Beware – Foreign Law May Trump Choice of Law Clauses In Your Agency Agreements!

Here’s a word of caution when dealing with commercial agents based in the EU:  the European Court of Justice (the “ECJ”) has recently ruled that EU Member States can implement mandatory commercial agency rules that will trump any choice of law clauses contained in particular agreements between parties, including arbitration clauses. The ruling stemmed from a case involving a Belgian commercial agent who entered into a commercial agency agreement in order to operate the principal’s container liner shipping service. A disagreement arose when the agent accused the principal of unlawfully terminating the agreement months before the date provided for in the contract. Although the parties’ agency agreement contained an arbitration clause that referred all disputes to the Bulgarian Chamber of Commerce and stipulated that Bulgarian law applies, the Belgian agent brought a claim against the principal in a Belgian court for compensation pursuant to Belgium’s Law on Commercial Agency Agreements. The law provided that “any activity of a commercial agent whose principal place of business is in Belgium shall be governed by Belgian law and shall be subject to the jurisdiction of the Belgian courts.”

Thus, the question was whether the Belgian law granting jurisdiction over the matter to the courts of Belgium and sanctioning the use of Belgian law trumps the choice of law clause in the parties’ agency agreement calling for arbitration of any dispute between the parties in Bulgaria under Bulgarian law.  The ECJ concluded that given the fact that a Member State’s mandatory national laws do not permit the Member State to deviate from such mandatory requirements in order to comply with EU law, a finding that Belgium’s Law on Commercial Agency Agreements imposed “mandatory” obligations on the Member State and the contracting parties would render the  arbitration clause in the agreement unenforceable.

What does this mean for you?

  1.  Simply pasting in a standard form arbitration clause may not be providing you with the protection you think it is.  The case illustrates the fact that your agent’s home country may have statutes that override terms in your agreement.  Thus, you want to perform more due diligence on potential local agents prior to entering into contracts.   You should go beyond merely understanding where the particular branch or office you are contracting with is doing business and find out if the agent is doing business in other countries with laws that could affect your agreement.
  2.  Also it is now even more important to have a basic understanding of what affect the agent’s local law will have on your agreement terms if a dispute should arise. You can then better assess the risk associated with the agreement and either account for that risk in the agreement or attempt to structure the business relationship in a different way in order to avoid exposure to that particular risk altogether.