The Calculation of the Agent (or Exclusive Distributor) Customer Compensation Amount - Calculation Factors
Psarakis LL.M. (mult.), PgCert
Summary: In the field of commercial mediation, the law of compensation for the agent's clientele is of particular interest. This article explains the method of calculating this compensation and provides specific examples regarding the measurement factors.
In the field of commercial mediation, the law of compensation for the agent's clientele is of particular interest. By "customer compensation" we mean the compensation to which the agent is entitled in the event of the termination of his contract for the assignment of the customer list that he has built up over the years of cooperation with the business represented (hereinafter referred to as the business). When a partnership of many years is terminated, it is reasonable for the agent to expect some compensation for the benefits that remain with the business and for the years to come as a result of his efforts. The amount of this compensation is determined on the basis of specific rules and its recognition has been a legislative option of the European Union. The EU, on the one hand, for reasons of uniformity of the law of its Member States, and on the other hand, to protect the position of the representative, adopted Directive 86/653/EEC, which was subsequently incorporated in Greece by Presidential Decree 219/1991. Article 9 of that Presidential Decree provides as follows: "A commercial agent shall be entitled to compensation after termination of a commercial agency contract if and to the extent that during the term of the commercial agency contract he has brought in new customers or significantly advanced business with existing customers and the principal retains substantial benefits arising from business with those customers and the payment of such compensation is fair, taking into account all the circumstances and in particular the commissions lost by the commercial agent and arising from business with those customers".
In particular, the calculation of the customer compensation is divided into three stages:
- Stage A: (a) the new customers brought into the firm are identified; (b) the benefits to be obtained by the firm in the following years are determined on a probabilistic basis; (c) the 'customer turnover', i.e. the percentage of customers who will gradually withdraw over the following years, is determined; and (d) the 'discount' interest is deducted.
- Stage B: the fairness of the nature of the compensation is examined, taking into account various factors that sometimes increase and sometimes decrease the final amount of compensation.
- Stage C: the amount resulting from the two stages above is compared with a maximum amount provided for in the Presidential Decree in question; the lower of these two amounts is the amount finally paid.
In the first stage, the number of new customers introduced by the agent and the extent to which the agent has promoted business with existing customers are ascertained. This is because the amount of the compensation is determined by any benefit that the represented undertaking will derive from the customers introduced by the agent. In order for the agent to be entitled to compensation, the undertaking must retain significant benefits after the termination of the agency agreement; and these benefits must derive precisely from the new customer relationships introduced by the agent, which remain loyal to any new agent, etc. However, it is possible that the number of customers may be very small, even one, if the turnover generated through them is particularly high (e.g. a distributor of a consumer product concludes a sales agreement with a single new customer who happens to be the largest supermarket chain in the country, etc.).
We then need to predict the likely future duration of the benefit of these customers, measured in years; i.e. we will proceed with a prediction of the stability of the customer relationship. In this context, it is natural that a variety of factors will be taken into account, such as constant supplier changes in the given market, etc. For example, the probability of concluding a second contract in the future with a customer for a product with a long life (e.g. a refrigerator with an average life of 10 years) is relatively low (see, however, the exception in the case of the sale of spare parts etc. in the Larissa Court of Appeal decision 29/2005: 'When the dealership's products have a long life, such as cars, customer relationships are maintained by meeting the customer's needs for spare parts and by keeping them informed about new models'). Similarly, dealers in tourist areas with impersonal customers, which change from year to year, will find it more difficult to demonstrate the stability of certain customer relationships, since the customers of one year may be completely different from those of the next. Typically, the duration of customer retention is between 2 and 3 years (of course, depending on the product and the relevant market, it can be as long as 5 or 6 years). Once the new customers have been identified, the gross commission on them for the last 12 months of the agency contract is calculated and this amount serves as the basis for calculating the benefit for the years in which the customer is likely to be retained. Therefore, if the gross commission of new customers in the last 12 months is EUR 50 000 and it is estimated that this new customer base will be maintained for the next 3 years, the benefit, at this stage of the calculation, is EUR 150 000. It is also important at this stage of the forecast to take account of the sales trend, i.e. if the trend in recent years has been highly downward, the dealer cannot easily claim that the customers introduced by him will be maintained at the same level over the next three years.
It is, moreover, reasonable to take into account in the calculation made at this stage any 'customer turnover', i.e. the degree of customer movement depending on the characteristics of the relevant market. Each year a percentage of 'churn' is calculated, which increases over the years. It is assumed that some customers will be lost over time, since customer switching between suppliers in any market is considered a normal occurrence in a free competition economy. The degree of churn is calculated as a percentage on an annual basis and is determined mainly on the basis of historical data (if the firm lost 10 % of its customers in the previous year, it is likely that the same percentage will apply in the following year). It is clear that the degree of churn varies from market to market, but courts have gone so far as to accept rates of 30% or 40% per year.
