Term of the Agency Agreement
There are no statutory rules on the term of Agency Agreements. The parties are thus, as a general principle, 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.
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 is considered to have been tacitly renewed for an indefinite term.
Termination of the Agency Agreement
If the Agency Agreement has been entered into for a fixed term, as a general principle, the Agency Agreement may only be terminated extraordinarily for good cause. During a fixed contractual term, no termination for convenience is admissible. Hungarian case law has not established a clear-cut rule upon which the duration of a fixed term may be considered as an invalid constraint on the parties' freedom. As a rule of thumb, to be on the safe side, all fixed terms which exceed five years should be thoroughly assessed.
If the Agency Agreement has been entered into for an indefinite term, it may be terminated extraordinarily for good cause and for convenience by complying with certain minimum notice periods. Hungarian statutory law sets out the following minimum notice periods (depending on the actual duration of the Agency Agreement in question):
- during the first contractual year, a minimum notice period of one month with effect to the end of the month must be complied with;
- during the second contractual year, a minimum notice period of two months with effect to the end of the month must be complied with; and
- during the third and consecutive contractual years, a minimum notice period of three months with effect to the end of the month must be complied with.
The notice periods may not be shortened. The notice periods may be extended by contractual agreement, provided, however, the notice period for the Commercial Agent is at least of the same length as the notice period of the Principal.
Hungarian statutory law does not provide for a written form requirement with respect to the termination notice. For evidentiary purposes, we recommend setting out such requirement in the Agency Agreement and in any case terminating the Agency Agreement in writing with confirmation of receipt.
The indemnification claim as main consequence of the Agency Agreement's termination
The main consequence of the Agency's Agreements termination under Hungarian law is that – unless there are certain precluding circumstances – it triggers the Commercial Agent's entitlement to financial compensation in the form of an indemnification claim (this means that out of the two possible consequences EU law on Commercial Agents allows Member States to adopt – i.e. indemnification claim model or compensation claim model – Hungary opted for the indemnification claim model).
The Commercial Agent is, upon the Agency Agreement's end, entitled to an indemnification claim, if:
- payment of indemnity is equitable having regard to all the circumstances of the individual case and, in particular, the commission lost by the Commercial Agent, provided that
- during the contractual term, the Commercial Agent has acquired business with new customers or significantly increased business with existing customers of the Principal and the Principal continues to derive substantial benefits from such business; or
- the Commercial Agent completed its assignment for setting up a long-term relationship, but he is prone to lose regular income due to the termination of the Agency Agreement.
The calculation of the indemnification claim according to the above principle is subject to a case-by-case analysis. In any case, however, the amount of the Commercial Agent's indemnity is capped: it may not exceed the Commercial Agent's average annual remuneration over the preceding five years (or the actual term, if it was less than five years). The cap may be used as an estimate figure for Principals to assess the financial risk of a termination of the Agency Agreement.
The indemnification claim is precluded, if:
- the Agency Agreement was terminated by the Commercial Agent (unless the termination is justified by circumstances attributable to the Principal or the continuation of the Agency is unreasonable to the Commercial Agent due to its age or an illness);
- a third party succeeds to the Commercial Agent and after the Agency Agreement's end all three parties (i.e. Principal, Commercial Agent and the third party) enter into an agreement setting out the succession; or
- the indemnification claim was not invoked as against the Principal at the latest one year from the Agency Agreement's end.
The rules on the Commercial Agent's indemnification claim are mandatory and may not be contractually excluded. However, there are certain ways to at least influence the risk of an indemnification claim and its quantum which makes it worth including provisions in this regard in the Agency Agreement.
Other consequences of the Agency Agreement's termination
In the absence of a contractual agreement to the contrary, Hungarian law does not stipulate a post-contractual non-compete obligation of the Commercial Agent. Hungarian law, however, allows an agreement on such post-contractual non-compete obligation of the Commercial Agent for a period of maximum two years calculated from the end of the Agency Agreement. Such agreement on such post-contractual non-compete obligation must be in writing.
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