The most common cause of litigation in Colombia between foreign companies and their Colombian distributors has been the severance payment from the principal to the agent upon termination of any commercial agency agreement — an agreement where a person or entity agrees to promote, in a stable and independent manner, the products and services of another person or entity in a given territory. Under a commercial agency agreement, the agent undertakes to secure a position for the principal’s products or services in a certain market.
During the past several years, the Colombian Supreme Court has, time and again, clarified the essential elements of the agency agreement. The Court has established that an agency relationship exists when; (i) the agent acts on behalf of the principal, (ii) the agent acts independently, (iii) the relationship is of a permanent nature, and (iv) the agent’s activities are aimed at promoting the principal’s products or services.
Under Colombian law, an agent is entitled to receive a severance payment upon termination of the agency agreement, regardless of the cause of termination. This severance payment is equal to one-twelfth of the average commission received by the agent during the last three years of the agreement, multiplied by the duration of the agreement. If the agency lasted less than three years, the compensation is equal to one-twelfth of the average commission received by the agent while the agreement was in force. Additionally, if the principal terminates the agency without cause, or the agent terminates it for cause against the principal, the principal must also pay an indemnity to the agent at an amount fixed by experts. Calculation of this sum takes into account several intangible factors, including the extent of the agent’s activities to enhance the principal’s line of services or products.
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