Term of the Agency Agreement
There are no statutory rules on the term of Agency Agreements. The parties are, thus, generally, free to set out the parameters of the contractual term, for example in agreeing on a fixed term or an indefinite term or a combination.
It is advisable to expressly stipulate the contract term in the Agency Agreement. In the absence of such a stipulation and if no contract term can be determined by interpretation of the contract or trade customs, the contract shall be deemed to be concluded for an indefinite period.
If the parties agree on a fixed term and, after the expiry of the fixed term, continue to perform the Agency Agreement, the Agency Agreement may be considered to have been tacitly renewed for an indefinite term.
In accordance with Articles 91 et seq. of the PRC Contract Law, the Agency Agreement ends upon expiry of its agreed term, by mutual cancellation of the agreement or by termination. Article 411 of the PRC Contract Law further stipulates that an Agency Agreement as an entrustment agreement (Article 396 PRC Contract Law: "An entrustment contract is a contract whereby the principal and the agent agree that the agent shall handle the affairs of the principal.") terminates when either the Principal or the Commercial Agent die, become legally incapacitated or insolvent.
Termination of the Agency Agreement and the contractual right to terminate unilaterally
According to Article 410 of the PRC Contract Law, an Agency Agreement can, generally, be terminated by both the Commercial Agent and the Principal at any time. The terminating contractual partner shall compensate the other contractual partner for any damage resulting from the termination, unless the terminating contractual partner is not responsible for the damage.
For Agency Agreements with an indefinite term, the parties should agree on a contractual right to terminate unilaterally with a prior notice period in the Agency Agreement. It should further be stipulated that in case of a contractual right to terminate unilaterally, no claims for damages as set out under Article 410 of the PRC Contract Law apply. It is also possible to determine a fixed contract term with automatic renewal, if none of the contracting parties terminates within a certain period before expiry.
Extraordinary termination
According to Article 94 of the PRC Contract Law, a contracting party may terminate the contract without prior notice period, inter alia, due to a material breach of contract by the other contracting party which has not been remedied within a reasonable period of time after having received a reminder or if the purpose of the contract cannot be achieved due to force majeure. In this case, the terminating party shall not be liable for damages due to such termination.
Pursuant to Article 93 para. 2 of the PRC Contract Law, the parties may agree in the contract on further conditions for an extraordinary termination of the contract.
An Agency Agreement should expressly stipulate the reasons for extraordinary termination in order to prevent disputes about the existence of a reason for termination. For example, the law does not define the period within which a defaulting contractual partner has the right to remedy a breach of contract in order to avert the termination. It is therefore advisable to define such time period. In addition, payment delays of a certain duration, an event of force majeure of a certain duration or the failure of a certain minimum turnover of the Commercial Agent are often agreed as extraordinary reasons for termination.
The indemnification claim as a consequence of the Agency Agreement's termination
As set out above, according to Article 410 of the PRC Contract Law, either the Principal or the Commercial Agent may, generally, terminate the Agency Agreement at any time which may lead to indemnification claims, if the non-terminating party sustains any loss due to the termination, unless such loss is due to a reason not attributable to the terminating party. However, Article 410 of the PRC Contract Law is not mandatory and the parties can agree otherwise. Statutory PRC law does not provide for any stipulations on a commission for business transactions which are concluded after the contractual term has ended.
Other consequences of the Agency Agreement's termination
In the absence of a contractual agreement to the contrary, PRC law does not stipulate a post-contractual non-compete obligation of the Commercial Agent. PRC law, however, allows an agreement on such post-contractual non-compete obligation of the Commercial Agent as long as the period is justifiable.
Any claim arising from an Agency Agreement is, generally, subject to a three-year limitation period, starting from the date on which the creditor (e.g. the Commercial Agent) knew or ought to be aware of the debtor and the circumstances creating the obligation. In absence of such knowledge, there is a maximum limitation period of 20 years from the date on which the claim arose.
During the last six months of the limitation period, if the claim cannot be exercised due certain circumstances which have caused the right holder to fail in making claims (e.g. force majeure), the limitation shall be suspended.
Further, the limitation of action shall be discontinued if (1) the creditor requests performance from the debtor; (2) the debtor agrees to fulfil its obligations; (3) the creditor initiates court proceedings or applies for arbitration or (4) other circumstances equal to initiating court proceedings or arbitration. In such case, the calculation of the limitation period will re-start. For “requesting performance” in the above sense, it is sufficient if the creditor verifiably requests the debtor to discharge its obligations.
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