Choice of Law in International Commercial Agency Agreements: Party Autonomy, Article 38 of Decree-Law No. 178/86 and the Limits of Overriding Mandatory Rules

Subtitle: Between the protection of the commercial agent, Directive 86/653/EEC, the Rome I Regulation and the Ingmar/Unamar case law

Suggested SEO title: Choice of law in international commercial agency agreements and clientele indemnity in Portugal
Meta description: Analysis of Article 38 of Decree-Law No. 178/86, choice of law in international commercial agency agreements, Directive 86/653/EEC and overriding mandatory rules in light of the Ingmar and Unamar judgments.
Keywords: international commercial agency agreement; choice of law; Article 38 Decree-Law 178/86; clientele indemnity; commercial agent; Rome I Regulation; overriding mandatory rules; Directive 86/653/EEC; Ingmar; Unamar.

I. Introduction

Choice of law in international commercial agency agreements now lies at the intersection of three normative forces which do not always coexist without tension: party autonomy, as a structural principle of European private international law; the protection of the commercial agent, enshrined in Decree-Law No. 178/86 of 3 July and in Directive 86/653/EEC; and the restrictive discipline governing overriding mandatory rules, as developed through Article 9 of the Rome I Regulation and the case law of the Court of Justice of the European Union.

The issue is of evident practical importance. In an agency agreement concluded between a foreign company and an agent carrying out activities in Portugal, the parties will often choose the law of the principal’s country, English law, Swiss law, German law, French law or another legal system regarded as more suitable for the transaction. Such a choice may seek predictability, neutrality, contractual familiarity or integration of the agreement within an international distribution model. The question is whether that choice may displace the Portuguese rules on termination of commercial agency agreements, particularly as regards notice, indemnity for failure to give notice and the agent’s clientele indemnity.

Article 38 of Decree-Law No. 178/86 addresses that concern in Portuguese domestic law. It provides that, in respect of contracts governed by that statute and performed exclusively or predominantly in Portugal, foreign law shall apply to the termination regime only if it proves more favourable to the agent. The provision was conceived as an instrument for the protection of the commercial agent, preventing the choice of a less favourable foreign law from emptying the protection conferred by Portuguese law of its substance.

However, after Ingmar and Unamar, the problem can no longer be resolved by a simple formula. It is not enough to say that the choice of a foreign law will always displace Portuguese law. Nor is it accurate to maintain that Article 38 automatically neutralises any foreign law less favourable to the agent, without an analysis of compatibility with European private international law.

It is within this intermediate space that the analysis must be situated: Article 38 retains its own normative relevance, but its characterisation as a true overriding mandatory rule, in the European sense, must be tested against Article 9 of the Rome I Regulation and the restrictive case law of the Court of Justice, in particular the Unamar judgment.

II. Article 38 of Decree-Law No. 178/86

Article 38 of Decree-Law No. 178/86 contains the specific Portuguese provision on the spatial application of the commercial agency regime. Its structure rests on four elements.

First, the provision refers to “contracts governed” by the statute. Its direct scope is therefore the commercial agency agreement. Any projection onto commercial concession, distribution or franchise agreements may only arise indirectly or by analogy, and never as an immediate consequence of the statutory wording.

Secondly, the provision requires that the contract be performed exclusively or predominantly in Portuguese territory. The criterion is functional, not merely formal. What matters is where the agent’s activity is carried out, where the clientele is acquired or developed, and where the typical economic result of agency is produced.

Thirdly, Article 38 confines its intervention to the termination regime. It does not purport to govern all aspects of an international commercial agency agreement. A foreign law chosen by the parties may continue to govern matters such as interpretation, ongoing obligations, the regime applicable to certain breaches, commercial terms, reporting obligations, confidentiality or other matters falling outside the termination core. Article 38 is therefore a sector-specific rule of precedence.

Fourthly, the provision does not necessarily impose Portuguese law in every case. Its technique is comparative: the chosen foreign law may apply if it is more favourable to the agent. Article 38 does not embody a rule of legal nationalism, but rather a principle of more favourable treatment for the agent in matters of termination.

