Termination for Cause of Intermediary Agreements: the examples of Commercial Agency, Exclusive Distribution and Franchise Agreements

Legal Insight

March 2022

Daphne Sfyri, LL.M

Summary: Any continuing contract, such as mediation contracts, requires for its smooth functioning the existence of a relationship of trust between the parties. Any action which disturbs the trust between the parties and makes it objectively intolerable for the cooperation to continue gives rise to the right to terminate the contract for cause before the contractually fixed period has elapsed. The existence or non-existence of good cause for termination, as well as the attribution of the good cause to the fault of one of the contracting parties, directly affects the relevant rights to compensation.

The right of extraordinary termination, i.e. the right of each party to prematurely terminate a lasting relationship, breaks the fundamental principle of our legal system "pacta sunt servanda". Simply put, agreements must be honoured. Termination for cause is expressly provided for in the law for certain contracts: From the spirit of these provisions (e.g.: 672 CC, 766, 797 CC) and from good faith, a general principle of law is derived, according to which it is possible to terminate immediately any continuing contract, whether it is of fixed or indefinite duration, even if this right is not expressly provided for in the law or the contract, when the continuation of the contract until the contractually fixed time or any period of ordinary termination provided for has become intolerable.

Typical examples of continuing contracts are the so-called intermediary contracts, i.e. agency, exclusive distribution and franchise contracts. The parties to a continuing obligation undertake contractual obligations which are not performed instantaneously but extend over time. For example, in a sales contract, the seller undertakes to transfer ownership and the buyer to pay the price. The duration of performance of both contractual performances is instantaneous. By contrast, the obligations of the parties to so-called intermediary contracts are of a duration and extend over time, which gives rise to new needs (e.g. the need for immediate release from a problematic long-term partnership) and directly affects the law of termination.

Before analysing the issues involved in the termination of mediation contracts, the most important features of mediation contracts are briefly outlined:

A commercial agency contract is a continuing contractual relationship whereby a third party, called a commercial agent, undertakes, for a fee (commission), on a permanent basis (for a fixed or indefinite period), in the capacity of an independent intermediary, either to negotiate on behalf of the principal the sale or purchase/provision of goods/services or to negotiate and conclude these transactions in the name and on behalf of the principal. The latter element distinguishes the commercial agency contract from distribution and franchising contracts, since the distributor/franchisee, as will be explained below, acts in his own name and on his own account, assuming all the risks of the transactions involved. In contrast to other persons who enter into a contract with the entrepreneur on an occasional basis, as is the case with momentary contracts (e.g. a sales contract), the partnership between the commercial agent and the principal is a permanent partnership and therefore, by its very nature, it follows that the existence of trust between the parties is a crucial element for the smooth functioning of the commercial agency contract.

An exclusive distribution contract is a special kind of permanent contract of obligation, during which one party (the supplier) is obliged to sell the contract goods to the other (the distributor), which the latter then resells them to third parties in his own name, for his own account and at his own risk. The distributor has the obligation to promote the supplier's interests, while the supplier integrates the distributor into its commercial organisation in the sense of exercising supervision and control.

A franchise contract is a continuous contract between two parties, the franchisor and the franchisee, under which the franchisor grants the franchisee a set of distinctive features and constantly renewed know-how and provides the franchisee with a set of services through the exercise of continuous control, The franchisee must pay the franchisor the agreed remuneration and follow the franchisor's instructions.

It should be made clear at this point that the classification of the legal nature of a contract (e.g. a commercial agency contract or a distribution or franchise contract) is not determined by the classification given by the parties to the contract in the contractual text, but it is the person who applies the law, i.e. the judge, who will make the legal classification of the contract based on the nature and extent of the obligations assumed by the parties to the contract and, by extension, will impose the corresponding legal consequences.

Subsequently, the conditions for terminating mediation contracts are specified, as well as the main consequences of their termination: 

Initially, the commercial agency contract is governed by Decree 219/91: "On Commercial Agents in compliance with Directive 83/653/EEC of the Council of the European Communities". In the case of commercial agency contracts of indefinite duration, termination occurs upon termination without prior notice but upon the existence/proof of good cause or due to a breach of contract (extraordinary termination) or upon compliance with a deadline (Art. 8 par. 4 of Decree No 219/91: the period of notice is one month for the first year of the contract, two months from the beginning of the second year, three months from the beginning of the third year, four months from the beginning of the fourth year, five months from the beginning of the fifth year and six months from the beginning of the sixth and subsequent years) without good cause (ordinary termination). It should be noted that the right to early termination of the contract for good cause is derived from the interpretation of Article 8 para. 8 of Decree 219/91 ('A commercial agency contract may be terminated at any time and without observing the time limits set out in paragraph 4 in the event that one of the parties fails to perform all or part of the contractual obligations and in the event of exceptional circumstances'), in conjunction with the above general principles of our legal system, while in the case of unregulated distribution and franchising contracts the principle of good faith is invoked.

