Comment: Mandatory Compensation to Commercial Agents upon Termination of Agency under Ethiopian Law

AuthorKamil Abdu Oumer
PositionKamil Abdu Oumer (LLB, LLM), Lecturer of Law at Wollo University School of Law, Dessie, Ethiopia. I thank Dr. Elias Nour for his constructive comments. The author can be reached at: Kamillaw2009@gmail.com
Pages424-439
424
Mandatory Compensation to
Commercial Agents upon Termination of
Agency under Ethiopian Law
DOI http://dx.doi.org/10.4314/mlr.v11i2.8
Kamil Abdu Oumer
Abstract
The Ethiopian Commercial Code recognizes mandatory compensation if agency
agreement for an indefinite period of time is terminated due to the fault of the
principal; and the Draft Commercial Code is likely to maintain this approach.
This comment examines the status and functions of a commercial agent as well as
the compensation due to the agent upon the termination of the commercial
agency. I argue that there should be mandatory compensation upon the
termination of agency relations for both definite and indefinite period of time
unless the agency relation is terminated due to the fault of the agent that justifies
termination of a contract. This is justified by comparative experience in the legal
regimes of Germany, France, Britain, the European Union, Turkey and some
international conventions on agency relations.
Key terms
Commercial Agency · Compensation · Indemnity ·Agent · Principal
____________
Introduction
The academic discourse (in transactional agency law) regarding mandatory
compensation upon termination of a commercial agency is underway for the last
few decades. Many scholars believe that a commercial agent should be entitled
for compensation/indemnity if the principal terminates the relation without fault
on the part of the agent. Their first justification is that the agent, through
his/her/its efforts, has contributed goodwill for the business of the principal that
enables the principal to benefit even after the termination of the agency.
Kamil Abdu Oumer (LLB, LLM), Lecturer of Law at Wollo University School of Law,
Dessie, Ethiopia. I thank Dr. Elias Nour for his constr uctive comments. The author can be
reached at: Kamillaw2009@gmail.com
COMMENT 425
Therefore, termination without compensation may be considered as unlawful
enrichment for the principal.1 The second justification relates to the expense the
agent might have incurred in the interest of the business of the principal (before
the agency agreement is terminated) and the expected commission the agent
would have earned had the relation continued. Termination of agency relations,
therefore, may cost the agent the investments he/she has made in expectation of
future commission.2 Mandatory payment is also justified by the need to protect
the commercial agent (usually considered as the weaker party) in the face of a
stronger principal.
One of the arguments against mandatory payment is that the principal may
shift the cost to the agent for the mandatory payment, and this creates
compliance cost. Opponents of mandatory payment also argue that the agent
may not be the weaker party in some circumstances and may exacerbate the
problem of information asymmetry between the agent and the principal.3 The
UK Chamber of Commerce, for example, argued that the agent may be more
powerful since the principal hires an agent because it lacks the capability to
operate by itself.4 But, the view of the majority is that the agent is a weaker
party and needs legal protection.
Mandatory compensation/indemnity for termination of agency agreements is
adopted in various continental legal systems after the legislation of the European
Council Directive on the Coordination of the Laws of the Member States
Relating to Self-Employed Commercial Agents 653/1986. The same holds true
in Britain. However, in most of the states in the United Sates, there is no
statutory law that recognizes mandatory compensation.5
The Ethiopian Commercial Code also provides for mandatory compensation
if a principal terminates an agency agreement for indefinite period of time
without good cause.’ The new Draft Commercial Code also retains the
provision by changing ‘good cause’ to ‘force majeure’. The team of National
Experts employed by the Addis Ababa Chamber of Commerce and Sectoral
Associations has recommended against revision of the provision.6
1Aaron N. Wise (2010), Sales agency Relationships under United States Law, a short guide
for the foreign Business person. Available at:
other_problems_under_us_law--tc__00145021_.pdf> . Last visited, March 3, 2017, p5
2 Ibid.
3 QI Zhou (2014), ‘Limits of mandatory rules in contract law: an example in agency law’,
Northern Ireland Legal Quarterly Vol. 65, No.4, pp.357-69, p. 358-359.
4 Id., p. 361.
5 Wise (2010), supra note 1, p. 4.
6 Addis Ababa Chamber of Commerce and Sectoral Associations (2009), ‘Position of the
Business Community on the Revision of the Commercial Code of Ethiopia. Available at:
426 MIZAN LAW REVIEW, Vol. 11, No.2 December 2017
This comment examines the legal debate in relation to mandatory
compensation to commercial agents upon termination, and it discusses viable
options. The first two sections highlight the features of agency relations and
briefly discuss the legal status, powers and duties of commercial agents under
Ethiopian Law in comparison with laws of other countries and some
international conventions. The third section analyses mandatory compensation
upon termination of agency agreements under Ethiopian law.