Under Portuguese law, termination of a commercial agency agreement includes expiry, ordinary termination, termination for cause, termination by agreement, indemnity for failure to give notice, indemnity for breach and, above all, clientele indemnity. It is precisely in relation to the latter that the tension becomes most acute, since the clientele indemnity is at once the most characteristic, most onerous and most debated institution within the agency regime.

Portuguese scholarship has emphasised that the clientele indemnity is not an indemnity in a purely compensatory damages sense. Joana Vasconcelos underlines that it is closer to compensation for the benefit retained by the principal after termination than to damages in the classic sense. The same author connects this construction with the compensatory model of German inspiration adopted in Portugal, in contrast with the more damages-oriented French model.

This framework has significant consequences for Article 38: if the clientele indemnity is regarded as the core of the agent’s protection upon termination, it is understandable that the Portuguese legislature sought to prevent it from being eliminated by the mere choice of a less favourable foreign law. But the protective nature of the rule does not, by itself, settle its characterisation as an overriding mandatory rule in European law.

III. Directive 86/653/EEC and the Minimum European Protection of the Agent

Council Directive 86/653/EEC of 18 December 1986 is the European matrix for the harmonisation of the regime applicable to self-employed commercial agents. Its purpose was to coordinate the laws of the Member States on essential aspects of the agency relationship, including the rights and duties of the parties, remuneration, termination and protection of the agent after the end of the contract.

The Directive nevertheless adopted a technique of minimum harmonisation and compromise. In relation to post-termination protection, Article 17 allowed Member States to choose between two models: a compensatory model, of German inspiration, focused on the advantages retained by the principal after termination; and a damages-based model, of French inspiration, focused on reparation for the loss suffered by the agent.

Portugal substantially followed the compensatory model. As Joana Vasconcelos observes, the Portuguese option must be understood in light of the German model, although the Directive permitted the coexistence of different national solutions, thereby reducing the harmonising reach of the European instrument.

Article 19 of the Directive plays a decisive role: the parties may not derogate from Articles 17 and 18 to the detriment of the commercial agent before the agency contract expires. That provision prevents the advance waiver of the essential protection granted to the agent. It follows that, at European level, there is a minimum mandatory core of post-termination protection.

The Directive does not, however, fully resolve the private international law issue. It establishes a minimum level of protection and allows Member States to adopt regimes more favourable to the agent. The difficulty arises when a more protective national law seeks to prevail over the law of another Member State chosen by the parties and equally compliant with the Directive. That is precisely the problem addressed in Unamar.

IV. Party Autonomy under the Rome I Regulation

Article 3 of the Rome I Regulation enshrines the principle of freedom of choice of the law applicable to contractual obligations. This principle is one of the most important expressions of party autonomy in European private international law. Its function is to ensure predictability, legal certainty and respect for the economic rationality of the parties in international contractual relations.

The law chosen by the parties generally governs the essential aspects of the contract: interpretation, rights and obligations, performance, breach, consequences of non-performance, extinction of obligations, limitation periods, validity and burden of proof. This logic is also reflected in the Hague Principles on Choice of Law in International Commercial Contracts, which describe party autonomy as an instrument of predictability and certainty in cross-border trade.

Party autonomy is not, however, absolute. Article 9 of the Rome I Regulation admits the application of overriding mandatory provisions. These are provisions compliance with which is regarded as crucial by a country for safeguarding its public interests, such as its political, social or economic organisation, and which apply irrespective of the law otherwise applicable to the contract.

The concept is demanding. It is not sufficient that a rule be mandatory under domestic law. Many rules which cannot be derogated from by the parties are not, for that reason alone, overriding mandatory rules in the private international law sense. The distinction is fundamental: domestic mandatory effect prevents derogation within the applicable law; an overriding mandatory rule claims application despite the fact that the applicable law is another law.

The Hague Principles follow the same logic. Article 11 recognises that party autonomy may be limited by overriding mandatory rules and public policy, but treats those limitations as exceptional and functionally justified. Choice of law remains the rule; its restriction requires sufficient justification.