Therefore, in the case of termination of the contract due to termination for cause, the commercial agent - recipient of the termination is entitled (under strict conditions) after the termination of the commercial agency to customer compensation, while he loses the right to compensation for any further damage based on the general provisions (e.g. loss of profit), as well as compensation for the damage suffered (general provisions of the CC). However, if the good cause for the termination of the contract is attributable to the agent's fault, the relevant right to customer compensation is also lost (for more information on how customer compensation is calculated, see here). As regards the legal nature of customer compensation, it is accepted that it is a kind of reasonable compensation/peculiar claim for remuneration for the services provided by the agent and for his contribution to the creation of a stable customer base that remains with the principal. It is also important that the commercial agent is obliged to duly inform the principal within one year of the termination of the contract that he will exercise his right to customer compensation, otherwise the right to customer compensation is permanently lost.

The exclusive distribution contract is not regulated by specific provisions. However, it has been consistently accepted by case law that both Decree-Law 219/91 and the provisions of the CC on mandate apply by analogy. The aforementioned jurisprudential direction was also reflected in legislation in Article 14 para. 4 of Law 3557/2007 (The provisions of Decree Law 219/1991, as in force, shall apply to contracts accordingly: {....} b) exclusive distribution, if, as a consequence of this contract, the distributor acts as part of the supplier's commercial organisation). 219/91 and for the (exclusive) distributor to be entitled to customer compensation, the (exclusive) distributor must act as part of the supplier's commercial organisation: the (exclusive) distributor must follow the supplier's instructions, contribute significantly to the expansion of the supplier's customer base, not compete with the supplier, the supplier must be informed of the distributor's customer base and, indeed, after the termination of the distribution contract, the customers must be transferred to the supplier. It should be noted, however, that a simple distributor, i.e. a distributor who sells not only the supplier's products but also products competing with his own, does not enjoy the protection of Decree-Law 219/91, i.e. the protection of the exclusive distributor and the commercial agent. 

It is also accepted that, on the basis of the principles of equality and good faith, it is possible to apply the provisions of the Decree, in whole or in part, on a proportional basis. 219/91 to the franchise contract but also to those commercial intermediary contracts which have the essential characteristics of a commercial agency contract: that is to say, if the intermediary function of the franchisee is similar to that of a commercial agent to such an extent that it is identical in its essential elements, which is the case when the professional assumes obligations similar to those of a commercial agent under the contract (4 par. 1 of P. Decree No 219/1991) and in particular (a) to refrain from competitive acts to the detriment of the franchisor during and after the expiry of the contract, (b) to observe professional secrecy, (c) to promote the franchisor's products permanently and exclusively in the area of responsibility of the franchisor, (d) to advertise the products sold, even at his own expense, and (e) to inform his principal of his clientele. It is precisely the agreement on these obligations, which do not necessarily have to be cumulative, but may be interchangeable, so that the absence of one of them is covered by the particular intensity of the others, that makes the franchisee an integral and decisive part of the franchisor's business network, since the franchisor's commercial activity, although it is developed at his own risk, also brings immediate benefits to the franchisor, since the latter does not only derive economic benefits from the fulfilment of his business activities, but also from the sale of his products.

In the light of the foregoing, therefore, the considerations set out above concerning the termination of a commercial agency agreement also apply to exclusive distribution and franchising agreements under the conditions set out above.

As regards in particular the question of good cause for termination of agency contracts, the following points are important: firstly, it is of the utmost importance to define the vague legal concept of 'good cause', since the existence or otherwise of good cause directly affects the rights of the parties. More specifically, good cause for termination exists when there are exceptional circumstances or when one of the contracting parties defaults on obligations so essential that it becomes intolerable for the other party, in accordance with the principles of good faith, to continue the contract until its termination, in accordance with the terms dictated by it (CC 778/2019).