1. Agency as Tripartite Relation
Business activities may be conducted by creating direct networks, or using
intermediaries or licensing others to produce and sell products.7 Commercial
agency is one of the intermediary mechanisms for a trader in order to penetrate a
new market or boost existing business. A principal trader may prefer to trade
within an area through a commercial agent for it may be more affordable than
opening a branch; or the principal may want to benefit from the expertise and/or
experience of the agent in a certain location.
Commercial agency is usually a tripartite relation among a businessperson, a
commercial agent and a third party. Agency relation, therefore, includes the
internal relationship between the agent and the principal, and the external
relationship which involves the principal and the third party as well as the
relation between the agent and the third party. Through agency relationships, the
principal benefits from the performance of the agent and is willing to take
liabilities.8 But, there are doctrinal disagreements as to what agency relations
should include; and, in different legal systems, scope of agency relations varies.
In legal systems like Germany, Italy and Sweden, agency contracts are
concerned only with the external relations (i.e the relation between the agent and
third party as well as the relation between the principal and the third party); and
the relation between the agent and the principal is excluded from the concept of
agency.9 Likewise, the Convention on Agency in the International Sale of
ition-of-the-
business-community-on-the-revision-of-the-commercial-code-of-ethiopia.pdf>. Last
visited, march 3, 2017.
7 Robert T. Jones (1972), ‘Practical Aspects of Commercial Agency and Distribution
Agreements in the European Community’, The International Lawyer, Vol. 6 No.1, pp. 107-
127, pp. 107-127.
8 Eric A. Posner (2000), ‘Agency Models in Law and Economics’, The Law School of
University of Chicago John M. Olin Law & Economics. Working Paper No. 92 (2d Series),
Available at: . Last visited, December
21, 2016 , p. 4.
9 Ali Aljasmi (2015), ‘Choice of law in respect of agency relationships in the European
Union and the united Arab Emirates’, A thesis submitted for the degree of Doctor of
COMMENT 427
Goods (1983) regulates only the external relation.10 The Hague Convention in
Relation to Agency, on the other hand, includes the relation between the agent
and the principal within the scope of agency relations.11 Others like the EU
Directive, British statutory law and the French Commercial Code regulate only
the internal relation (the relation between the agent and the principal).12
In Ethiopia, the Commercial Code has provisions concerning the relation
between the principal and the commercial agent. The Code does not define
agency. Nor does it contain provisions that govern the relation between the
principal and the third party or the relation between the agent and the third
party. This is because agency is one of the few transactions that are regulated
under both the Civil Code and the Commercial Code, with the latter, inter alia,
dealing with special contracts as envisaged under article 1676(2) if the Civil
Code. Provisions of the Civil Code shall thus apply on issues which are not
covered under relevant Commercial Code provisions.
Article 2199 of the Civil Code defines agency as “a contract whereby a
person, the agent, agrees with another person, the principal, to represent him and
to perform on his behalf one or several legally binding acts.” This provision
considers agency as a relation between the agent and the principal, and there are
few provisions in the Civil Code that expressly deal with the relation between
the agent and the third party, and the relation between the principal and the third
party. With regard to tripartite relations, Article 2233 of the Civil Code states
that “the legal relations of principal, agent and third parties” shall be subjected
to articles 2179-2198 which deal with general provisions of agency law.
2. Legal Status, Powers and Duties of Commercial Agents
Agency law regulates both intra-firm governance and inter-party transactions.13
In relation to inter-party relations, agency law regulates the tripartite relation
Philosophy Department of Law, University of Essex. Available at:
7/1/Final%20version%20Thesis_%20Law.pd f> Last
visited, December 23,2016, p. 91
10 The Convention on Agency in the International Sale of Goods, 17 February 1983,
Geneva, Article 1(3).
11 Aljasmi (2015), supra note 9, p. 91.
12 Ellen Eftestøl-Wilhelmsson (2006), ‘EC agency law and intermediaries in shipping’,
Legal Studies Research Paper Series Paper, No 11. 141-178.Available at:
. Last visited, September 3, 2016, p. 143, French
Commercial Code, (as updated Un til 03/20/2006) article L 134 -1 & the following, British
Commercial Agents (Council Directive) Regulations 30537/1993,
13 George M. Cohen (2000), ‘The Collusion Problem in Agency Law’, University of
Virginia School of Law Legal Studies Working Papers Series, Working Paper No. 00-2.
