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The non-constitutionality judgment regarding fixed-term commercial agency contracts in Egypt – January 2014

The non-constitutionality judgment regarding fixed-term commercial agency contracts in Egypt – January 2014

According to Article (177) of the Egyptian Commerce Code No. 17/1999, an agency contract is one, by virtue of which a person undertakes, on a continuous basis and within the specified business territory, to promote for, negotiate and conclude transactions in the principal ‘s name and for his account, in return of a remuneration. The agent’s task may also include the execution of such transactions in the principal’s name and for his account.

With regards to the termination of the fixed-term commercial agency contract, Article (189) of the Egyptian Commerce Code does refer to it. It stipulates that:

  1. Regarding the fixed-term contract, if the principal refutes to renew the contract upon its termination, the agent shall be entitled to receive compensation, estimated according to the judge’s sole discretion, even if it has been otherwise agreed upon;
  2. In order to receive such compensation, it is required that: a. The agent does not commit any fault or negligence during the execution of the contract. b. The agent’s activity leads to an apparent success in promoting the goods or in increasing the number of clients;
  3. When estimating the compensation, the damages incurred by the agent as well as the principal’s benefit resulting from the former’s activity in promoting the goods and increasing the number of clients, shall both be taken into account.

On 14 June 2012, the Egyptian High Constitutional Court rendered its judgment ruling that the aforementioned Article is unconstitutional. This judgment is based on the following: 

  1. As a general rule, fixed-term contracts are considered terminated by force of law, by the lapse of the term agreed upon by the parties, and consequently all contractual bonds between them come to an end, resulting that each party retrieves his/her respective full authority, deriving from the ownership right and from the freedom of contracting;
  2. In the event the principal does not renew the agency contract upon its termination, the principal’s responsibility is based upon an assumed fault accompanied by his intention to harm the agent;
  3. The main goal of the contractual agency is the formation of a clientele and the promotion of goods. So the apparent success of the agent in promoting the goods or in increasing the number of clients is merely a normal outcome of executing the contract in bona fide and of fulfilling a legal commitment upon the agent, in accordance with the contract and the provisions of law. In addition, the apparent success of the agent is the fruit of the collaboration between the agent and the principal;
  4. The general rule that has been legalised by the Civil Code in Article (4), stipulating that whoever uses his/her right in a legitimate manner shall not be liable for the damages resulting from such usage. Any exception to this general rule requires the adjustment of the responsibility provisions, in order to be consistent with the Constitutional Declaration dated 30 March 2011.

Moreover, the Court issued its judgment, rendering also Paragraph (1) of the subsequent Article No. (190) of the Egyptian Commerce Code unconstitutional, which stipulates that: “The compensation suit, mentioned in the previous article, cannot be filed after the lapse of 90 days starting from the termination date of the contract”, since this article is tightly linked to the previous one (Article 189) deemed unconstitutional.

In our opinion, this judgment represents a victory to the freedom of contracting principle, which is one of the main tributaries of the personal freedom principle, mentioned in Article (8) of the Constitutional Declaration, dated 30 March 2011.

Whereas, the interference of the legislator by this compulsory rule, created a bizarre situation: the principal finds himself facing two strange choices; either to renew the agency agreement (which would turn this – originally fixed-term agreement – into a permanent one) or to compensate the agent, as determined by the judge, according to the rules and provisions of Article (189), the matter which causes an imbalance in the relation between both parties and constitutes a restriction on the freedom of choice (the crux of the freedom of contracting principle). However, it is the legislator duty to guarantee this principle, under the rules of justice, seen from their social side as the base of the economic system.

Nevertheless, we believe that the judgment neglects the agent’s right to claim for compensation for the damages he/she has suffered due to the termination of the contract by the principal, despite of all the effort made by the former in the process of promoting the goods and boosting the number of clients, especially that the Civil Code does not handle – by any means- the matter of commercial agency.

Furthermore, it is not acceptable, that the principal terminates the commercial agency contract, for which, the agent spent much effort and time, and bore pecuniary expenditures – that might have been very high- aiming to gain the fruits of his/her efforts in the promotion of a good that was unknown or unclaimed in the scope of business within the geographical territory subject to the said contract.

Not to mention that it is morally unacceptable, that the principal decides to terminate the contract, even though the agent did not commit any fault or negligence while performing his obligations. Afterwards the principal would immediately appoint another commercial agent, whose task is to distribute the same goods, subject of the former agent’s contract, the matter which causes a disadvantage to the first agent, as a result of exerting effort, time and money, and deprives him from the benefits of his commercial activity which lead to an increase in the number of goods sold and the growth of the principal’s commercial activity.

We also believe that the theory of unlawful enrichment is applicable on the new agent, who will benefit and enrich – as previously mentioned- at the expense of the first agent’s efforts in the promotion of the goods.

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