Agent's severance pay. How is it calculated if AEC does not apply?
In cases where no Collective Bargaining Agreements apply to the agency relationship, understanding whether (and how much) severance pay is due to the agent is not at all easy.
In contrast to AECs, which provide for a precise calculation allowing the parties to quantify the severance payment, the Civil Code only provides a ceiling for the level of indemnity, without giving precise guidelines on the method of calculation
Severance pay was introduced at European level by the Directive 86/653EECthen transposed into our legal system most recently with the reform of Legislative Decree 65/1999, which amended the current text of Article 1751 of the Civil Code, which provides as follows:
"Upon termination of the relationship, the principal is obliged to pay the agent an indemnity if the following conditions are met:
- The agent has procured new customers to the principal or has appreciably developed business with existing customers;
- The principal still receives substantial advantages arising from business with such customers;
- The payment of this allowance is fairtaking into account all the circumstances of the case, in particular the commissions that the agent loses and that result from business with such customers."
The judge must therefore, in the first analysis, find on the basis of the preliminary findings, whether the agent has increased the agent's clientele and/or business and, therefore, determine what amount should be owed to the agent, judging according to equity.
In cases where no Collective Bargaining Agreements apply to the agency relationship, understanding whether (and how much) severance pay is due to the agent is not at all easy.
Contrary to the AEC, which provide for a precise calculation that allows the parties to quantify the severance payment, the Civil Code only provides for a ceiling for the level of indemnity, without providing precise guidelines on the method of calculation
- Read also: Severance Indemnity: Art. 1751 of the Civil Code and AEC compared.
The following is a brief analysis of the criteria set out in the Civil Code.
1. The agent's contribution of customers.
The termination indemnity pursuant to Article 1751 of the Civil Code is undoubtedly intended to reward the principal's activity of promoting and developing customers. For this reason, the following must be considered excluded from the scope of applicability of this rulerecruitment and coordination of agentssince the latter, although relevant and very important from an organisational point of view, is only instrumental and ancillary in nature with respect to customer enhancement.[1]
Following this reasoning, not even the mere increase in turnover by the agent can be considered sufficient to prove the acquisition of new customers or the substantial development of those already existing at the beginning of the relationship:[2] it is not sufficient for the agent to prove (cf. Burden of proof in the agency contract) the increase of its commissions over the years, if it also does not diligently indicate the new customers it has brought in. This is stated in case law:
"the request for payment of the indemnity pursuant to Article 1751 of the Civil Code cannot be granted in the event that the applicant generically acknowledge on appeal of the recurrence of the relevant prerequisites, however failing to deduct precisely the volume of business handled for each individual customeras well as to specify the business concluded, the total value of the contracts, any increase over the business concluded with the same client in the preceding year, omitting altogether to indicate which clients he personally took care of."[3]
And again:
"The agent acting pursuant to Art. 1751 of the Civil Code must first prove that he has brought new customers to the principal, or at least that he has increased the turnover of customers who, prior to the commencement of the agency relationship, were already doing business with the principal."[4]
As for the definition of 'new customer", it should be recalled that in 2016 the European Court of Justice,[5] questioned whether it was possible to recognise as such, legal entities which, prior to the granting of the agency mandate, had already established business relations with the principal, but for products different from those covered by the agency contract. In the present case, the agent had received a mandate to sell spectacle frames of different brands from those that had already been marketed by the principal; the Court was therefore asked whether the sale of such new products to existing customers could fall within the civil law definition[6] of 'new client'. The Court stated that;
"are to be regarded as new customers within the meaning of that provision, even though they already had business relations with the principal with respect to other goods, if the sale of the first goods by the agent has required to enter into specific business relationshipswhich it is for the referring court to ascertain."
2. Advantages for the principal arising from the agent's activity.
The second condition laid down in Article 1751 of the Civil Code is that "the principal still receives substantial benefits from doing business with such customers." When analysing this condition, one must certainly understand to which time period reference must be made to verify the existence or non-existence of advantages. According to the best doctrine[7] the wording of the law is quite clear and refers to the situation existing at the time of the termination of the relationship; case law, on the contrary, is not unambiguous on this point, and there is an opposite orientation, which deems it necessary to verify whether the advantages subsist and continue also in subsequent years and, in this sense, excludes the indemnity if the agent is not able to prove judicially the 'retention' of customers even after the termination of the relationship.[8]
Certainly, the agent cannot be negatively affected by the principal's personal choice to opt for transferring the company to others (for a price undoubtedly determined not only by the trade mark, but also by the goodwill, essentially consisting of the customer portfolio), unless, of course, it is established that the increase in customers was due to factors external to the agent.[9]
On the other hand, the condition must be deemed to be fulfilled if the contracts concluded by the agent are contracts of durationas the development of goodwill and the benefits to the principal, even after termination of the relationship, are in re ipsa.[10]
3. The determination of severance pay in equity.
Once the existence of the first two requirements has been ascertained, the judge will have to quantify the allowance in equity. As mentioned above, for the purposes of determining the quantumthe judge is bound to verify compliance with the requirement of equity prescribed by Art. 1751 of the Civil Code, taking into account all the circumstances of the case and in particular the commissions that the agent loses and that result from business with those customers.