Available at: . Last visited,
September 3, 2016, p. 3.
428 MIZAN LAW REVIEW, Vol. 11, No.2 December 2017
among the principal and the agent, the agent and third party as well as the
principal and third party. Also called transactional agency law, it tries to
facilitate transactions by “deterring” disagreements between the three parties
and resolving them in case dispute occurs.14 Its basic principle is that a
businessperson “who wants to conduct his business through another person
should benefit from the result and should not escape from the liability” thereof.15
Classical agency law used to focus on the protection of the principal from the
acts of an agent who is empowered to change the legal position of the principal
in his actions. Accordingly, agency was considered as a fiduciary relation in
which the principal needs protections.16 Modern agency law, on the other hand,
tends towards the protection of the agent, who is usually considered to be the
weaker party, vis-à-vis a stronger principal.
Domestic laws and international/regional agreements in relation to
commercial agency define a ‘commercial agent’ rather than ‘commercial
agency’. Article 1(2) of the European Convention on the Coordination of the
Laws of the Member States Relating to Self-Employed Commercial Agents, for
example, defines a commercial agent as “… a self-employed intermediary who
has continuing authority to negotiate the sale or the purchase of goods on behalf
of … the ‘principal’, or to negotiate and conclude such transactions on behalf of
and in the name of that principal.”
Under Ethiopian law, the status, powers and duties of commercial agents are
embodied in two separate legal instruments: the Commercial Code and the
Commercial Registration and Business Licensing Proclamation 980/2016.
Article 44(1) of the Commercial Code defines a commercial agent as “a person
or business organization, not bound to a trader by a contract of employment and
carrying out independent activities, who is entrusted by a trader with
representing him permanently in a specified area and dealing or making
agreements in the name and on behalf of the trader.”
2.1 The legal status of agent and principal in commercial agency, and
the issue of citizenship
There is almost a consensus as to the legal status of the principal as trader in
commercial agency relations. But, there are divergent views regarding the legal
status of the agent. In some legal systems like Turkey, the legal status of the
14 Ibid.
15 Paula J. Dalley (2011), ‘A Theory of Agency Law’, University of Pittsburgh Law Review,
Vol. No. 72, pp. 495- 547, p. 497.
16 Wilhelmsson (2006), supra note 12, p. 142.
COMMENT 429
agent as a trader is not clear.17 In the French Commercial Code, both principal
and agent are traders.18
Under the Ethiopian Commercial Code, both the commercial agent and the
principal are traders.19 In the Commercial Registration and Business Licensing
Proclamation 980/2016 too, the agent should be “carrying out independent
Business activity.20 Therefore, unlike an agent under the Civil Code,
commercial agency under Ethiopian law is a trade activity and a commercial
agent is a trader that needs commercial registration and licensing to operate in
Ethiopia.21
At present, international/regional agreements focus on the specific
transaction rather than the legal status of the agent. Under the European Council
Directive on the Coordination of the Laws of the Member States Relating to
Self-Employed Commercial Agents (653/1986), UNIDROIT, Convention on
Agency in the International Sale of Goods (1983), and the Hague Convention on
the Law Applicable to Agency (1978), there is no requirement for the agent to
be a trader. It is not even necessary for the agent to be a professional agent.22
Rather, the agent may be trader or non-trader, and may act professionally or
occasionally. But, since commercial agency is an income generating
professional activity with profit as its sole objective, it is justifiable that the
Ethiopian Commercial Code treats commercial agent as a trader.
In UAE’s commercial agency law, commercial agency is reserved for
nationals.23 There is no blanket prohibition of foreigners from engaging in
commercial agency in Ethiopia. But, shipping agency services are reserved only
17 Under the ex-Turkish Commercial Code, an agent had to be a trader. Under the new code,
however, there is no express provision. See article 11(2) of the new Turkish Commercial
Code 6102/2012.
18 See French Commercial Code, Article L 134 -1.
19 Commercial Code of Ethiopia, 1960, Article 5(19) & 44(1).
20 See Commercial Registration and Business Licensing Proclamation 980/2016 article 2(9).
Whereas the Commercial Code uses Tr ader, the Commercial Registration and Business
Licensing Proclamation 980/2016 uses ‘businessperson’ instead of trader and ‘business
activity’ in lieu of trade activity.
21 See Article 5(19) of the Commercial Code of Ethiopia, 1960, and Commercial
Registration and Business Licensing proclamation 980/ 2016.
