had been assigned the power to change the customer portfolio of its agent during the course of the contractual relationship, used this clause in order to make a drastic reduction in the agent's customer portfolio, amounting to 88%.

The Court, which was questioned on the legitimacy of such conduct, noted that although the principal is generically given the power to reduce the customer base of its agent, this power should, however, be exercised primarily for the purpose of adjusting the contract to the actual evolution of the relationship over time. Moreover, again according to the Supreme Court, this power must in any event be subject to limits and be exercised by the holder with fairness and good faith.

The appeal was essentially based on the allegation of breach and/or misapplication, by the principal, of theArticle 2 A.E.C. 2002 (collective economic agreements) and Article 2697 of the Civil Code. Paragraphs 3, 4 and 5 (relevant here) of Article 2 A.E.C. 2002 read as follows:

“Zone variations (territory, clientele, products) and the amount of commissions, except in minor cases (meaning reductions of up to five per cent of the value of the commissions accruing to the agent or representative in the calendar year preceding the variation, or in the twelve months preceding the variation if the preceding year has not been worked in full), may be implemented upon written notice to the agent or representative to be given at least two months in advance (or four months in advance in the case of agents and representatives engaged in business exclusively for one company), unless the parties agree in writing to a different commencement date.

If these changes are of such a magnitude as to appreciably alter the economic content of the relationship (appreciable variation being understood as reductions greater than twenty per cent of the value of the commissions accruing to the agent in the calendar year preceding the variation, or in the twelve months preceding the variation if the preceding year was not worked in full), the written notice shall not be less than that provided for the termination of the relationship.

If the agent or representative communicates, within 30 days, not to accept changes that significantly alter the economic content of the relationship, the communication of the principal shall constitute notice of termination of the relationship of agency or representation, at the initiative of the principal“.

It follows from reading this article, therefore, that the principal is conferred a potestative right, consisting in the possibility of decreasing his agent's clientele. In that case, if the agent communicates that it does not accept the decreases imposed on it by the principal, a just cause for terminationwhich allows the principal to terminate the contractual relationship without having to pay the agent the termination indemnity pursuant to Article 1751 of the Civil Code.

However, this potestative right is, according to settled case law, also subject to the general principles of our legal system, of fairness and good faithin the performance of the contractual relationship, governed precisely by Articles 1175, 1375 and 1749 of the Civil Code (see Court of Cassation No. 9924/09).

Moreover, the same Court referred to its own orientation (see Court of Cassation 5467/2000), according to which, in general, in an agency contract, the granting to the principal of the power to amend certain clauses (in particular those relating to the territorial scope and the amount of the commission), should "be justified by the need to better adapt the relationship to the needs of the parties, as they have changed in the course of time".

The use of potestative powers, therefore, must not, however, result in a substantial circumvention of contractual obligations and must therefore be limited and subject to the principles of fairness and good faith.

The Court concluded, stating that in the present case, the principal essentially used and disguised its own potentative rightthe purpose of reducing, precisely, the clientele of its agent, in order to put the latter in a de facto situation impossible to accept and, therefore, with the purpose and function of having the contractual relationship terminated, without the obligation to pay the indemnity in lieu of notice arising.

Finally, it is recalled that the Court has already referred numerous times to the principle of acting in good faith pursuant to Article 1375 of the Civil Code. On other occasions it has, for example, considered contrary to this principle the conduct of the principal who had made a radical change in pricing policyso as to make it effectively impossible for the agent to operate (cf. Cass. Civ. 1995 No. 1142), the refusal unconditionally and systematically of make garlic course orders transmitted by the agent (Civil Cass. 1985 No. 6475), replace the agent during the notice period, at the same time informing the customers (Civil Cass. 1991 No. 1032).[:]