It is interesting to note that, while the law clearly identifies the requirements for the agent to be granted the indemnity, for the quantification in equity, the normative reference is not exhaustive and concerns all "the circumstances of the case', identifying, by way of example only, the reference to commissions that the agent loses and that result from business with customers.[11] In this regard, case law holds that the judge must:
"have regard to all those elements that are suitable for an adequate personalisation of the quantum due to the agent"[12] e "may or may not be considered 'fair'in the sense of also compensating for the special merit of the agent emerging from the [emerging] factual circumstances."[13]
"If it does not consider it fair, in the absence of a specific regulation, it must award the agent the differential necessary to bring it back to fairness. "[14]
It is clear that equity is a principle that is difficult to apply in practice. It follows that the non-application of the AEC to the relationship certainly entails greater uncertainty as to the quantification of the severance payment, since this is ultimately left to the sensitivity of the individual judge.
It is also important to recall that the one referred to in Article 1751 of the Civil Code is a typical case of judicial equity and as such can only be criticised in the court of legitimacy from the point of view of the logic and congruity of the reasoningbut not in its amount.[15]
4. Severance pay calculated on the basis of the criteria set by the Commission.
From the above analysis, it appears that the approach of the European directive, which only provides a ceiling for the level of indemnity, without providing precise guidelines as to the method of calculation, has and continues to create great uncertainty. It is clear, therefore, that a clear and precise method, perhaps developed by national jurisprudence, would lead to greater legal certainty, with benefits for both contracting parties.
This issue was also encountered by the same European Commission in its report of 23/7/1996which, aware of this regulatory limitation, prepared a report aimed on the one hand at analysing how European case law has approached this interpretative issue and on the other hand at providing a solution to the member states.
A solution would have been found in the German model (and in particular §89b of the HGB from which the legislation was inspired), taking into account the fact that since 1953 it has provided for the payment of a surplus value allowance, which has given rise to extensive case law regarding the calculation of the latter.
The Commission report goes into detail to analyse the calculation model developed by German case law, to which reference is made in full. For what it is worth, it is important to emphasise the fact that the system developed by German case law was then used as a model for the drafting of AEC calculations and that, therefore, the same system, although very complex, is not completely alien to us.
The Commission, after having analysed the calculation method in an analytical manner, concludes by noting that the model developed by German case law can nevertheless be used as a model to be applied, as this "facilitate a more uniform interpretation of this article."
Italian jurisprudence has, in any case, very rarely followed this model (perhaps also because it was not pushed by the parties' advocates), which at the moment remains almost completely unknown; in any case, there are a number of judgments on the merits that have shared the Commission's position, which deemed it appropriate to quantify the severance indemnity on the basis of the calculation criteria established by the European Commission in its report of 23/7/1996 on the application of Article 17 of Directive 86/653/EEC. [16]
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[1] Cass. Civ. 2018 No. 25740.
[2] On this point see also Bortolotti, Distribution Contracts, p. 386 ff., 2016, Wolters Kluver.
[3] Court of Milan 26.7.2016.
[4] Court of Bari 12.2.2014.
[5] Judgment of 7.4.2016, Case C-314/14, Marchon v. Karaskiewicz
[6] To be more precise, in the definition of 'new customer', of which Article 17 of the European Directive 1986/653 on commercial agentsby Article 4, Legislative Decree No 303 of 10.9.1991, which amended Article 1751 of the Civil Code and replaced it by Article 5, Legislative Decree No 65 of 15.2.1999.
[7] Bortolotti, Distribution Contracts, p. 388.
[8] See Court of Padua 21.9.2012 where the indemnity was denied for lack of orders following the dissolution of the relationship; to the contrary Cass. Civ. 2013 no. 24776 ".Moreover, the utility for the principal is to be assessed at the time of termination of the relationship, the crystallisation of the results obtained by the agent at that time being of relevance. "
[9] Cass. Civ. 2013 no. 24776.
[10] Cass. Civ. 2013 no. 24776.
[11] See Cass. Civ. 2018 no. 21377, Cass. Civ. 2008 no. 23966.
[12] Cass. Civ. 2016 No. 486.
[13] Cass. Civ. 2014 No. 25904.
[14] Court of Appeal Florence 4.4.2012.
[15] Cass. Civ. 2018 No. 25740.
[16] Court of Pescara of 23.9.2014, with comment by Trapani in Agenti&Rappresentanti di commercio no. 2/2015; Court of Bassano del Grappa of 22.11.2008
