The brokerage contract: understanding its role and how it works

Are you looking to sell a property, find the best insurance for your business, or perhaps secure advantageous financing? In many situations, navigating the complexities of the marketplace alone can be daunting. This is often where the broker comes in, the intermediary whose job it is to facilitate the meeting between those who offer and those who seek. But what exactly does a broker do from a legal point of view? What are your rights and obligations when you use their services?

Brokerage is a widespread activity, affecting many sectors. However, its legal framework is sometimes unfamiliar to the general public. The aim of this article is to explain the fundamental aspects of the brokerage contract under French law: its legal nature, the obligations of each party, and the way it is terminated. Understanding these basics is essential if you are to secure your business and work effectively with this intermediary, especially in the face of the challenges of the 21st century. international brokerage.

What is legal brokerage?

To fully understand the role of the broker, it is first necessary to understand how the law characterises his activity and the contract that binds him to his client. There are three main aspects to it: it is a commercial activity, carried out independently, via a specific contract that can be described as an intermediary mandate.

A commercial activity by nature

French law considers brokerage to be a commercial activity. Article L. 110-1 of the French Commercial Code explicitly lists it among "commercial acts". This means that a person who engages in brokerage on a regular and professional basis is, in principle, considered to be a trader.

This classification has several important practical consequences. Firstly, disputes relating to the exercise of the brokerage profession generally fall within the jurisdiction of the commercial courts, as set out in article L. 721-3 of the French Commercial Code. Secondly, the rules of evidence are different: between traders, evidence of commercial acts may be provided by any means (testimonials, emails, etc.), which is more flexible than civil rules, which often require a written document for large amounts (article L. 110-3 of the French Commercial Code).

It is interesting to note that the commercial nature of a broker's activity does not depend on the nature (civil or commercial) of the contract he helps to conclude. Thus, even a matrimonial broker, whose activity leads to a union governed by civil law, is considered a merchant by the courts.

An independent activity

Another distinctive feature of brokers is their independence. He is not an employee of the person who uses his services (the principal). There is no hierarchical relationship between them. Brokers are free to organise their own work, hours and methods, although they must of course comply with the objectives set by their clients.

This independence clearly distinguishes him from an employee acting under the authority of an employer. If a so-called "broker" is in fact working as part of a service organised by his principal, with precise instructions, fixed working hours and regular supervision, the courts could reclassify the relationship as a contract of employment, regardless of the title given to the initial contract. Independence is therefore an essential element in the definition of a broker.

This independence also means that brokers operate at their own risk, as entrepreneurs. They run their own business, which they can develop and organise as they see fit.

A specific contract: the intermediary mandate

The exact nature of the broker-client contract has been the subject of legal debate. However, the most common and practical analysis is to consider it as a specific form of mandate: an intermediary mandate.

What does it mean? The mandate, defined in article 1984 of the Civil Code, is traditionally seen as a contract by which one person (the principal) gives another (the agent) the power to do something. in its name and on its behalf, often conclude a legal act (sale, lease, etc.).  

The broker acts well on behalf of his client: he looks for a co-contractor in the client's interest. However, and this is what makes them so special, they generally do not act on their clients' behalf. on behalf of his client in the sense that he does not have the power to legally bind the client by signing the final contract on his behalf. Its fundamental mission is to through The broker's role is to seek out, find and introduce potential partners and facilitate negotiations, but the final decision to enter into a contract (or not) rests with the parties themselves. The broker establishes contact and brings people together, but does not take their place in concluding the final agreement.

Unless the brokerage contract expressly provides for it by giving him a power of representation, the broker does not bind his client by his action alone. His role ends where the actual conclusion of the main contract begins. The broker's mandate is limited to putting the client in contact and facilitating the transaction.

How does the brokerage contract work?

Now that the legal nature of brokerage has been clarified, let's look at how it works in practice: how is it formed and what are the obligations of each party?

Formation of the contract

Like most contracts under French law, a brokerage contract is in principle 'consensual'. This means that it is validly formed by the simple exchange of consents, without a written document being required for its validity (apart from exceptions provided for by specific laws, such as for estate agents or matrimonial brokers). A verbal or even tacit agreement (resulting from the actions of the parties) may suffice.

However, for obvious reasons of proof, it is strongly recommended that the agreement be formalised in writing. This document should clearly specify :

• The identity of the parties (the customer and the broker).
• The exact purpose of the broker's assignment (what type of contract are you looking for? for what goods or services?).
• The duration of the assignment (if specified).
• Above all, the terms of the broker's remuneration (amount or percentage, who pays it and when it is due).

Clarity on these points from the outset avoids many disputes later on.

The law also requires brokers to be transparent. They must not have any hidden personal interest in the deal they are brokering. If he does have such an interest (for example, if he is himself interested in buying the property he is commissioned to sell for his client, or if he has links with the other party), he must inform his client in good faith. The Commercial Code (article L. 131-11) even provides for a criminal fine and the possibility of damages if this obligation of transparency is not respected.

The obligations of the customer (principal)

Anyone who uses the services of a broker also has a duty to that broker.