22 Aljasmi (2015) supra note 9 , p. 20; See also article 1 of UNIDRIOT (International
Institute for the Unification of Private Law), Article 1 Hague Agency, Art 1(2) of EU
Agency Directive.
23 Howard L. Stovall (2008), ‘Recent Revisions to Commercial Agency Law in the United
Arab Emirates’, Arab Law Quarterly Vol. 22, No. 3, p. 310.
<10.1162>
430 MIZAN LAW REVIEW, Vol. 11, No.2 December 2017
for Ethiopian investors.24 It is also clear that a foreign commercial agent may
not (on behalf of a foreign trader) engage in areas of investment reserved for
domestic investors. Still, it is not clear whether a foreign commercial agent can
engage in areas of investment reserved for Ethiopian nationals as representative
of an Ethiopian trader.
2.2 Whether commercial agency solely emanates from contract
Agency relation may emanate from law, judicial decisions or consensual
agreements. But, commercial agency is, “a consensual” relation.25 The relation
between the agent and the principal emanates from consensual acts.26 In the
common law legal systems, the consensual act need not be a contract.27 In the
above regional and international instruments too, there is no requirement for
contract. What is required is a consensual empowerment, not necessarily a
formal contract. Under some domestic jurisdictions and international
conventions –like the Convention on Agency in the International Sale of Goods
1983–, the power of the agent may be either express or implied.28 The
Convention, further, provides that “the authorization need not be given in or
evidenced by writing and is not subject to any other requirement as to form. It
may be proved by any means, including witnesses.”29
The Commercial Code of Ethiopia and the Commercial Registration and
Business Licensing Proclamation 980/2016 use the phrase ‘entrusted by a
trader/business person/’ without specifying whether mere agreement is enough
or whether a full-fledged contract between the two is required. In the Amharic
version both laws employ the phrase ‘ል ’ which may allow us to see
the meaning of agency (ል) from the Civil Code. As indicated above, agency
under the Ethiopian Civil Code, among others, is a contract, and it can be argued
that the relation between a commercial agent and a principal can only be created
through a contract.
If commercial agency emanates from a contract, therefore, the agreement
between the principal and the agent should fulfil the basic elements of a
contract. Regarding the form in which the agency agreement should be made,
24 Investment Incentives and Investment Areas Reserved for Domestic Investors, Council of
Minister Regulation 270/2012, Article 3.
25 Eric Rasmusen (2001), ‘Agency Law and Contract Formation’, Harvard Law School
Discussion Paper, No. 323, p. 4. Available at:
Last visited, October 25, 2016, , p.
4
26 Paula J. Dalley (2011), ‘A theory of agency law’, University of Pittsburgh Law Review,
Vol. No. 72, p. 501.
27 Thomson Reuters (2015), USA Restatement (Third) of Agency, Westlaw, p. 4.
28 Convention on Agency in the International Sale of Goods, Articles 1(1) & 9(1).
29 Id., Articles 1(1) & 10.
COMMENT 431
there are tendencies of differentiating an agency for mere intermediation and
agency for the conclusion of contract or power of agency in which the
commercial agent has the power to bind the principal through his conduct. In
Turkish law, for example, there is a difference in form between the agency to act
as intermediary and agency to bind the principal. A commercial agent may not
enter into a contract or another obligation that might bind the principal or take
delivery of goods for which he personally has not paid or accept payment for
goods that he had not personally delivered unless s/he is empowered to do so in
a written form, and the same has been registered in the commercial register.30
Under the Ethiopian Commercial Code, there is no provision that regulates
the form required for commercial agency agreements and there is no distinction
between agency to act as intermediary and agency to enter into a binding act in
the commercial laws. But, agency provisions in the Civil Code provide that
“where the act to be performed by the agent is under the law to be made in a
prescribed form, such form shall be complied with in conferring authority upon
the agent” and “the agent may not without special authority alienate or mortgage
real estate, invest capitals, sign bills of exchange, effect a settlement, consent to
arbitration, make donations or bring or defend an action”.31
2.3 Duration of commercial agency
Unlike agency in civil transactions, commercial agency between an agent and a
principal is not confined to a specific activity, and thus needs to create a
relatively long lasting relationship between the two. The agency relation may be
for a definite or an indefinite period of time. But, it goes beyond a one-time
activity. The French Commercial Code, for example, states that the agent should
be “permanently entrusted” by the principal.32 Likewise, the European Council
Directive on the Coordination of the Laws of the Member States Relating to
Self-Employed Commercial Agents 653/1986 provides that the relation need be
a continuous one.33 The European court of Justice decided that “it is not
important whether the agent negotiated one or more contracts so long as he has
continuing authority”.34
However, the Convention on Agency in the International
Sale of Goods (1983) and the Hague Conference on Private International Law
Convention on the Law Applicable to Agency (1978) do not require continuity.