It is against this background that Article 38 of Decree-Law No. 178/86 must be re-read. The Portuguese provision has the appearance and function of an overriding mandatory rule. But its compatibility with Article 9 of the Rome I Regulation depends on whether the protection it seeks to secure corresponds, in Portuguese law, to a crucial public interest, and not merely to reinforced protection of the private interests of the agent.

V. Ingmar: Protection of the Agent against the Choice of the Law of a Third State

The judgment in Ingmar GB Ltd v Eaton Leonard Technologies Inc. of 9 November 2000 is the first indispensable landmark. The case concerned a British company, acting as commercial agent, and a United States company, acting as principal. The parties had chosen the law of the State of California. That law did not confer on the agent protection equivalent to that provided by Articles 17 and 18 of Directive 86/653/EEC.

The Court of Justice held that the protection conferred by Articles 17 and 18 of the Directive must apply where the agent carries out his activities in a Member State, even where the contract chooses the law of a third State and the principal is established outside the European Union.

The ratio of the judgment is clear: the minimum European protection of the commercial agent cannot be eliminated by a clause choosing the law of a non-EU State where the agent’s activity is carried out within the territory of the Union. The Directive would be deprived of effectiveness if it were sufficient to choose the law of a third State in order to remove the agent from the European termination regime.

The importance of Ingmar does not lie solely in the individual protection of the agent. The judgment also protects the coherence of the internal market: agents carrying out activities within the European area should not be placed in asymmetric competitive positions depending on the law chosen by principals established outside the Union.

Manuel Pereira Barrocas rightly emphasises that Ingmar affirmed the protection of a Community commercial agent in relation to the clientele indemnity, particularly by reference to Articles 17 to 19 of the Directive, preventing that protection from being circumvented by the simple device of choosing foreign law.

However, Ingmar concerned an extra-EU relationship. The principal was established in the United States. The question would become more complex where both laws in conflict were laws of Member States which had correctly transposed the Directive. That was the situation addressed in Unamar.

VI. Unamar: The Restrictive Test for Overriding Mandatory Rules

The judgment in United Antwerp Maritime Agencies NV v Navigation Maritime Bulgare of 17 October 2013 constitutes the turning point. The contract had been concluded between a Belgian company and a Bulgarian company. The parties had chosen Bulgarian law and arbitration in Sofia. Bulgarian law had correctly transposed Directive 86/653/EEC. Belgian law, however, afforded broader protection to the agent and sought to impose itself as the law of the forum.

The Court of Justice accepted that a more protective national law may displace the law chosen by the parties. But it laid down a strict condition: the court of the forum must verify, in a detailed manner, that the national legislature considered it crucial, within the legal order concerned, to grant the agent protection going beyond that provided by the Directive, having regard to the nature and purpose of the relevant mandatory provisions.

The difference from Ingmar is substantial. In Ingmar, the issue was the neutralisation of minimum European protection by the choice of the law of a third State. In Unamar, both laws were those of Member States and both complied with the minimum requirements of the Directive. The issue was no longer the preservation of the European minimum core, but the precedence of enhanced national protection over the law chosen by the parties.

Manuel Pereira Barrocas interprets Unamar as affirming a restrictive concept of overriding mandatory rule. On his reading, the judgment requires that the loi de police protect crucial public interests of a political, social or economic nature; it is not enough that the rule be more favourable to the agent or non-derogable as a matter of domestic law.

The same author further stresses that the Court of Justice attached particular significance to party autonomy, treating it as a fundamental element of the European system of conflict of laws. Member States may not, therefore, without sufficient justification, transform any and every national protective regime into an absolute limit to the law chosen by the parties.

The consequence for Portugal is decisive: Article 38 of Decree-Law No. 178/86 continues to exist and must be applied by Portuguese courts. But its interpretation cannot ignore Unamar. Where the chosen law is the law of another Member State which has correctly transposed the Directive, the automatic precedence of the more favourable Portuguese law requires particular caution.

VII. Portuguese Article 38 after Unamar

Article 38 must now be read on two levels: the Portuguese domestic level and the European level.

