Portfolio Compensation in Turkey: Conditions and Calculation
The portfolio compensation demand (also known as equalization demand) is legislated as one of the consequences of the termination of the agency agreements granting exclusivity. Agencies or other similar commercial agents (“seller” or “agency”) create a customer portfolio for their client (“principal”) during their activities to perform the agreement, or, deepen the existing commercial relations. Despite that, the seller cannot demand any fee for the customers s/he has brought to the principal as of the termination of the agreement, although the principal can continue to benefit from the customer portfolio directly or through a new seller. Due to this unfair situation, Turkish Commercial Code No. 6102 (the “TCC”), in line with EU Council Directive 86/653/EEC, ensures that the seller shall be paid compensation for the benefits of the customer portfolio provided to the principal.
A. Commercial Agents who can Demand Portfolio Compensation
The TCC provides that portfolio compensation will mainly be applied when agency agreements terminate, and also unless it is unfair, it will be applied to the permanent contractual relations that give exclusivity. In this respect, the portfolio compensation provisions are mainly applied for agents who are defined in TCC as “independent entities who consistently make agreements on behalf of a commercial enterprise, or, mediate agreements for a commercial enterprise within a specified place or region on the basis of an agreement, without being dependant such as commercial representative, sales officer, or, an employee of the enterprise” but also to other contractual relations that ensures exclusivity relationship.
Unless otherwise agreed in writing by the parties in an agency relationship, there is a recognized exclusivity within the region left to the agency. Therefore, the existence of exclusivity provision in the agreement is not a mandatory condition for portfolio compensation demand for the agency agreements.
Also, as stated above, the other kind of commercial agents or distributors can demand portfolio compensation in case they are authorized exclusively in a region, yet, these agreements must include explicit exclusivity provision.
B. Conditions of Portfolio Compensation
According to Article 122 of TCC, the following 4 conditions must be met in the concrete case for the seller to demand portfolio compensation:
Termination of Agreement
The agencies can demand portfolio compensation if the time of the agreement expires, or, become terminated without any fault of the seller. Also, extinguishing the exclusivity seller and other essential changes in the agreement can be evaluated as partial termination, hence, the agency can demand portfolio compensation despite the agreement, or, the contractual relationship continues.
Principal Must Obtain Significant Benefits from the Customer Portfolio of the Agency
The principal must have gained or, will gain “significant benefit” after the termination of the agreement through the customer portfolio of the agency. Therefore, the customer portfolio that the agency has maintained during the agreement should be evaluated in detail and the benefits that the principal will gain through the customer portfolio without the agency should be estimated. The burden of proof that the principal has important benefits from the customer portfolio brought by the agency belongs to the agency.
Agency Must Lose Fees
Another condition of the portfolio compensation demand is that the agency must lose income after the termination of the agreement. The mentioned loss here is not the loss of the agency’s fees will be earned during the agency agreement. It is the loss of income that would be earned by agency with new customers if the agreement continues. This condition will be met if the agency is deprived of the right to charge fees due to the agreements made / to be made with new customers, since its contractual relationship with the principal does not continue.
The determination of this condition is easier than the determination of the "obtaining significant benefits" criterion evaluated above, yet, usually, this condition is taken into consideration in the calculation of the compensation in practice.
Portfolio Compensation Demand Must Suit in Equity
In case the three conditions explained above are met, Turkish Courts will examine whether the compensation demand is fair or not. In this evaluation, all objective and subjective conditions of the concrete event are considered together. For instance, if the seller has already provided significant benefits during the term of the agreement and the benefits provided are already satisfying the purpose of the portfolio compensation, it can be claimed that the seller's request does not suit in equity. Implementation of this abstract and subjective criteria will be within the discretion of the judge.
C. Upper Limit of Portfolio Compensation
In portfolio compensation demand, the seller cannot exceed the average of the annual commission or other payments received during the last five years of activity in the performance of the agreement. However, the legal provisions do not specify whether annual revenue or net profit will be taken as a basis in determining the upper limit. Although this issue is controversial in implementation and judicial decisions, since the TCC mentions other payments together with the commission, it is accepted that the total annual revenue generated by the Seller from the activities in the performance of the agreement should be considered as the upper limit in the calculation of the compensation request.
D. Calculation of Portfolio Compensation
Many objective and subjective factors and variables are evaluated in the calculation of portfolio compensation, and, some special and technical information is needed. For this reason, in practice, Turkish Courts obtain expert reports on the amount of portfolio compensation to determine the amount.
Apart from the financial and technical examination, the compensation is basically calculated with the below steps:
The principal's benefits and the seller’s losses are calculated. The raw compensation can be found by making the difference (of the principal's benefits and seller’s losses) subject to the interest deduction.
Raw compensation is made subject to the above-mentioned fairness (equity) check.
In the last stage, the upper limit amount of portfolio compensation is determined. Amounts exceeding the upper limit are reduced to the upper limit figure.
Article contact: Bilge Derinbay / E-mail: firstname.lastname@example.org