Under Ethiopian law, a commercial agent represents the principal
permanently, which seems to mean until it is terminated according to the law or
30 See Articles 106 & 107 of the Turkish Commercial Code No. 6102/2012.
31 Civil Code of Ethiopia, 1960, Articles 2180 & 2205 (2).
32 See French Commercial Code, Article L 134 - 1.
33 European Council Directive on the Coordination of the Laws of the Member States
relating to Self-Employed Commercial Agents, 653/1986, Article 1(2),
34 Wilhelmsson (2006), supra note 12, p. 145.
432 MIZAN LAW REVIEW, Vol. 11, No.2 December 2017
by agreement. Yet, commercial agency agreement may be made for a specified
period of time, as provided under article 52(1a) of the Commercial Code which
reads “agency agreement shall terminate where the period of time for which it
was entered into expires”.
2.4 Independence of a commercial agent
A commercial agent acts independently and shall never enter under the audit of
the principal.35 The agent is not an employee who works under the control of the
principal. Even if the agent and the principal retain their independent legal
personality, the principal may control the acts of the agent in the way of issuing
initial and interim instructions.36 But, the agent may refuse to execute
instructions from the principal that may challenge its independent existence. 37
Under Ethiopian law, a commercial agent is not bound by a contract of
employment and is free to manage its own day to day activities. While the agent
is an independent actor, it also should carry out all instructions of the principal,
inform any dealing he has made on behalf of the principal and send periodic
reports about his works.38 However, there is lack of clarity regarding the nature
and extent of instructions that may be issued by a principal to the agent vis-à-vis
the level of independence a commercial agent is entitled to.
2.5 Location and exclusivity of commercial agency
A commercial agent is usually an exclusive agent empowered to represent the
principal within a specific area or in relation with certain customers. Some
jurisdictions like the United Arab Emirates (UAE) avoid such exclusive
mandates of commercial agents which seem to be inconsistent with anti-
monopoly regulations.39 Others, such as Lebanon, allow exclusivity only for
luxurious goods.40
Under Ethiopian law, the geographical area in which the agent operates on
behalf of the principal need to be specified. Moreover, “unless otherwise
provided in the agency agreement, a commercial agent shall be the exclusive
35 Yusuf Korun (2013), ‘Acentenin Hak Ve Borç lari’, T.C.İstanbul Kültür Üniversitesi
Sosyal Bilimler Enstitüsü Yüksek Lisans Tezi. p. 10; Avilable at:
/YusufKorunYLtez.pdf>
Last visited, December 21, 2016,
36 USA Restatement law-agency, supra note 27, pp. 2-3, 6.
37 Study Group on a European Civil Code Principles & Research Group on EC Private Law
(Acquis Group) (2009), ‘Definitions and Model Rules of European Private Law’,
European law publishers GmbH, Munich, p. 2340-41.
38 See Article 46 of Commercial Code of Ethiopia 166/1960, Article 46(2a).
39 Stovall (2008), supra note 19, p. 312.
40 Ibid.
COMMENT 433
agent of the principal in the area specified in the agreement”.41 Therefore, the
principal may not appoint more than one agent within a given geographical area
unless the agency agreement with the first agent expressly allows so.
Exclusivity is being challenged in different legal systems from the perspective
of competition and consumer protection. In Ethiopia too, the Commercial
Registration and Business Licensing Proclamation 980/2016, has prohibited
operating “as sole importer or sole distributor” except for some business areas
that the Council of Ministers may allow through Regulation.42 The presumption
of exclusivity should be avoided in the absence of contractual agreement to the
contrary.
2.6 The purpose and scope of representation
A principal trader may authorize the agent for dealing with third parties. The
authority may be to enter into a contract, to negotiate or perform contracts or
only to introduce the principal.43 It does not necessarily have to be the
conclusion of a contract on behalf of the principal. Intermediaries (known as
introducing agents) –which are authorized only to introduce the principal– are
also subject to regulations of commercial agency.44
Under Ethiopian law, there is a discrepancy between the Commercial Code
and the Commercial Registration and Business Licensing Proclamation
980/2016. Under the Commercial Code, the agent may be entrusted to deal or
make an agreement while the Proclamation provides that the agent is
empowered to make an agreement.45 According to the Commercial Registration
and Business Licensing Proclamation, a commercial agent should be
empowered to make an agreement on behalf of the principal. This may imply
that an agent entrusted to introduce a principal or only negotiate agreements on
behalf of the principal is not envisaged under the Proclamation.