At the domestic level, the provision is clear: if the agency agreement is performed exclusively or predominantly in Portugal, foreign law will only prevail, as regards termination, if it is more favourable to the agent. As a legislative provision in force, Portuguese courts cannot simply disregard it.

At the European level, however, the matter is more demanding. For Article 38 to be treated as an overriding mandatory rule within the meaning of Article 9 of the Rome I Regulation, its application must be justified by the safeguarding of a fundamental public interest of the Portuguese legal order.

This is where the dogmatic difficulty arises. The protection of the commercial agent is undoubtedly important. But is it a crucial public interest of the national economic organisation? Or are we dealing with the protection of the private interests of an economically more vulnerable contractual party, albeit one who is legally autonomous?

Barrocas formulates the issue in particularly sharp terms: the clientele indemnity, when viewed in light of Unamar, would be difficult to classify as a true loi de police if it is understood merely as the protection of private interests and if the right may be waived after it has arisen in the agent’s legal sphere.

This does not mean that Article 38 has been rendered ineffective. The same author concludes that, in the absence of legislative amendment or a specific ruling of the Court of Justice on the Portuguese provision, national courts must continue to observe it, albeit in conformity with the Unamar case law.

This is also the methodologically safest position. Article 38 should not be eliminated by interpretation; but neither should it be applied mechanically as though Unamar did not exist. Its application should depend on an analysis of the specific case, the chosen law, the degree of protection afforded by that law, the location of the agent’s activity, the nature of the rules in question and the concrete prejudice to the minimum or enhanced protection of the agent.

The distinction is particularly important where the chosen law is that of a third State. In that case, the force of Ingmar is greater: the minimum core of the Directive cannot be displaced to the detriment of an agent operating within the Union. The situation is different where the chosen law is that of another Member State which complies with the Directive but affords less extensive protection than Portuguese law. In that case, Unamar requires a more refined assessment.

VIII. Arbitration, Recognition of Arbitral Awards and International Public Policy

The difficulty increases when the international commercial agency agreement contains an arbitration clause. The choice of arbitration does not, by itself, amount to a choice of the applicable law. The Hague Principles are clear in distinguishing between a choice of law agreement, a jurisdiction clause and an arbitration agreement: they address different problems and should not be conflated.

As a general rule, nothing prevents disputes arising from a commercial agency agreement from being submitted to arbitration. The agent’s claims, including proprietary claims connected with termination and clientele indemnity, are arbitrable under the Portuguese Voluntary Arbitration Law. Barrocas rejects non-arbitrability as a means of protecting the agent, precisely because the rights in question are patrimonial and because there is no Portuguese rule reserving such disputes to State courts.

The question therefore moves to another level: may a foreign arbitral award which applies the law chosen by the parties and refuses to award a clientele indemnity be recognised in Portugal? Or does such recognition infringe Portuguese international public policy?

The Portuguese Supreme Court addressed this issue in its judgment of 23 October 2014. The Court accepted that the clientele indemnity provided for in Article 33 of Decree-Law No. 178/86 is mandatory under Portuguese law, but refused to conclude that its non-application by a foreign arbitral award necessarily infringes Portuguese international public policy.

This decision is essential because it distinguishes three planes which are often confused: domestic mandatory effect, overriding mandatory rules and international public policy.

Domestic mandatory effect means that the rule cannot be derogated from by the parties where Portuguese law is applicable. An overriding mandatory rule means that the provision applies despite the fact that the chosen law is another law. International public policy is a narrower limit: it prevents the application of foreign law or the recognition of a foreign decision only where the result is manifestly intolerable for the fundamental principles of the Portuguese legal order.

Portuguese case law has been cautious in its use of international public policy. In the judgment of 23 October 2014, the Supreme Court assessed the concrete legal effect of the arbitral decision, and not merely the abstract divergence between the foreign solution and Portuguese law.

This approach is consistent with the restrictive logic of Unamar. Portuguese agency law may be mandatory; but not every instance of its non-application offends international public policy. International public policy is not a mechanism for reviewing the merits of a foreign award, nor an indirect means of always imposing Portuguese law.