• Duty of loyalty and information The customer must cooperate in good faith with the broker (in accordance with article 1104 of the French Civil Code). This means providing the broker with all the necessary and accurate information to enable him to carry out his mission effectively. Lying to the broker or withholding essential information may render the customer liable.
• Obligation to pay remuneration (commission) This is the client's main obligation. As brokerage is a professional activity, it is naturally remunerated. Payment of this commission, often referred to as "brokerage", is generally due when the main transaction (sale, rental, loan, etc.) has actually been concluded thanks to the broker's intervention.
  • When is commission due? In principle, the commission is earned as soon as the final agreement between the customer and the third party is sealed (signature of the main contract), even if this contract is not subsequently executed (unless the broker is at fault). If the commission is a percentage of the price, it is logical that it should only be due if the contract fixing that price is concluded.
  • What happens if the customer refuses to sign a contract even though the broker has found a partner who meets the criteria? The customer remains free to contract or not. However, if they refuse abusively, with the sole aim of avoiding paying the commission, even though the broker has fulfilled his mission perfectly, they may still be required to pay it. Article 1304-3 of the Civil Code states that a condition (in this case, the conclusion of the main contract) is deemed to have been fulfilled if the party who had an interest in it (in this case, the customer who does not want to pay) prevented it from being fulfilled. This is a question of loyalty.
  • Who pays the commission? Normally, this is the broker's customer (the principal). But the contract may stipulate that it is the other party, or that it is shared. Professional practices may also play a role.
• Obligation to reimburse costs Unless the contract provides for a fixed fee including expenses, the client must reimburse the broker for expenses incurred in the performance of his duties (travel expenses, advertising, etc.), provided that they are justified and useful (article 1999 of the Civil Code). This reimbursement is due even if the case is ultimately unsuccessful, provided it is not the broker's fault.

The broker's obligations

Brokers also have important obligations towards their customers.

• Duty of care and loyalty Brokers must perform their duties "as good professionals" (article 1992 of the French Civil Code). He must make every reasonable effort to find a co-contractor or a solution corresponding to his client's needs. He must act loyally, i.e. always in his client's interest, avoiding any conflict of interest (as seen above).
• Duty to provide information and advice This is an essential obligation that is often at the heart of disputes. The broker must :
  • Inform customers about the features of the proposed contract, its advantages, disadvantages and possible risks.
  • Check the essential information about the third party they are presenting (their identity, legal capacity and, to a certain extent, their apparent solvency). They cannot guarantee solvency, but they would be liable if they introduced a partner who was known to be insolvent without informing their customer.
  • Ensure that all the conditions are met for the main contract to be legally valid and effective. For example, drawing attention to important clauses or necessary formalities.
  • Adapt his level of information and advice to the knowledge and experience of his customer (a well-informed professional customer will require less explanation than a novice private individual). It is up to the broker to prove that he has fulfilled this obligation to provide advice.
• Accountability The broker must keep his client informed of the progress of his assignment, the steps taken, the difficulties encountered and, of course, the final outcome (success or failure). This is an obligation of transparency arising from the fact that they are acting on behalf of others (article 1993 of the Civil Code).
• No obligation of result (in principle) The broker undertakes to do his best to find a partner (obligation of means), but he does not guarantee that the main contract will actually be concluded, or that it will be properly executed by the third party. Nor is he a del credere (guarantor of payment) unless a specific clause in the contract expressly provides for this, which is rare and generally gives rise to additional remuneration.

The end of the brokerage contract

Like all contracts, brokerage contracts come to an end. The terms and conditions depend on its duration.

• Fixed-term contract If a specific term has been set (for example, a 6-month mandate to find a buyer), the contract automatically ends on the agreed date. It can only be terminated early by mutual agreement, or in the event of serious misconduct on the part of one of the parties justifying judicial termination.
• Open-ended contract If no term has been set, either party may terminate the agreement at any time, subject to a reasonable period of notice (article 1211 of the French Civil Code). This right of unilateral termination is a fundamental principle to avoid perpetual commitments.
  • In the case of established commercial relationships between professionals (which may be the case if a broker works regularly for a company), any termination, even partial, must be subject to written notice that takes account of the duration of the relationship. A sudden termination without sufficient notice may render the person responsible liable under article L. 442-1 of the French Commercial Code.

Termination of the contract, whatever the cause, triggers the final obligation for the broker to report on his assignment and for the customer to pay the remuneration due if the transaction was concluded through his intermediary.

The brokerage contract is an invaluable tool for facilitating transactions in many areas, whether for brokers specialising in real estate, insurance and banking or other intermediaries such as commercial agents or transport brokers. Its legal nature as an intermediary mandate, its commercial and independent nature, and the reciprocal obligations it entails, constitute a framework that it is important to master in order to avoid misunderstandings and disputes. Clarity in the initial contract, particularly regarding the assignment and remuneration, and respect for loyalty by both parties are the keys to a successful collaboration.

Are you considering using the services of a broker or encountering difficulties in connection with a brokerage contract? Our firm can advise you on your rights and obligations and assist you in protecting your interests, in particular through our expertise in banking and finance law.

Sources

• Commercial Code: in particular articles L. 110-1 (commercial acts), L. 131-11 (conflict of interest), L. 442-1 (sudden termination).
• Civil Code: in particular articles 1103 (binding force), 1104 (good faith), 1128 (validity of contract), 1194 (consequences of contract), 1211 (open-ended contract), 1304-3 (suspensive condition), 1984 to 2010 (mandate, obligations of agent and principal).