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Legal Framework of Agency Contracts

Agency contracts are regulated under the new Turkish Commercial Code No. 6102 (“NTCC”) in a more detailed manner and some legal issues, which were not prescribed by the law but regulated as per Supreme Court of Appeals’ decisions, are reflected in the text of the code for the first time. Therefore, while in this paper we review the general provisions of the new law on agency contracts, we also evaluate the new issues regulated in the new law.

Pursuant to Article 102 of the NTCC, “he/she who takes as a profession the permanent carrying out of negotiation activities (i.e. intermediation activities) for contracts relating to a commercial enterprise or conclusion of such contracts on behalf of such commercial enterprise in a specific place or territory, without an ancillary role such as a commercial intermediary, mercantile agent, sales clerk or employee, shall be deemed to be an agent.”

In view of this definition, the main elements of an agency relationship may be briefly summarized as follows:

- The agent must negotiate and/or conclude contracts relating to a commercial enterprise;

- There must be an underlying agreement that constitutes the basis of the agent’s negotiation or contracting activities; and

- Such activities must show permanence and the agent must pursue these activities as a career.

In this respect, an agent carries out brokerage activities for businesses relating to the commercial enterprise of the principal, or performs such activities on behalf of the principal. The relationship between an agent and a principal is deemed as a form of “special representation”. A real person or legal entity agent is legally required to conduct the agency operation in compliance with the principal’s instructions and in a manner consistent with the interests of the principal.

The freedom of contract principle is also relevant for agency contracts. In the absence of a formal contractual arrangement, provisions on agency contracts laid down in the NTCC shall apply. In the cases where there is no provision in the articles of the NTCC on agency contracts, the provisions concerning occasional intermediaries under the new Code of Obligations No. 6098 (“NTCO”) will be applied to the commercial agencies who act as intermediaries, and the provisions concerning commissioners will be applied to the commercial agencies who conclude contracts; if there are no such provisions, then the provisions about representation will be applied.

Certain special topics regarding agency are regulated under other various codes. For example; insurance agencies are regulated in the Insurance Code and travel agencies are regulated in the Travel Agencies and Travel Agency Unions Code. The intermediaries who are agencies of brokerage houses in the purchase and sale of capital markets instruments are regulated under the Communiqué of the Capital Markets Board Regarding The Principles on Intermediary Activities and Intermediary Institutions, Serial: V, No: 46.

Legally Required Form for an Agency Contract

As per the general rule under the NTCO, the validity of a contract is not subject to any legal form, provided that a specific form is set forth as a validity requirement under a specific provision or law. As there are no specific laws requiring any such mandatory form (including the relevant provisions of the NTCC governing agency contracts) an agency contract may be entered into even in a verbal form. Notwithstanding the foregoing, as per the Civil Procedures Law No. 6100, a written document, i.e. a document signed by a principal and an agent, is required to prove the valid existence of a contract if the disputed amount exceeds TRL 2500 (app. Euro 1100), should there be any disputes regarding the agency relationhip.

Nonetheless, should a principal contemplate granting an agent the authority to execute contracts and other legal documents, to receive payments and to renew or decrease receivables on principal’s behalf, such power of attorney must be given in writing. Also, the authority to conclude contracts shall be registered and announced by the agent.

Rights and Obligations of an Agent

As indicated above, the parties are free to contractually agree on the rights and obligations of the agent. Even if there are no written contractual arrangements, it is possible to determine the basic rights and obligations of an agent under the provisions of the applicable laws.

1. i. Obligations

Under the Turkish commercial and contracts law regime, an agent is required to:

- Conduct activities relating to the business of the principal within the territory. The principal is free to contractually limit such activities to a narrower extent than provided for in the legislation. Similarly, the principal may impose sales targets on its agents;

- Respect the principal’s interests e.g. show due care in selecting customers, monitoring the conditions of the market, etc.;

- Observe the duties of loyalty and trust, which duties cover the: (i) duty to notify the principal about all issues relating to the relationship between the principal and the agent, (ii) duty to act in accordance with the principal’s instructions to the extent that such instructions do not encroach on the independence of the agent, (iii) non-compete obligation, (iv) duty of confidentiality;

- Take preventive and/or protective measures in favor of the principal when necessary i.e. to seek remedies such as notifications for payment or protest, injunctive relief, evidence consideration etc., as may be required; and

- Remit all relevant payments and send the necessary documents to the principal in a timely fashion.

1. ii. Rights

Under the Turkish commercial and contracts law regime, an agent is entitled to:

- Request payment of commission fees; an agent will be entitled to commission fees only after the customer duly pays the amount under its sales agreement with the principal;

- Unless otherwise agreed under the contract, carry out activities in a territory exclusively assigned;

- Claim compensation for extraordinary costs;

- Claim portfolio compensation for losing its clientele and suffering financial distress as a result of an unjust termination by the principal or valid termination by the agent; and

- If a non-competition obligation is set forth after the termination of the agreement, claim special compensation for non-compete.

Rights and Obligations of a Principal

The rights of the agent constitute the obligations of the principal, and the obligations of the agent constitute the rights of the principal, due to the synallagmatic nature of agency contracts. To clarify, the principal shall inform the agent regarding the offers that he does not accept, shall provide the documents regarding products, shall inform the agent on the issues necessary for him to fulfill his obligations, and especially shall notify if the volume of business will be less than expected and shall pay the necessary fees.

