Non-Compete Obligation Of The Commercial Agent

December 2014 Naciye Yılmaz
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Introduction

Non-compete obligation of the commercial agent is assessed under two headings under Turkish Law. Firstly, we address the non-compete obligation of the agent during the term of the agency agreement. Pursuant to Article 104 of Turkish Commercial Code numbered 6102 (“TCC”), entitled “Exclusivity”, an agent should not act on behalf of different principals who work within the same geographical area or territory, and who are in competition with each other. This obligation results from the agent’s duty of loyalty. Secondly, there are non-competition agreements which cover the period subsequent to the termination of the agency agreement. Non-competition agreements are regulated under Article 123 of the TCC. According to the legislative justification of the TCC, the ratio legis of the relevant disposition is protection of agents against non-competition agreements that are usually concluded upon the request and under pressure of the principal, by introducing the time and subject limitation, the written form requirement and compensation requirement for the prohibition of competition.

Non-Compete Obligation during the Term of the Agency Agreement

The right to exclusivity regulated under Article 104 of the TCC is qualified as either “monopoly right” or “exclusivity” by doctrine, and in practice. The TCC adopts the “one agent – one principle” rule[1], even though the parties are free to agree otherwise. The non-compete obligation of the agent during the term of the agency agreement is known as the monopoly right of the principal. This monopoly right of the principal means that unless otherwise agreed in writing, as per the duty of loyalty of the agent, the agent shall not act on behalf of several competing commercial enterprises that are located in the same geographical area or territory. Within this framework, we see that the non-compete obligation of the agent is limited with time, scope and area.

With respect to the wording of Article 104 of the TCC, various scholars defend that “competitors” should be interpreted in the strictest sense, and be understood as “competitors active in the same commercial fields of activity[2].” In other words, an agent can act on behalf of several commercial enterprises active in different commercial fields of activity. The fact that agents are independent commercial auxiliaries is one of the reasons why an agent can act on behalf of several commercial enterprises. Geographical limitation is determined in accordance with agreement between the parties. In addition, exclusivity can be provided for a specific product or group of customer so long as it is determined for a certain geographical area or territory.

The agent may act on behalf of competing commercial enterprises provided that the principal gives its consent, accordingly. Written form is a validity condition for this agreement. However, within the scope of the agent’s obligation to protect its principal’s interests, which is one of the of the agent’s duties of loyalty, even though the agent is allowed to compete through an agreement, the agent should not harm the principal’s interests[3]. In such a case, an abuse of the right to compete shall be in question[4]. In other words, the fact that the agent is released from a non-compete obligation by an agreement does not mean that the agent is also released from its other legal obligations against the principal. In any event, the agent is obliged to protect its principal’s interests.

Breach of Non-Compete Obligation

A non-compete obligation is a liability for an agent since he/she cannot establish an agency relation with the competitors of the principal. Any non-compliance with this liability either may result in compensating the principal, or may cause in the principal to terminate the agency agreement[5].

Non-Competition Agreements

Article 123 of the TCC regulates the contractual non-compete obligation for the period subsequent to the termination of the agency agreement. In principle, parties are free to continue working together after the termination of the agency agreement. However, non-competition agreements are used to be executed for the purposes of the protection of trade secrets shared during the term of work between the parties, the loyalty obligation of the agent, and the avoidance of any conflict of interest. Under Turkish legislation, the provision regulating the latest agreement for the first time in the TCC originates from the German Commercial Code. Before the adoption of the TCC, the provisions pertaining to the service contract under the abolished Code of Obligations numbered 818 were applied when necessary to the agency agreements, and the non-competition agreements were also treated accordingly[6].

Pursuant to Article 123 of the TCC, the agreement by which the agent’s conduct of business is restricted after the termination of the contractual relationship between the parties shall be made in writing. In addition, the principal must deliver a signed document comprising of the terms and conditions of the non-competition agreement to the agent. Written form is required for the validity of this agreement[7].

Scope of Application

Subject of the non-competition agreement is the limitation of the agent’s activities with a non-compete obligation for the agent. The wording of the relevant article refers to “restricting the activities of the agent after the termination of agency agreement.” Therefore, scope of the non-compete obligation is determined in accordance with the agent’s activities conducted for the principal[8]. Thus, the scope of the non-compete obligation shall be determined primarily according to the provisions of the agency agreement. However, the expression, “activities of the agent” shall be strictly interpreted, and the agent shall be allowed to continue its activities in other fields. There is a tendency to broadly interpret this expression, in practice. Therefore, it is defended that the scope of the below-mentioned compensation should also be broader[9].

