Turkish Law Blog
Portfolio Compensation Under the Turkish Commercial Code
Founding Attorney Hatice Zümbül – Legal Intern Mehmet Turgut
Adequate compensation known as portfolio compensation (also known as “Goodwill Indemnity/Compensation” and “Clientele Compensation”) is a provision that the company continues to benefit circle of customers that the agent constituted with the ending of agency agreement, pays to the agent which lost its wage with the ending of agreement.
In Turkish legislation, first lawful regulation regarding portfolio compensation is set forth under the Turkish Commercial Code numbered 6102, dated 13.01.2011 (“TCC”). According to article 122 of the TCC, after the termination of the agency agreement, the commercial agent shall be entitled to a reasonable compensation where the conditions given by the article in question are met.
Pursuant to article 102 of the TCC which defines agent, which acts as intermediaries in agreements concerning the principal or execute such agreements on behalf of the principal on a continuous and contractual basis within a specific geographical area or territory (without possessing a legal status of commercial representatives, trade agents, sales officers or company employees).
Accordingly, those who act as intermediaries within a specific geographical area based on a continuous and contractual basis excluding commercial representatives, trade agents, sales officers or company employees shall have right to demand goodwill indemnity under some circumstances stipulated by the TCC.
In this context, the purpose of this article is to explain portfolio compensation and its conditions to demand in order to clear the matters for companies which is a part of agency or exclusive distributor agreement. Firstly, the legal nature of the portfolio compensation will be examined. After then the conditions for portfolio compensation will be given before presenting the calculation of the amount of portfolio compensation.
II. The Definition and Elements of Agent
1. Elements of Agent and Agency Relationship
According to the TTC, those who take 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. Through this definition, the elements of agent can be specified as follows;
- Agents are independent from the principle and have their own business with following the instructions of the businesses they represent in the marketing of goods and services.
- Agency relationship is established with the contract that is not obliged under any legal form. However, the agent shall be given a specified written authorisation letter in order for receiving goods for which the agent does not pay yet and for authorisation on debt/money collection, discounts or delay.
- The territory or area where the agent will carry out its business is determined by the contracting parties’ will unless otherwise specified in written, another agent shall not be assigned for the same territory or area at the same time.
- Agency activity is not one-off activity; it maintains for the period determined by the contract.
- Agent carries out the business such as making agreement on behalf of the principal, protecting the right of principal, collecting debts arising due to contracts.
2. Portfolio Compensation Under Exclusive Distributor Agreements
Before the Law no 6102 enters into force, even though there was no legal regulation for exclusive distributor/seller to demand portfolio compensation, they could demand compensation under the name of portfolio compensation on the ground of legal precedents of the Court of Cassation (“Yargıtay”). Through the Law no 6102, the portfolio compensation is regulated under article 122/5.
Accordingly, article 122/5 states that “the provisions of Portfolio Compensation shall also be applicable to the exclusive distribution agreements and other continuous agreement relationships granting an exclusive right, as long as the situation shall not be against good faith.”
With this regulation that is to be applied for permanent debt relations such as exclusive distributor agreement or agency agreement, it is purposed that the differences between such permanent debt relations are removed, and stable and equitable practices are put into force. It is, actually, appropriate that the portfolio compensation is paid to the exclusive seller/distributor considering the similarity of interests provided by agents or exclusive sellers to the principal.
It is also important to mention the differences between the agency relations and exclusive seller relations. First of all, one of the main differences is the fact that agency can carry out the business on the behalf of the principal, and is paid for this activity while the exclusive seller sells the goods on his/her behalf and own account and profit and loss belong to his/her.
III. Conditions to Demand Portfolio Compensation
Portfolio compensation is an indemnification paid by manufacturer to distributor or principal to agent after termination of distributorship/agency agreement, since the manufacturer/principal has gained certain profits from the customer portfolio provided by distributor or agent. In other words, the agent creates goodwill for its principal, reinforces its principal’s relations with the customers and introduces the trademark of the principal to the customers. As a result of this relation, the principal or manufacturer in the example of exclusive seller, keeps to benefit from these new customers and relations by which the agent or seller contacted.
In this context, for such benefit of principal, agents or exclusive sellers are entitled by the Law to demand compensation called as portfolio/goodwill indemnity when the conditions are met. The conditions where the portfolio compensation shall be paid are stipulated under the article 122 of the TCC.
