What is an Agency Agreement? The Agent’s Right to Equalisation Compensation when the Contract is Terminated
Agents, who are indispensable actors of commercial life, play a key role in bringing products and services to the market by intermediating commercial transactions in a certain geographical area on behalf of and on account of a principal (producer, provider), or by performing these transactions directly on behalf of the principal. This relationship is legally established with the “agency agreement” regulated under Articles 102 and following of the Turkish Commercial Code (TCC). The agency relationship is generally a long-term partnership based on mutual trust. However, when this relationship is terminated, the legislator has provided a special protection mechanism in order to ensure that the agent is compensated for the labour and investment made during the term of the contract: “Equalisation Compensation”. This right, popularly known as “portfolio compensation” or “client compensation”, is one of the most important guarantees of the agency. In this article, we will examine in detail what an agency agreement is and the conditions under which the agent may claim equalisation compensation when the agreement is terminated.
Definition and Elements of Agency Agreement (Art. 102 TCC): According to the TCC, agency is the activity of a person who, “without being bound to the enterprise by a service contract, such as a commercial representative, commercial agent, sales clerk or employee of the enterprise, adopts the profession of acting as an intermediary in contracts concerning a commercial enterprise or performing them on behalf of that enterprise on a continuous basis within a certain place or region based on a contract”.
- Independence: The agent is not an employee of the principal; he is an independent merchant working on his own behalf and account.
- Continuity: The agency relationship is established for a continuous activity, not for a single business.
- Specific Place or Territory: The field of activity of the agent is generally geographically limited.
- Contractual Basis: The relationship is based on a written or oral agency agreement.
- Profession: The agent performs this business as a profession.
What is Equalisation Compensation (Portfolio Compensation) (Art. 122 TCC): Equalisation indemnity is a special type of indemnity that aims to prevent the principal from continuing to benefit unfairly and to compensate the agent for the loss incurred by the agent due to this reason, thanks to the customer circle (portfolio) created by the agent through its own efforts and transferred to the principal after the termination of the agency agreement. The basic logic of this compensation is based on the idea that it is unfair that the value created by the labour of the agent continues to be used by the principal after the end of the contract.
Conditions for Claiming Equalisation Compensation: In order for an agent to claim an equalisation indemnity, the following three conditions must be fulfilled together:
-
The Principal’s Obtaining Significant Benefits Through the Customers Acquired by the Agent:
- The agent must have brought new customers to the principal or significantly increased the business volume with existing customers.
- The principal must continue its commercial activities through this customer circle after the termination of the contract and obtain or have the potential to obtain significant benefits (profit, turnover, etc.).
-
Loss of Remuneration of the Agent:
- If the contract had continued, the agent must have been deprived of the commission fee to which the agent would have been entitled due to the works to be performed with this customer circle due to the termination of the contract. In other words, the agent must have suffered a “loss of remuneration”.
-
The payment must be equitable:
- The court shall evaluate all the circumstances of the case (termination fault of the agent or the principal, the scope of the monopoly right granted to the agent, the state of the market, etc.) and decide whether the payment of an equalisation compensation is equitable.
Circumstances in which the Equalisation Compensation cannot be claimed: The TCC clearly regulates that the agent may not claim this compensation in certain circumstances:
- Termination of the Contract by the Agent: The termination of the contract by the agent itself, which does not allow the principal to show a just cause. However, this right is reserved in the event that the principal’s negligent behaviour leads to termination or the agent is unable to continue the relationship due to reasons such as age or illness.
- Termination by the Principal for Just Cause: Termination of the contract by the principal for just cause due to a defective behaviour of the agent.
- Transfer of Agent’s Rights to a Third Party: The transfer of the rights and obligations arising from the agency agreement by the agent to a third party with the approval of the principal.
Calculation and Limitation of Compensation:
- Calculation Method: There is no clear calculation formula for compensation. In the light of the above conditions, the court determines an amount in accordance with equity by having an expert examination.
- Upper Limit: The law provides an upper limit for compensation. The compensation to be claimed cannot exceed the average annual commission or other payments for the last five years of the agency’s activity. If the contract lasted less than five years, the average during the continuation of the activity is taken as basis.
Loss of the Right to Claim (Statute of Limitations): This right is not an absolute right and must be exercised within a certain period of time. The agent must assert the claim for equalisation compensation within one year following the termination of the agency agreement. This period is a limitation period and a lawsuit cannot be filed after this period has expired.
Prohibition of Waiver: One of the most important provisions protecting the agent is that this right cannot be waived in advance. A clause in the agency agreement stating that “the agent shall not claim equalisation compensation upon termination of the agreement” is invalid. This right may be waived only after the termination of the contract.
Equalisation indemnity is an important legal guarantee based on equity, which prevents the unrequited loss of the customer portfolio that the agent has built up with years of effort in the event of termination of the agency relationship. In order to be entitled to this right, it is essential that the agent has provided the principal with a customer circle that provides significant and continuous benefits. It is of critical importance for an agent, whose agency contract has been terminated, to obtain consultancy from a lawyer specialised in commercial law in order to assess whether this right exists and to take the necessary legal steps within the one-year grace period, in order to avoid loss of rights.