According to the Commercial Code, on the other hand, an agent may be
empowered to negotiate agreements, to make agreements or both to negotiate
and make agreements. As the Proclamation focuses on Registration and
Licensing, it is not expected to deal with issues of commercial agency in detail,
41 Commercial Code of Ethiopia (1960), Article 45.
42 Commercial Registration and Business Licen sing Proclamation 980/2016, Article 38.
43 Aljasmi (2015), supra note 9, p. 23.
44 Gregor Kleinknecht, ‘commercial agen cy contracts: termination and indemnity in England
and Wales’ Capitolo Quinto, pp. 94, 95. Available at:
solicitors.co.uk/wp-content/uploads/2016/04/Gregor-Kleinknecht-chapter.pdf> Last
visited, March 3, 2017.
45 See Article 44 of the Commercial Code of Ethiopia (1960) and Article 2(7) of the
Commercial Registration and Business Licensing Proclamation 980/2016.
434 MIZAN LAW REVIEW, Vol. 11, No.2 December 2017
and thus the provisions of the Commercial Code prevail regarding the scope of a
commercial agent’s activities.
The Turkish Commercial Code makes a distinction between the power to
negotiate and the power to bind the principal. Under the Turkish law, the power
to bind the principal should be granted in a written form and should be
registered while the power to act simply as an intermediary may be given in any
form. As discussed above, there is no such distinction in Ethiopia.
2.7 Some exclusionary rules on the scope of commercial agency relations
Various conventions and domestic laws have exclusionary rules which exclude
certain relations from the application of commercial agency laws. For example,
commercial agents whose activities are unpaid, commercial agents who operate
on commodity exchanges or in the commodity market, etc. are not covered
under the European Council Directive on the Coordination of the Laws of the
Member States Relating to Self-Employed Commercial Agents 653/1986.
Moreover, under the EU Directive, commercial agents for negotiating contract
for service are excluded from the application of the directive unless the laws of
member states provide otherwise.46
Likewise, the Ethiopian Commercial Code provides that there is no
commercial agency if there is an employment relationship between the parties.47
But, if the Ethiopian law further excludes agents regulated under special laws
from the scope of the Commercial Code, special regulation would be necessary.
2.8 Agent’s act on behalf and in the name of the principal
The will theory and the civil law legal system assert that there is no contract
between the principal and the third party if there is no meeting of mind.48 In the
common-law, on the other hand, the agent may bind the principal even if he acts
in his name.49 Under Ethiopian law, the commercial agent should act “in the
name and on behalf of the trader”.50 By virtue of this phrase, it may be argued
that undisclosed agency has no place in commercial agency law of Ethiopia. The
Ethiopian Civil Code also provides that if the agent acts on his own behalf, he
“shall personally enjoy the right or incur the liabilities deriving from the
contract he makes with third parties, notwithstanding that such third parties
know that he is an agent.”51
46 Wilhelmsson (2006), supra note 12, p. 143.
47 Commercial Code of Ethiopia, 1960, Article 44.
48 Rasmusen (2001) supra note 25, p 29 & Alj asmi (2015), supra notes 9, p. 204
49 Id., p 189.
50 Commercial Code of Ethiopia, 1960, Article 44.
51 Civil Code of Ethiopia 165/1960, Article 2197.
COMMENT 435
3. Mandatory Compensation upon Termination
3.1 Rationale of mandatory compensation and comparative approaches
The main rationale behind classical commercial agency law was protecting the
principal who trusted the agent.52 Accordingly, most agency rules focus on the
obligation the agent has towards the principal. However, recent laws as stated
earlier, incline towards the protection of the commercial agent, usually
considered to be a weaker party.53
One of the schemes in this regard is mandatory compensation upon
termination of a commercial agency, and this has evoked extensive academic
discourse in commercial agency law. The primary rationale for mandatory
compensation is the argument that the agent is the weaker party worth of
protection, and commercial agency law should have protection of the weaker
party as its primary object.54 As highlighted in the introduction, there are
opponents of this view and they argue that the principal may shift the cost to the
agent because the mandatory payment creates compliance cost. They also
contend that the agent may not be the weaker party in some circumstances.55
There are three approaches in relation to mandatory payments upon
termination of commercial agency agreements. These are the indemnity
approach of the French model, the compensation approach of the German
model and the British model which incorporates both the indemnity and the
compensation models. The European Council Directive on the Coordination of
the Laws of the Member States Relating to self-Employed Commercial Agents
653/1986 oblige member states to adopt either the indemnity approach or the
compensation approach.56
Under the French Commercial Code, upon the termination of the agency
agreement, “commercial agents shall be entitled to an indemnity for the loss
suffered”.57 In the European Council Directive, the agent shall be entitled to an
indemnity if “he has brought the principal new customers or has significantly
increased the volume of business with existing customers and the principal
continues to derive substantial benefits from the business with such
customers”.58 Indemnity is therefore due for the additional values the business
of the principal has gained due to the efforts of the agent. In the British system,
52 Wilhelmsson (2006), supra note12, p. 142.
53 Study Group on a European Civil Code Principles & Research Group on EC Private Law,
(2009) supra note 37, p. 1.