First of all, in order for an agent to demand portfolio compensation , the reason of the termination of contract shall not be attributed to her/him. Article 122(3) regulates that “the compensation shall not be payable where the commercial agent has terminated the agency agreement unless such termination is justified by circumstances attributable to the principal or the principal has terminated the agency agreement because of default attributable to the agent.”
In other words, if the agent terminates the contract on its own or the principal terminates the contract on just grounds, then the agent shall not be entitled to claim the portfolio compensation.
Besides, pursuant to article 122 of the TCC; the commercial agent shall be entitled to a reasonable compensation upon termination of the agency agreement if:
i- She/he has brought the principal new customers and the principal continues to derive substantial benefits from the business with such customers, and
ii- She/he is deprived of the commission that she/he would be entitled to if the agency agreement was not terminated and that arises out of agreements entered into or will be entered into within a short time between the principal and third parties introduced by the commercial agent's activities,
iii- the payment of this compensation is equitable having regard to all the circumstances.
In examination of these provision, the principal shall continue to derive substantial benefits from the business with new customers that the agent has brought to the principal. The meaning of new customers does not cover those who was brought due to the prior the agency contract or brought due to activities of the former agent. The agent shall prove whether the customers the principal benefit from is the new customer or not.
Moreover, the agent shall be deprived of the commission because of the termination of the contract. In other words, it is necessary that if the agency agreement was not terminated, the agency would benefit from the new customers she/he brought. Also, the agent shall not be entitled to demand portfolio compensation where any remuneration is paid to her/him even though the contract is terminated.
Accordingly, portfolio compensation shall be fair and equitable. Considering the circumstances of the case, the payment of this compensation shall be appropriate. It means the efforts of agency to promote the product and create an image and take a share in the competitive market. The fact that the product or business is a known famous brand does not cause their efforts to be ignored.
Lastly, it also carries importance to consider for contracting parties that “the parties may not derogate from right to compensation to the detriment of the agent before the agency agreement expires. The compensation shall be claimed by the agent within one year after the termination of the agency agreement” (Article 122(4) of the TCC). This provision is regulated in order to protect agents, and the agent shall claim the portfolio compensation within a year following the termination of the contract.
Calculation of the Amount of Portfolio Compensation
Article 122(2) regulates the calculation and the limits of the amount of portfolio compensation. Accordingly; “the amount of the compensation may not exceed a figure equivalent to a compensation for one year calculated from the commercial agent's average annual remuneration over the preceding five years and if the agreement goes back less than five years the compensation shall be calculated on the average for the period in question.”
If the contract continued less than five (5) years, then the yearly average of the whole activity period shall be taken into consideration.
In this context, the Law does not bring a statutory provision with regards to the amount which may be claimed by the agency/exclusive seller but defines some minimum rules. Parties, on the other hand, may always agree on an alternative model which allows an equalization payment above the threshold defined in legislation.
Briefly, in the calculation of portfolio compensation, the net amounts to be paid to the agency should be calculated. This amount is the amount that is paid to the agency in the case of the continuation of the agency contract with the principal.
In order to find the net amount, first the gain of the principal and then the loss of the agency is calculated. Secondly, the gain of the principal and the loss of the agent shall be reviewed depended on the good faith. The good faith, mathematically calculated business gain and loss of agency, reshapes according to the characteristics of the present case. It might decrease or increase the amount of portfolio compensation depended on the case. Lastly, the net amount decreases to the limit where it exceeds the limit stipulated under article 122 of the TCC.
The Turkish Commercial Code no 6102 regulates the compensation which was formerly applied by the Court of Cassation decisions, under the name of portfolio compensation, and defined some rules in relation to such payable amount. Portfolio compensation is an indemnification paid by manufacturer to distributor or principal to agent after termination of distributorship/agency agreement, since the manufacturer/principle has gained certain profits from the customer portfolio provided by distributor or agent, and its purpose is that agents shall not be derived its rights arising from new customers.
In Turkish Law, article 122 of the TCC set forth the conditions to demand portfolio compensation and the limit of its amount. Accordingly, agents or exclusive sellers are entitled to demand portfolio compensation with a fair amount where the contract is terminated without the agent or seller’s fault and the principal keeps to benefit from the new customers brought by the seller or agent. Where any remuneration is paid to the agent, she/he shall not be entitled to demand portfolio compensation.
The purpose of this regulation is to ensure, on an equitable basis, an agent’s rights deriving from the clientele. Therefore, principal’s fault for the termination of the contract is not a requirement to demand portfolio compensation.