The notice contained in Article 25 of the Agency Contract Law is enforceable in the case of fixed term contracts that are tacitly renewable

In particular, the Provincial Court of Leon (Judicial Division 2) recently handed down a ruling on January 4, 2019 that analyzes an intriguing issue regarding the applicability of the notice provided for in Article 25 of Law 12/1992 of May 27, on the Agency Contract Law (hereinafter “LCA”) for cases of a company terminating an indefinite term agency contract.

In the court case decided by the aforementioned ruling, it was essentially discussed whether the compensation sought by the agent pursuant to Article 29 of the LCA was appropriate in the event of a unilateral termination by the employer without providing the agreed upon two-month notice.

In this sense, Article 29 of the LCA stipulates that “Without prejudice to compensation for customers, employers who unilaterally terminate an indefinite term Agency Contract, shall be obligated to compensate the damages that, in its case, the early termination has caused to the agent, provided that it does not allow the amortization of the expenses that the agent, instructed by the employer, has incurred in order to perform the contract.”

On the other hand, Article 25 of the LCA states that “The indefinite term agency contract shall be terminated by the unilateral termination by either party by giving written notice” and “The notice period shall be one month for each year of the term of the contract, with a maximum of six months”, notwithstanding that “The parties may agree on longer notice periods, but the agent’s notice period may not be less than the employer’s notice period in any case“. Finally, the aforementioned regulation adds that “To determine the notice period for fixed term contracts that have been converted into indefinite term contracts by operation of law, the term the fixed term contract would have had shall be calculated by adding the time that has elapsed since the contract was converted into an indefinite term contract.”

The parties to the dispute in these proceedings entered into an agency contract where a company appointed another agent for the province of Madrid in order to exclusively carry out business transactions and actions for the products that it distributed in its price catalog. The plaintiff alleged that the contractual relationship between the parties was unilaterally terminated by the defendant in breach of the two-month notice period stipulated in the agency contract, therefore he should pay the relevant compensation for unjustified termination of contract.

The defendant challenged, along with other recitals, alleging that, in addition to, in his opinion, having fulfilled the contractually established notice period of two months, the agency contract entered into between the parties was to be deemed to be a fixed term contract and not an indefinite term contract and therefore a notice period would not even be necessary, despite appearing in the text of the contract between the parties, since the contract would end after one year.

The following was stated in clause seven of the contract entered into by the parties: “This Contract is entered into for one (1) year and shall thus expire on May 16, 2017, but will be automatically extended for another year if not otherwise communicated in writing at least 2 months prior to expiration.”

The legal arguments then are clear: the plaintiff understands that this automatic, indefinite extension for annual periods entails an indefinite term of the contract with the subsequent application of the provisions of Articles 25 and 29 of the LCA, in particular the compensation and the defendant understands that since the initial contractual term and its subsequent extensions is a fixed, finite period, notwithstanding their tacit renewal, the aforementioned provisions of the law do not apply.

The Court ruled on the previous issue stating that “Indeed, the issue is controversial and there is no peaceful response in the rulings of the various Provincial Courts, however, we believe, as we said in the previous Ruling dated February 26, 2018, that the contract subject to a tacit extension clause, as is the case, is more in line with an indefinite term agency contract than a fixed-term contract (in this sense, the Ruling of the Provincial Court of Asturias, Judicial Division 1, dated June 19, 2002, and the Ruling of the Provincial Court of Barcelona, Judicial Division 1, dated February 2, 2004 and those mentioned therein), so that the notice period for terminating the contract would be the agreed two months in accordance with the provisions of Article 25.3 of the Agency Contract Law 12/92 of May 27”.

As a rule in our system, the parties have the power to unilaterally unbind themselves from indefinite term contracts – in this sense, Supreme Court ruling 130/2011 of March 15 -, however, the duty of loyalty, whose particular importance in business transactions is pointed out in  Article 57 of the Spanish Commercial Code, requires that the party that intends to unilaterally withdraw without cause gives notice to the other party even when it is not expressly stipulated in accordance with the provisions of Article 1258 of the Spanish Civil Code, unless there is reasonable cause to omit such communication – in fact, the duty of legal notice that Article 25 of the Agency Contract Law imposes is a specific expression of said rule. In this sense, Supreme Court ruling 130/2011 of March 15, reiterating ruling 1009/2005 of December 16, states that “it is, of course, unnecessary to give notice to terminate indefinite term contracts however it should be noted, that, although this is so, nevertheless it happens that exercising the power to terminate by surprise or without prior warning, without a certain margin for reaction in the form of reasonable advance notice, can be construed as an abuse of the right to terminate, or constituting unfair conduct incurred in bad faith when exercising rights, which while it does not prevent terminating the link, but must lead to compensation when it causes damages.”

Whether the contract from the aforementioned rulings was for an indefinite term or not can be argued. Of course, initially, it was not since a term of one year was foreseen. But it was also stipulated that, after that initial term, it could extended for an indefinite term, however always divided into spans of a year. In any case, a declaration of either party’s intent was required to terminate the contractual relationship. In that sense, if it was not an indefinite term, it did have an important similarity with contracts of this kind in that a declaration of either party’s intent was required to terminate it, just as Article 25 of the Law stipulates for indefinite term contracts.

Therefore, it can be said that, if the contract was not an indefinite term contract, it did have a great resemblance to that kind of relationship in terms of its termination method and, on the other hand, the declaration of the employer’s intent had the same objective and purpose of the termination of any contract.

This, in turn, is the interpretation that other provincial courts have been holding, citing, in addition to the rulings referred to in the excerpt transcribed above, the rulings of the Provincial Court of Cadiz – Judicial Division 8 – June 24, 2002, Provincial Court of Pontevedra – Judicial Division 6 – July 23, 2002, Provincial Court of Barcelona – Judicial Division 14 – November 29, 2002, and Provincial Court of Barcelona – Judicial Division 12 – October 2, 2003).

In any of these cases, one cannot overlook the fact that the compensation required due to failure to give prior notice is not immediate and objective, and in this regard, the aforementioned Supreme Court ruling 130/2011, dated March 15, stipulates that “Article 1101 of the Spanish Civil Code, by imposing on the party that fails to comply with the obligation to compensate, limits said party to “the damages and losses caused”, without presuming their concurrence due to the fact of non-compliance, in such a way that the damages actually caused to the agent because the employer did not notify its intentions in advance to terminate the contractual relationship, as stated in ruling 991/2007, of September 28 “as a rule, they can be compensated according to the general rules of contracts – and, of course, after proving their reality, given that the failure to give prior notice does not necessarily cause them, in accordance with settled case-law concerning any breach of contractual obligations: rulings of December 28, 1999, July 26, 2001 and April 30, 2002, among many others – “” and concludes “We establish as case-law doctrine that the unilateral termination of agency contracts without notice does not necessarily result in damages and, where appropriate, this does not have to coincide with the average remuneration received by the agent during the period of time covered by the notice.”

Thus, it is important to consider that from the employer’s perspective it would certainly be more advisable to enter into fixed-term agency contracts since their subsequent extensions require new, express agreement by both parties, thereby avoiding the application of the provisions of Articles 25 and 29 of the LCA.