Caught on our radar
What is an
How do you secure your goods if your reseller is declared bankrupt? The Swedish Supreme Court has assessed a commission agreement and provided guidance on the issue.
Vendors can place goods on the market in various ways, depending on the form of distribution agreement selected. The most common are reseller agreements, agency agreements and commission agreements. What are known as franchise agreements also constitute a type of distribution agreement.
Resellers buy and sell goods under their own name and on their own behalf. This means that the reseller becomes the owner of the goods, and he also bears the risk of these. Remuneration normally involves the margin, which the reseller manages to achieve between the purchase price and the selling price.
Agency agreements involve an agent selling in the name of the supplier and on his behalf. It is often said that the agent is the extended arm of the supplier. The agent normally receives remuneration in the form of commission on deals done.
In commission agreements, the parties are designated commissioner and principal respectively. A commissioner sells in his own name, but on behalf of the principal. The end customer is often unaware of this underlying relationship. Remuneration to the commissioner is paid entirely or mostly in the form of commission on the sales made.
Advantages of commission agreements
One of the reasons as to why parties choose to cooperate in accordance with the commission model instead of using agency or reseller agreements is that the principal provides the commissioner with goods to sell without the latter having to finance the goods. Another reason is that the principal has security for his assets left with the commissioner. If the commissioner were to declare bankruptcy, the principal has what is known as separation rights, i.e. the right to take his stock and funds received for goods sold.
Actual commission agreement
For the principal to benefit from the security normally provided by the commission agreement, there has to be an actual commission relationship in place. What the agreement itself is actually called is then of secondary importance. The terms of the actual agreement are the crucial factor. If the de facto agreement terms mean that a purchase agreement is involved, for example, the agreement does not provide the legal consequences of a commission agreement.
The main circumstances that indicate an actual commission relationship are that the commissioner has the right to return unsold goods and the principal has an interest in the profit, which means that the latter wishes to achieve as advantageous terms of sale as possible in respect of the customer, particularly in terms of price.
The Citroen case
The case in question related to a reseller (the Company), which sold cars in accordance with an agreement with Citroen Sverige AB (Citroen), termed a commission agreement. The Company was declared bankrupt, but Citroen was notified directly beforehand and collected 36 cars from the Company. After the bankruptcy, another car was collected with the approval of the bankruptcy estate. This had been left behind previously, as the keys could not be found. The bankruptcy estate then brought an action and demanded to be compensated for the value of the cars collected.
The bankruptcy estate was of the opinion that Citroen did not have what is known as separation rights in the bankruptcy due to the agreement (i.e. that there was no question of a proper commission relationship that permitted the entitlement to take the property) and that recovery of the cars had therefore taken place unlawfully. The bankruptcy estate was also of the opinion that the cars could be recovered in accordance with the special rules in the Bankruptcy Act.
Citroen, for its part, was of the opinion that Citroen, according to the commission agreement, was always the owner of the cars and therefore also had the right to take them back. Both the District Court and the Court of Appeal were of the opinion that commission was involved and so found in favour of Citroen.
The Supreme Court
The Supreme Court came to the same conclusion, but made a more in-depth assessment of the agreement situation in question. The Court found first that the implications of the rules in the Commission Act are that the principal is protected against the commissioners’ creditors if the commissioner is declared bankrupt. Furthermore, it was clarified that the rights in rem, as they are known, require an actual commission relationship.
As specified above, the essential factors are that the commissioner has the right to return unsold goods and that the principal has a direct interest in the terms of sale to the end customer, in particular the price. Other circumstances, which may have an influence, include who is liable for insurance of the goods, who is responsible for costs for financing and storage, and who has the right to dispose of the goods and how these should be accounted for. The Court found that the main risk of lost sales lay with Citroen. According to the agreement, the Company did indeed have free right of return, but in practice returns did not take place. Instead, the parties used a system for redirecting cars to other resellers.
As regards the price, the Company received a set fee for every car sold. This fee was set by Citroen and varied depending on the sales statistics on the new car market. Citroen therefore had no independent interest in the price that could be achieved in relation to the customer, but it did have an interest in ensuring that as many cars as possible could be sold. The Court found in this instance that no independent or crucial significance could be attached to Citroens interest in the price and sales volume when assessing the agreement.
The Court also looked in greater detail into the issue of acting as a principal, i.e. when the commissioner himself intervenes as a buyer. According to the agreement, the Company had no right to dispose of the cars other than through sales to customers with accountability. This, together with the invoicing and registration procedures applied by the parties, indicated that the Company had a heavily curtailed right to dispose of the cars and that the Company was therefore acting on behalf of Citroen.
Other circumstances to which importance was attached was the fact that the cars had not been included in the Company’s accounts, and the corresponding liability to Citroen had not been recorded either. In all, therefore, the Court found that Citroen, despite the fixed fee approach, had an actual interest in sales to customers and that the agreement therefore also had to be regarded as a commission agreement, which assured Citroen of both ownership rights and separation rights.