Some case law examples are then cited, which accept the existence of good cause for the termination of a mediation contract and define its meaning:

a) The violation of a term of the exclusive distribution contract accidentally drawn up between the parties, according to which he was obliged to return to the Supplier the unused - expired products, so that on the one hand they could be destroyed and on the other hand, in view of the agreement of the parties for a cap on the amount of these (returns), to be liquidated (Athens Court of Appeal, 1308/2021).

b) The culpable unilateral (without agreement) intervention in the contract resulting in a reduction of the fee (Athens Court of First Instance 1618/2016) or an increase in the cost of operating the contract (Single-Member Court of Appeal).

c) An increase in the selling prices of the contract goods from the agent/supplier to the commercial agent/distributor ( SC 751/2019).

d) Violation of the exclusivity clause and the non-compete obligation (SC 455/2015, Single Court of Appeal 249/2020).

e) The constant irritability and professional incompetence of the commercial agent/representative, the failure to regularly seek customers.

f) The unsupported accusation against the agent/representative such as the accusation of embezzlement/theft/general commission of crimes.

g) The culpable failure of the agent/supplier to meet its contractual obligations.

h) Repeated failure to settle/pay the agent's commissions on time, failure to deliver the goods on time (Athens Court of Appeal 811/2016).

i) The merger of limited liability companies does not in itself entail the automatic termination of the (sub)agency agreement. The commercial agent, however, reserves the right to terminate this contract when the merger negatively alters his financial data or undermines the relationship of mutual trust (N. Nika, The fate of commercial (sub)agency upon merger of joint stock companies).

j) The bankruptcy of an agent/representative.

k) Acts of unfair competition on the part of the parties (Single Judge Court of Appeal 1977/2021).

Especially in the latter case, where there is good cause for complaint: the closer the links between two partners, the more necessary it becomes to ensure a climate of mutual trust throughout the period of cooperation between them. Consequently, especially in the case of long-term contracts such as the one in question, close cooperation and loyalty between the parties become very important. Otherwise, such cooperation is doomed to fail from the outset, since the legal basis of the contract is essentially undermined. What happens, therefore, when this relationship of trust is broken. Does the principal have the right to terminate the commercial agency contract or must he wait until the problematic partnership is dissolved, as provided for in the contract or in accordance with the legal formalities? In the decision of the Athens Court of Appeal (no. 1996/2021) it was held: " {...} this court considers that there is good cause and exceptional circumstances for such termination. This is because it was proved with certainty that after the withdrawal of the above significant partner {..." from the plaintiff and the already reduced performance of the latter in new connections {...} a reasonable suspicion of possible cooperation of other partners of the plaintiff with the above competing company (as it happened, even after the termination) and certainly distrust regarding the ability of the plaintiff to cooperate in the future with the first defendant". Thus, therefore, the court held that the represented party had good cause to terminate the commercial agency agreement at issue, even though the breach of trust did not (necessarily) amount to fault on the part of the commercial agent. It is therefore sufficient for the objective fact of a breach of trust on the part of one of the parties to be sufficient for the contract to be terminated for cause.

When weighing the existence of good cause or not, a multitude of factors are taken into account, as they have been developed by case law and theory: first, the more central/confidential the role of a person in a legal person, the more serious his or her misconduct is. The closer the personal bond between the parties, the greater the claims between them. The greater the degree of dependency one party displays on another, the greater the loyalty obligations of the stronger party. The longer this relationship lasts, the greater the intensity of the trust bond increases. In other words, the more trust there is in a relationship, the more easily it can be terminated if it is shaken. The specifics of the case, therefore, will "illuminate" and indicate to each party how the case should be handled and how the case should be handled.

Finally, if the complainant (for good cause) unilaterally interferes with the legal sphere of the recipient of the complaint by premature termination of the mediation contract, he is entitled to exercise this right only if it is absolutely necessary for the defence of his objectives. In other words, if the desired change in the behaviour of the other party to the infringement can be achieved by pointing out the infringement under the threat of legal consequences, then termination will not be the means necessary in accordance with the principle of proportionality to protect the interests of the complainant. Therefore, it should be considered, before any mediation contract is terminated for cause, whether a (warning) Letter of Formal Notice - Extrajudicial Declaration should be sent to invite the "infringer" to comply.

In conclusion, where events have occurred which have disrupted the operation of a mediation contract and the damage to the contractual relationship is so serious that it is extremely unlikely that it will function properly in the future, it is possible to terminate a mediation contract immediately for cause. The complainant must, however, exercise due diligence, since untimely and unjustified termination of a mediation contract gives rise to liability for damages to the recipient of the (untimely) termination, and the recipient of the termination must defend his rights within the statutory time limits.  Finally, it should be made clear that the aim of this article has from the outset been to inform the parties to mediation contracts of the legal framework in force and can in no way be regarded as a complete guide to the complex legal issues involved in terminating such contracts.