IX. Projection onto Commercial Concession and Franchise Agreements

The problem becomes even more delicate where Article 38 is sought to be projected onto commercial concession, distribution or franchise agreements.

Portuguese case law has long admitted the analogous application of segments of the agency regime to distribution agreements, particularly in matters of termination. The most relevant authority is Uniform Judgment No. 6/2019 of the Supreme Court of Justice, which held that, where Article 33(1) of Decree-Law No. 178/86 is applied by analogy to a commercial concession agreement, subparagraph (c) must also be included, adapted to the concession agreement.

That judgment confirms the possibility of applying the clientele indemnity by analogy to commercial concession agreements, but also shows that analogy must be demanding: the concessionaire must prove the cumulative requirements of Article 33, duly adapted. The indemnity does not arise from the mere termination of the concession.

Extension to franchising is even more problematic. The franchisee normally acts in his own name and on his own account, exploits a third party’s brand and business model, benefits from the franchisor’s know-how, assistance and distinctive signs, and remunerates the franchisor. His functional position is not the same as that of the agent.

Ferreira Pinto has adopted a particularly critical position regarding the undifferentiated extension of the clientele indemnity to distribution agreements. In his view, the institution does not seek generally to reward the acquisition of customers, but to prevent the opportunistic appropriation by the principal of an advantage created by the agent’s specific investment. That ratio, being proper to agency, is not always present in concession and is even less readily presumed in franchising.

That caution should be carried over to Article 38. Even if the analogous application of Article 33 to a concession agreement is admitted, that does not mean that Article 38 is automatically projected onto all international distribution contracts. An analogy in substantive law should not, without more, be converted into an analogy in conflict of laws or spatial application.

A distinction is therefore necessary. If the relationship, although described as distribution or franchising, corresponds materially to agency, Article 38 may apply directly. If, by contrast, it is a true concession or franchise agreement, the application of agency rules will depend on a case-specific analogy. In that case, the application of Article 38 should be approached with heightened caution, precisely because one would be moving from a special statutory rule to an extension not expressly provided for by the legislature.

X. Conclusion

Choice of law in international commercial agency agreements cannot be analysed through a simplistic opposition between contractual freedom and protection of the agent. The applicable legal system is more complex.

Party autonomy is a structural principle of European private international law. The Rome I Regulation enshrines freedom of choice of the applicable law and the Hague Principles confirm its importance for the certainty and predictability of international commercial contracts. At the same time, Directive 86/653/EEC establishes minimum protection for the commercial agent, particularly upon termination, and Portuguese law reinforces that protection through Article 38 of Decree-Law No. 178/86.

The Ingmar case law prevents the minimum European protection from being neutralised by the choice of the law of a third State where the agent operates in the European Union. Unamar, however, requires greater rigour where the laws in question are those of Member States which have correctly transposed the Directive: the more favourable national law may prevail as an overriding mandatory rule only if the legislature of the forum considered it crucial, within its legal order, to ensure enhanced protection for the agent.

In Portugal, Article 38 must continue to be applied. But it must be applied in a technically refined manner: as a rule protecting the agent in matters of termination, interpreted consistently with the Rome I Regulation and the case law of the Court of Justice. Its application should not be confused with a rule of international jurisdiction, nor with a general clause of international public policy, nor with an automatic invalidation of every choice of foreign law.

The balanced solution is therefore this: the choice of foreign law is, in principle, valid and effective; the Portuguese termination regime may prevail where the contract is performed exclusively or predominantly in Portugal and the foreign law is less favourable to the agent; but, especially in intra-European relationships, that precedence must be justified in light of the restrictive test governing overriding mandatory rules.

For contractual practice, the consequence is clear. In international commercial agency agreements involving activity in Portugal, the choice of law clause must be drafted with full awareness of Article 38, of the clientele indemnity regime and of the Ingmar/Unamar case law. Choice of law is not irrelevant; but nor is it omnipotent. The real legal problem lies between those two propositions.

Essential Bibliographical and Case Law References

Portuguese Legislation

Decree-Law No. 178/86 of 3 July, governing commercial agency or commercial representation agreements.