Authorities of an Agent and Unauthorized Representation

An agent is entitled to:

- Negotiate (intermediate) and/or conclude contracts on behalf and for the account of the principal; and on this basis, agents can be classified in two classes: (i) agents with the authority to conclude contracts on behalf and for the account of his principal, (ii) agents without the authority to conclude contracts on behalf and for the account of his principal;

- Represent the principal in respect of preventive and/or protective measures referred to above; which authority covers the right to represent the principal before courts; and

- Collect and receive payments in respect of the goods or services from third parties personally contracted by himself.

Pursuant to Article 108 of the NTCC, in cases where an agent acts without authority or exceeds the authority granted, the principal may immediately give consent to the relevant transaction negotiated and/or concluded by the agent. If such consent is not given, the agent will be responsible for the transaction on his own behalf and account.

Termination of Agency Contracts

Where agency contracts have an indefinite term, either party who requests to terminate the contract shall submit the request to terminate at least three months prior to the effective date of any contemplated termination. Agreements for a definite period of time shall automatically terminate upon lapse of the contractual term, unless the parties agree on an automatic renewal system. In any case, any party may rely on just grounds to immediately terminate the agency agreement.

Other than bankruptcy, death and restriction of capacity, which are referenced in the rules of the NTCO, incidents that may constitute just grounds for termination are not specifically defined in the NTCC; however, according to the Supreme Court of Appeal’s decisions, the following reasons may, inter alia, be considered as just grounds for termination of agency contracts:

In the event that one of the parties to the contract:

- Discontinues or becomes obliged to cease its activities for any reason for an unreasonable period;

- Engages in any activity causing harm to the other party, whether directly or indirectly; and

- Makes late payments in spite of written notice.

In addition, the parties to an agency contract may also mutually agree on other just grounds on the condition that such causes are not against the mandatory provisions of the law.

Needless to say, agency contracts are automatically terminated upon expiration, on the condition that they are not renewed by the mutual agreement of the parties or do not contain any auto-renewal provisions.

Goodwill Indemnity

Before the NTCC, there was no legal provision under Turkish law regulating the goodwill indemnity (in other words “portfolio compensation”); the concept and grounds for goodwill indemnity had been established by Supreme Court of Appeals’ precedents.

In line with established practices of the Supreme Court of Appeals, in the event of termination of the agency agreement, (regardless of whether the three months-notice is given or not) a “portfolio compensation” may be ordered by the court due to the goodwill created by the agent.

The method adopted to make such a calculation is to leave the compensation amount to the court’s discretion, but limiting it with the average of the agent’s yearly net profit accrued during the previous five-year period.

Goodwill indemnity for agencies is specifically regulated under Article 122 of the NTCC. Pursuant to the NTCC, the conditions for goodwill indemnity are that:

- Principal has derived significant benefit from the clientele formerly introduced by the agent, after termination of the agency contract;

- As a result of the termination, agent has lost the right to claim compensation pursuant to potential agreements with clients that it might have entered into, had its agency rights not been terminated by principal;

- Payment of the compensation is fair and equitable.

The NTCC also provides that the amount of compensation shall not exceed the yearly average of the agent’s annual commissions or other payments received within the previous five years. If the contract continued less than five years, then the yearly average of the whole activity period shall be taken into consideration. The NTCC specifically states that if the agent terminates the contract on its own or the producer company terminates the contract on just grounds, then the agent shall not be entitled to claim the goodwill indemnity. It must be noted that a provision in an agency contract establishing a waiver by the agent from the right to claim goodwill indemnity is not valid. In other words, even though the agency contract explicitly states that the agent will have no rights regarding any goodwill indemnity whatsoever, the court may still rule in favor of the agent asking for goodwill indemnity.

The claims must be raised within one year as of the termination of the agency contract.

Non-Competition Obligation and Indemnity

Pursuant to the NTCC, unless otherwise agreed in writing, the principal shall not appoint more than one agent at the same time within the same territory and same area for the same field of activity. Moreover, an agent shall not act on behalf of competitors who are located at the same place or region or are active in the same commercial area. In other words, the non-competition obligation shall apply to the agency during the term of the contract unless otherwise agreed by the parties.

On the other hand, under the law, the agent is not bound by a non-competition obligation after the term of the agency contract has ended. Another matter which is regulated by the NTCC for the first time, is the rules on non-competition agreements after the term of the contract which is set forth in Article 123. In order to limit the activities of an agent after the termination of the agency contract, the parties shall agree in writing and the agreement covering the rules of mutual understanding shall be signed by the principal and delivered to the agent. This kind of non-competition agreement can only be valid for an additional period of two years after the termination or expiry of the agency contract, and it can only be relevant to the territory covered by and customer group provided to the agent, and the subjects of the agreements that the agent is entitled to negotiate. The principal shall pay a reasonable compensation to the agent for the non-competition limitation. The principal may waive the non-competition limitation before the termination of the agency contract. In such an event, the principal will not be under the obligation to pay compensation after the passing of six months after the agent’s waiver. In the event that one of the parties terminates the contract on just grounds within one month of the termination date, such party can notify the other party in writing that it is not bound by the non-competition agreement. The arrangements contrary to the above rules will be invalid to the extent they are against the favor of the agent.