Commercial Severance and Fair Compensation in the Commercial Agency Agreement: Is it possible to agree its early waiver?

The views expressed in this article are solely of the authors and do not necessarily represent those of CMS Rodríguez-Azuero.

Companies which commercialize their products in the Colombian territory, often enter into certain types of agreements that seek to expand, promote and exploit their business. Among these agreements is the commercial agency contract, under which a merchant (agent) promotes or exploits the business of a domestic or foreign entrepreneur, in a certain industry and within a predefined area. 

Colombian Law 1 Colombian Commercial Code. Article 1324. provides that, when the agency contract is terminated, the agent has the right to receive two economic benefits as consideration for the efforts made to expand the entrepreneur’s business and build or increase its clientele: (i) commercial severance, which is the payment of one twelfth of the average remuneration received by the agent in the last three years, for each year of the term of the contract, or to the average of all received, if the term of the contract is less, and (ii) fair compensation, which applies only when the entrepreneur unilaterally terminates the contract without just cause, or when the agent terminates the contract for just cause attributable to the entrepreneur.

According to Colombian statute 2 Colombian Commercial Code. Article 1331.   and case law 3 Supreme Court of Justice. Decision No. 11001310300120150020301. M.P. Octavio Augusto Tejeiro Duque. , regardless of whether the parties have a written or verbal agreement or have entered  into a completely different type of contract (i.e., distribution, brokerage, collaboration, among others), if in practice their relationship meets the essential elements of an agency agreement, it may be declared by a judge as a de facto commercial agency, and therefore, the economic benefits set forth in the preceding paragraph (i.e., commercial severance pay and fair compensation, if applicable), may be awarded to the agent by a judge.

However, it is common for parties to waive, limit or modify these rights on the contracts directly. Therefore, the following question arises: is it possible for the agent to waive the commercial severance pay and fair compensation when signing the contract?

To begin with, the Supreme Court of Justice and the Arbitration Courts case law and some relevant doctrine regarding waiving the commercial severance will be studied. After this, the position regarding waiving the fair compensation will be analyzed in order to stress the importance and impact that specific clauses in the contracts will have when conflicts between the partis arise. 

First, regarding the waiver of commercial severance payment, there are opposite views in the literature. Some authors 4 José Ignacio Narváez, Álvaro Pérez Vives and Enrique Gaviria Gutiérrez  argue that it is not possible to waive it when signing the contract, since it would affect the public order, arguing that the interest of all commercial agents would be at stake. On the other hand, other authors 5 ARRUBLA PAUCAR, Jaime Alberto (2012), Contratos Mercantiles. Contratos Típicos”, pages 237-238, Legis. believe that it can be waived since it is a private matter which only involves the partis of the contract, and not the public order.

The Supreme Court of Justice’s case law has also shifted from one position to another. In 1980 6 Supreme Court of Justice. Judicial Journal No. 240, of 2/12/80, M.P. Germán Giraldo Zuluaga. , the Court took the public-order side. However, it provided that once the contract is terminated for any reason, the commercial severance right became enforceable and therefore waivable by the agent.

However, in 2011 7 Supreme Court of Justice. Decision No. 2001-00847-01. M.P. William Namén the Court changed its position, considering that public policy was dynamic, and that, as the economic context at that time was different from that of 1980, this matter was not of public interest. Thus, the Court concluded that the only law applicable to this case is the will of the parties themselves and therefore it could be excluded, dosed or modified in terms of quantification according to whatever the will of the agent and the entrepreneur may be.

Nonetheless, in 2017 8 Supreme Court of Justice. Decision No. SC18392-2017. M.P: Luis Armando Tolosa. , the Court returned to its original position where the waiver could only be done once the contract is terminated, because, in the words of the Court, "no one abdicates what he does not possess or what has not been incorporated to his patrimony, much less, an expectation or a nonexistent right cannot be waived". In other words, such decision took up the 1980 position by stating that the commercial severance can only be waived once it has been caused, this being the most updated position on the matter in the Supreme Court of Justice.

In addition to the Court’s most recent case law, it is relevant to note that some arbitration courts have developed an argument against the possibility to waive the commercial severance pay, thus taking a much more conservative position, considering that it is evident the intention of the legislator to protect agents from excesses or abuses 9 Arbitration decision rendered in the process of Maquinaria Pesada del Tolima Ltda. vs Tracey & Cía S.A. Bogotá. June 30, 2000. Chamber of Commerce of Bogotá, Editorial Legis. CD version. Bogotá, 2006. .

Once analyzed the commercial severance pay, we will address the agent’s right to receive fair compensation. In relation to the waiver of this right, the position has been unanimous, arguing the impossibility of agreeing its waiver in advance. Consequently, it has been stated that such benefit "is not waivable, since (...) it is indemnifying for the agent and penalizing for the entrepreneur for an unjustified unilateral termination of the contractual relationship (...); to accept its waiver would be equivalent to condoning future malice by the entrepreneur, which is expressly prohibited by article 1522 of the Civil Code and would constitute a tortious enrichment against the interests of the agent" 10 Arbitration decision Cellular Trading de Colombia Ltda., Cellpoint, vs. Comunicación Celular S.A., Comcel; March 18, 2002. . 

However, the possibility to waive both benefits -especially commercial severance pay- has been and still is subject of debate, case law changes and conflicting positions. Therefore, it is important that, at the time of negotiating the contract -not only of agency, but also other contracts that can resemble it due to the de facto commercial agency concept (such as distribution, brokerage, collaboration, among others)- both parties are especially careful when agreeing on this type of provisions.

Not to mention, it is advisable that the parties do not focus on the waiver of these benefits exclusively, but also on other aspects, for instance, the possibility of agreeing to an early payment of the commercial severance during the term of the contract, which may be analyzed on a case-by-case basis. Also, when negotiating the contract, it is important to study the dispute resolution clause to be agreed upon, such as an arbitration clause -foreseeing that the parties would resort to the arbitration courts- or a general clause -in which case they would resort to the civil judges-, depending on the position held in the contract and the interests in each case. The foregoing, considering that, on certain occasions, and depending on the position of the parties, some tend to be more protectionist than others, and therefore, more favorable in some positions in relation to the others. 

Consequently, seeking advice from Commercial Law experts will be beneficial and will facilitate that the business conditions are agreed according to the interests pursued in each case, minimizing the potential risks arising from the poor negotiation of certain clauses.