Decree-Law No. 118/93 of 13 April, amending Decree-Law No. 178/86 and completing the transposition of Directive 86/653/EEC.

Portuguese Civil Code, in particular Articles 280, 334, 405, 406, 809, 798 and 801.

Voluntary Arbitration Law, Law No. 63/2011 of 14 December.

European Union Law

Council Directive 86/653/EEC of 18 December 1986, on the coordination of the laws of the Member States relating to self-employed commercial agents.

Regulation (EC) No. 593/2008 of the European Parliament and of the Council of 17 June 2008, on the law applicable to contractual obligations — Rome I Regulation.

International Instruments

Hague Convention of 14 March 1978 on the Law Applicable to Agency.

Hague Principles on Choice of Law in International Commercial Contracts, Hague Conference on Private International Law, 2015; Portuguese translation by the Directorate-General for Justice Policy, 2019.

New York Convention of 1958 on the Recognition and Enforcement of Foreign Arbitral Awards.

European Case Law

CJEU, Judgment of 9 November 2000, Ingmar GB Ltd v Eaton Leonard Technologies Inc., C-381/98, ECLI:EU:C:2000:605.

CJEU, Judgment of 17 October 2013, United Antwerp Maritime Agencies NV v Navigation Maritime Bulgare, C-184/12, ECLI:EU:C:2013:663.

CJEU, Judgment of 23 March 2006, Honyvem Informazioni Commerciali Srl v Mariella De Zotti, C-465/04, concerning the interpretation of Articles 17 and 19 of Directive 86/653/EEC.

Portuguese Case Law

Supreme Court of Justice, Judgment of 23 October 2014, Case No. 1036/12.4YRLSB.S1, concerning commercial agency, clientele indemnity, Article 38 of Decree-Law No. 178/86, arbitration and Portuguese international public policy.

Supreme Court of Justice, Uniform Judgment No. 6/2019, concerning the analogous application of Article 33 of Decree-Law No. 178/86 to commercial concession agreements.

Supreme Court of Justice, Judgment of 16 February 2006, concerning the distinction between Article 38 of Decree-Law No. 178/86 and rules of jurisdiction.

Legal Scholarship

BARATA, Carlos Lacerda, Sobre o Contrato de Agência, Coimbra, Almedina, 1991.

BARATA, Carlos Lacerda, Anotações ao Novo Regime do Contrato de Agência, Lisbon, Lex, 1994.

BARROCAS, Manuel Pereira, “Acórdão UNAMAR do Tribunal de Justiça da União Europeia — Conceito restritivo de norma de aplicação imediata (loi de police) — Redução dos direitos do Agente Comercial?”, Revista da Ordem dos Advogados, 2017.

BRITO, Maria Helena, “O contrato de agência”, in Novas Perspectivas do Direito Comercial, Coimbra, 1988.

CUNHA, Carolina, A Indemnização de Clientela do Agente Comercial, Coimbra, Coimbra Editora, 2003.

FERREIRA PINTO, Fernando A., Contratos de Distribuição — Da tutela do distribuidor integrado em face da cessação do vínculo, Lisbon, Universidade Católica Editora, 2013.

FERREIRA PINTO, Fernando A., “A indemnização de clientela no âmbito dos contratos de distribuição”, Revista de Direito Comercial, 2019.

GOMES, M. Januário, “Apontamentos sobre o contrato de agência”, Tribuna da Justiça, No. 3, 1990.

LEITÃO, Luís Manuel Teles de Menezes, A Indemnização de Clientela no Contrato de Agência, Coimbra, Almedina, 2006.

MONTEIRO, António Pinto, Contrato de Agência, Coimbra, Almedina.

MONTEIRO, António Pinto, Contratos de Distribuição Comercial, Coimbra, Almedina.

VASCONCELOS, Joana, “Cessação do contrato de agência e indemnização de clientela — algumas questões suscitadas pela jurisprudência relativa ao DL n.º 178/86”, Direito e Justiça, Vol. 16, No. 1, pp. 243–263.