Finally, we deduct from any benefit the discount interest, as the compensation received by the commercial agent is a one-off payment of an amount which under normal circumstances and without termination of the contract would be received over the next 2-3 years. Similarly, the company is obliged to pay a lump sum which it would normally pay over a longer period of time (usually 2-5 years). The discount rate is determined by the judge on the basis of the interest rates prevailing on the market at the time.
It is important to stress that the amount of compensation does not depend on whether or not the undertaking has actually exploited the customer base in question. It may have been a commercial choice on the part of the undertaking not to appoint a new agent in the territory in question, with the result that it lost sales from that customer base. However, that choice on the part of the undertaking cannot deprive the agent of his compensation, as our courts have already ruled (cf. Supreme Court decision 709/2018: "Nor is it of legal significance that the agent's choice not to continue the commercial cooperation with the customers (new or old) that the agent-distributor had attracted, as is the case when the agent did not appoint an exclusive agent or distributor for the same territory, since in this case the existing possibility of the agent to continue the cooperation with the agent's customers at the time of the termination of the contract is cancelled by the agent's will").
In the second stage we consider the question of the legal nature of the compensation. We must consider various elements of measurement, which may have a reducing or increasing effect on the amount of compensation.
For example, the following factors may have a reducing effect:
(a) any reduced contribution of the distributor to the increase in the customer base due to an already increased awareness of the product, which may be due to, for example, increased advertising costs of the undertaking or to the product already being established on the market due to its particular qualitative characteristics (reliability of the goods). It is logical that the introduction of new customers for a product that enjoys worldwide recognition and advertising is probably due not so much to the distributor as to the firm that has made its product a global attraction (see for example Supreme Court decision 212/2006: '...the first applicant is not the exclusive creator of this clientele, since it was acting within the framework of a commercial and advertising policy organised by the defendant and was marketing goods (cars) of a nationally and globally known type'). However, any high advertising costs incurred by the undertaking do not go so far as to cancel out the amount of the dealer's compensation (cf. e.g. Supreme Court decision 709/2018: "...it is not important that the contractual products are branded and therefore known to the consumer, due to the advertising actions of the agent, in the context of his business activity to promote the sales of these products, since these actions of the agent, when they are made without reference to the agent's business, are not aimed at the marketing of these products through a specific agent, but generally at increasing the demand for the products.
(b) any high costs saved by the agent as a result of the termination of the agreement. For example, high management costs, savings of a high commercial rent that the agent would otherwise have had to pay, or, in the case of sub-representation of services, savings of sub-representation fees that the agent would otherwise have had to pay, etc.
(c) the fact that the termination of the contract was caused by the misconduct of an agent's partner or ancillary personnel. In the latter case, the compensation may even be reduced to zero, depending on the circumstances.
(d) any competitive activity of the agent after the termination of the contract, for example by entering into a cooperation - agency agreement - with a competing undertaking of the represented undertaking. In this case there is a logical risk that the undertaking after termination of the agreement may lose all the benefits of the new customers brought in by the agent for the simple reason that the agent will in many cases be able to transfer them to the new entrant.
The amount resulting from the above calculations may in no case exceed an amount equivalent to one year's remuneration calculated on the basis of the average annual remuneration of the agent over the last five years. In that case, the amount to which the agent is entitled shall correspond to that ceiling.
The European Commission issued a report on this subject in 1996, which also contains specific examples of the calculation of the amount of the commission. The following example is included:
The gross profit
from commissions on new customers of the last year amounts to 50.000€
duration of the benefit from the contributing customers is e.g. 3 years with
a turnover rate of 20% per year.
for the first year
8.000€=32.000€ for the second year
32.000€- 6.400€=25.600€ for the third
So the total
benefit over 3 years is 97.600€
to present value (discount rate), say 10%
So the remaining
amount is 87.840€
the basis of stage B e.g. 10% incremental
If the amount of
107.360€ exceeds the average annual remuneration received by the commercial
agent in the last five years, then it is reduced to the amount of the last
amount - say 100.000€.
agent's compensation for the application of stage C amounts to EUR 100,000
See, respectively, e.g. the decision of the Thessaloniki Court of Appeal of Thessaloniki, number 312/2015: 'Thus, in view of (a) the continuous downward trend of the goods traded by the defendant, (b) the fact that the plaintiff has brought new stable customers with an expected lifetime of customer relations for three years from the termination of the agency agreement to the defendant, which will retain financial benefits from them, (c) the plaintiff's total commissions for the year 2010 amounted to 28. 885,51 and for the first half of 2011 in the amount of EUR 15 214,72 and the total loss of its commissions for the following three years would amount to EUR 20. 220.06 less 40%, i.e. EUR 12 132.03 for the first year, EUR 12 132.03 less 30%, i.e. EUR 8 492.42 for the second year and EUR 8 492.42 less 20%, i.e. EUR 6. 793,94 for the third year, the applicant's fair compensation for the three-year period following the termination of the contract must be fixed at EUR 27 418,39, not exceeding the average annual remuneration received by the applicant over the last five years, which amounts to EUR 35 961,52.