54 Wilhelmsson (2006), supra note 12, p 147.
55 QI Zhou (2014), supra note 3, pp. 358-359.
56 The European Council Directive 65 3/1986, Article 17.
57 French Commercial Code, Article L 134- 12.
58 The European Council Directive 653/1986, Article 17.
436 MIZAN LAW REVIEW, Vol. 11, No.2 December 2017
indemnity is payable if it is agreed upon between the agent and the principal in
the agency agreement. 59
The Compensation approach, on the other hand, takes into account the
potential loss the agent faces due to the termination of the agency agreement.
Under the British model, compensation shall be paid to the agent if the agency
agreement did not contain indemnity clauses and the agency agreement is
terminated in circumstances which:
… deprive the commercial agent of the commission which proper
performance of the agency contract would have procured for him whilst
providing his principal with substantial benefits linked to the activities of the
commercial agent; or … have not enabled the commercial agent to amortize
the costs and expenses that he had incurred in the performance of the agency
contract on the advice of his principal.
The first condition is linked with the commission –the commercial agent would
have acquired had the agency agreement continued– and the benefit the
principal gains due to the performance of the agent. The second circumstance
does not consider the benefit the principal has acquired. It rather focuses on
reimbursing the costs incurred by the agent in the interest of the business of the
principal.
Generally, mandatory compensation/indemnity is meant to protect the agent.
The principal may want to reach customers directly after effective market entry
of his products due to the efforts of the agent and may terminate the agency
agreement. The agent may also lose investments made in the interest of the
activity he had been doing in relation with the work entrusted to him by the
principal. The principal may also continue to benefit from the new customers
brought by the efforts of the agent even after the termination of the agency.
Therefore, the agent needs to be compensated.
3.2 Ethiopian law on compensation upon termination of commercial
agency
The Commercial Code provides for compensation upon termination of
commercial agency, and it states two cumulative conditions that are required for
the payment of compensation, namely: undefined period of time as the duration
of agency and absence of good cause. Article 53 reads:
Where the principal terminates without good cause an agency agreement
entered into for an undefined period of time, the agent shall receive fair
compensation which shall be fixed having regard in particular to the time for
59 British Commercial Agents (Coun cil Directive) Regulations 3053/1993, Article 17.
COMMENT 437
which he acted on behalf of the principal and to the customers introduced or
goodwill created or extended by him.
Since goodwill is an important component of any business, commercial agents
usually have a certain contribution in the business of the principal.60 Therefore,
“in paying compensation, the principal is buying the agent’s patrimonial
entitlement rather than redressing future losses”.61 The other argument is that, as
discussed above, the agent might have incurred cost in the interest of marketing
the business.
Since compensation upon termination is for the goodwill the agent has
created or the cost incurred by the agent in relation to the business of the
principal, there is no justification for the omission of such compensation (from
Article 53 of the Commercial Code) where agency relations for a definite period
of time is terminated by the principal without good cause. The same reasons
(i.e., undue advantage from goodwill created by an agent, and cost incurred by
the latter) apply for agents whose agency is unduly terminated before the end of
the definite period stated in the contract.
In many legal systems, compensation upon termination of the agency
agreement is taken as a mandatory statutory provision that obliges the principal
to pay irrespective of the causes of the termination. The principal is therefore,
required to pay compensation upon termination of the agreement even if the
agency is terminated legally.62 The EU directive, for example, states that
indemnity/compensation shall be due even if the agency relation is terminated
due to the death, illness, age and infirmity of the agent.63 But, the agent may not
be entitled for compensation/indemnity if the agency agreement is terminated by
the principal due to the fault of the agent –that can justify the termination of
agency contract under the law– and if the agent willingly terminates the agency
agreement without any fault from the principal.64
Under Ethiopian law, the agent is entitled to compensation if the principal, as
stated above, terminates the agency agreement “without good cause”.65 The
phrase ‘without good cause’ should be interpreted with caution and the agent
should, for example, be compensated if he has not committed fault that has
caused the termination of agency. Unless indicative standards of ‘good cause
60 AsmaVranaki (2008), ‘Compensation for Commercial Agents’, The Modern Law Review
Vol. 71, No. 2 , pp. 271-279.