The time limitation for the agreement is set forth by law. Pursuant to Article 123 of the TCC, non-competition agreements should be concluded for a maximum of two years, starting from the termination of the agency agreement. This two-year period is definite and shall neither be extended, nor shall it be suspended or interrupted. The agreements stipulating a non-compete obligation for a period longer than two years shall be deemed partially null and void, and the restriction shall ipso jure not procure any effect after the termination of this two-year period[10].

Timing of the Non-Competition Agreements

As stated in Article 123 of the TCC, the timing of non-competition agreements is essential. As a result of the purpose regarding the protection of the agent, non-competition agreements shall only be concluded along with the agency agreement, or during the term of the agency agreement. However, it is unclear whether the non-competition agreements concluded after the termination of the agency agreement fall within the scope of Article 123 of the TCC. However, principals may require the agents, during the term of the agency agreement, to conclude future-dated non-competition agreements, and eliminate the protection laid down in Article 123 of the TCC. In order to eliminate this outcome, some scholars argue that Article 123 of the TCC should also be applied to the non-competition agreements concluded after the termination of the agency agreements[11]. Moreover, pursuant to Article 14 of Law numbered 6103 on the Entry into Force and Application of the Turkish Commercial Code, non-competition agreements concluded before the entry into force of the TCC, and still in force on 01.07.2012 (which is the date of entry into force of the TCC) are within the scope of Article 123 of the TCC.

Compensation for Non-Compete Obligation

Pursuant to Article 123/1 of the TCC, the principal shall compensate the agent for valid non-competition agreements. The lawmaker does not provide a specific amount here, but refers to an “adequate compensation.” The obligation of compensation payment arises directly out of the law, and does not need to be stated specifically in a non-competition agreement.

The amount of the compensation shall be determined, considering the objective conditions. However, it must be mentioned that in any case the compensation shall not exceed the value of the contract[12]. Various of the scholars state that the compensation as related to a non-competition agreement should be determined considering the calculated goodwill compensation, and according to the average commission/remuneration of the agent for the last five years corresponding to the period of non-competition, since the agent is prevented from acting on behalf of other competing enterprises in the same territory[13].

Pursuant to Article 123/2, the principal may renounce the non-competition agreement until the termination of the agency agreement. In that case, the principal is released from its obligation to compensation payment for non-competition after six months as of the date of the declaration related to the renouncement of the latest.

Invalidity

Article 123 of the TCC regulating the non-compete obligation is mandatory; therefore, any disposition to the detriment of the agent is null and void. The right for an adequate compensation is also deemed mandatory, that is why any disposition providing non-adequate and low compensation is deemed null and void, as well.

Conclusion

In conclusion, the non-compete obligation of the agent may be determined for the period of agency agreement, or after termination of the agency agreement. The non-compete obligation of the agent provided in Article 104 of the TCC is set forth in order to protect the agent considering the subject, time and geographical limitations. However, under Turkish Law, an agent’s non-competition with its principal is the rule; otherwise, shall be only agreed upon in writing. The non-compete obligation for the period after the termination of the agency agreement is provided by non-competition agreements. Such agreements are also concluded in writing, and a signed copy that included the terms of the related agreement by the principal should be delivered to the agent. Non-competition agreements shall be concluded for a maximum of two years, and considering the purpose of the provision, it is more appropriate to state that such agreements shall be concluded along with the agency agreement or during the period of agency agreement. As mentioned in detail, above, since non-competition agreements are synallagmatic, the principal shall adequately compensate the agent in exchange for its non-compete obligation, if any.

[1] Kaya, Arslan; Türk Ticaret Kanunu Şerhi, Birinci Kitap Yedinci Kısım: Acentelik, Beta Yayınları, 2013, p. 42.

[2] Kaya, Arslan; p. 42.

[3] Poroy/Yasaman, Ticari İşletme Hukuku, Vedat Yayıncılık, 2012, p. 251.

[4] Kayıhan, Şaban; Türk Hukukunda Acentelik Sözleşmesi, Seçkin Yayınları, 2011, p.108.

[5] Kaya, Arslan; p. 45.

[6] Göksoy, Yaşar Can, 6102 Sayılı Yeni Türk Ticaret Kanunu’na Göre Acentenin Sözleşme Sonrası Rekabet Yasağı Anlaşması, Dokuz Eylül Üniversitesi Hukuk Fakültesi Dergisi Cilt:12, 2010, p. 896.

[7] Poroy/Yasaman, p. 262.

[8] Kaya, Arslan; p. 292.

[9] Kaya, Arslan; p. 292.

[10] Kaya, Arslan; p. 293.

[11] Göksoy, Yaşar Can, p. 900.

[12] Kaya, Arslan; p. 296.

[13] Poroy/Yasaman, Ticari İşletme Hukuku, Vedat Yayıncılık, 2012, p. 262.

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