61 Id., p. 503.
62 Wilhelmsson (2006) supra note 12, p. 148.
63 The European Council Directive 65 3/1986, Article 18 (a & b).
64 Id., Article 18 (b & c).
65 Ethiopian Commercial Code (1960), Article 53.
438 MIZAN LAW REVIEW, Vol. 11, No.2 December 2017
are stated, its definition becomes susceptible to unpredictable and inconsistent
judicial discretion.
It is, however, to be noted that the agent deserves compensation only if s/he
has enhanced the goodwill of the business and if the principal continues to drive
benefits thereof. With regard to cost incurred by the agent who is not entitled to
compensation (or indemnity) upon termination of agency, the agent may claim
damages under the general law of obligations.
3.3 Amount of compensation
There are two approaches in determining the amount of compensation/indemnity
to an agent upon the termination of commercial agency, i.e., the fixed amount
approach and determination of the amount based on damage assessments. Many
civil law countries like Germany and France have adopted the fixed amount
approach. In Germany, for example, the amount of the indemnity is a one-year
commission that is determined based on the average of five years commission.
The amount of compensation in France is two times the annual average
commission the agent used to get during the last three years.66 Dutch courts may
grant up to a one year commission if they find the circumstances equitable.67 In
UK, the compensation/indemnity due for the agent should be calculated taking
into account the performance of the agent and the business status of the
principal.68
Article 53 of the Ethiopian Commercial Code, as stated above, provides that
the calculation of the payment should be made taking into account “the time for
which he acted on behalf of the principal and to the customers introduced or
goodwill created or extended by him.” Evaluation of goodwill needs clarity and
there should be indicative elements, in addition to the general definition
embodied in Article 130 of the Commercial Code.
An issue might also arise whether the principal or the new agent should
ultimately bear the cost. There are arguments that the cost “should represent the
cost of the succeeding agent for purchasing the agency (i.e the goodwill created
by the leaving agent).”69 It seems appropriate that the principal should bear the
cost, and there should be supplementary remedies against the succeeding agent.
66 Commission of The European Communities (1996), ‘Report on the application of article
17 of Council Directive on the Co-ordination of the laws of the Member States Relating to
Self-Employed Commercial Agents (86/653/eec)’, Brussels, pp. 2-5.
67 Suzan Lap (2011), ‘Commercial Agency Agreement under Dutch Law’, in Cristelle
Albaric & Marianne Dicksted (eds. 2011), International Commercial Agency and
Distribution Agreements: Case Law and Contract Clauses, pp. 773-8, Kluwer Law
International, the Netherlands.
68 Zhou,(2014), supra note 3, p. 359.
69 Vranaki (2008) supra note 60, p. 274.
COMMENT 439
Conclusion
The compensation/indemnity to be paid for a commercial agent upon the
termination of agency is related with (i) the goodwill of the principal’s business
toward the creation of which the agent has contributed, (ii) the cost the agent has
incurred in the interest of the business, and (iii) the loss of future commission he
would have gained had the agency continued. The Ethiopian Commercial Code
recognizes mandatory compensation if the principal terminates a commercial
agency which is created for an indefinite period of time without ‘good cause’.
Thus, compensation for the termination of commercial agency –under in the
Commercial Code– is a fault-based.
However, the theoretical justification of mandatory compensation discussed
in this comment and the transformation of agency law from prime focus on
principal protection to due attention to agent protection, warrant broader
mandatory compensation upon termination of commercial agency. Distinction
should not be made between definite or indefinite period of the agency contract,
as long as the agency relation is not terminated due to the fault of the agent. The
law should, however, take into account the benefits the principal continues to
earn after the termination of the agency.
Therefore, the Ethiopian commercial agency law should recognize mandatory
compensation for the commercial agent upon termination of the agency
agreement if (i) the agency agreement is not terminated due to the fault of the
agent, and (ii) if the principal continues to operate in the area and continues to
derive benefits from the goodwill the agent has brought to the business. On the
other hand, compensation should not be expected to be granted if the principal
decides to stop working in the area or incurs loss or is declared bankrupt. With
regard to the amount of compensation, lessons can be drawn from the good
practices of other legal regimes toward fixed amount of compensation based on
the duration of the agent’s services, the level of consumer attraction, creation of
goodwill and the continuity of the principal’s benefits after the termination of
the agency.

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