LESSON 2: THE BUSINESS ORGANISATION: THE SUBJECT

1. TYPES OF TRADERS
2. HOW TO BECOME A SOLE TRADER
3. TRADERS’ LIABILITY
3.1 General liability
3.2 Liability under consumer protection
3.2.1 Damages caused by defective products
3.2.2 Damages caused by services
4. AGENTS
General rules for agents
Types of agents in Spanish Law
5. FACTORS AND OTHER EMPLOYEES AND ASSISTANTS
5.2 Factors
5.3 Employees and assistants
6. COMMERCIAL AGENTS
7.1The contract
7.2. Duties and rights of the parties
7.3.1 Duties of commercial agents
7.3.2 Rights of commercial agents
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1. TYPES OF TRADERS

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 In Art. 1 Cco: we can read that “are considered businesspersons for the purposes of
this Code

1. Those who, having the legal capacity to engage in business, do so habitually;

2. Business or industrial companies incorporated pursuant to this Code

There are two main forms of legal organization of a business:

sole trader (one person, an individual) who is doing business and considered the
companies that are formed following the rules of the Commercial Code, that are considered
traders as well.

Both, an individual or a company can be a trader. To be considered a businessperson

or trader an individual or a company needs:
- To be organised in a professional way
- The organisation is held to put good and services in the market
- Act in his own name under his own responsibility

In this sense a businessperson or trader is a person, individual or legal person, who

organizes, in a professional way, the means to offer goods and services in the market, the
person who professionally in his own name and under his own responsibility organizes
business.

1.1.The sole trader

In the Spanish legal system the sole trader is the person who organizes in a
professional way the means to put goods and services in the market, the person who organizes
business in his own name and has the responsibility for the success or failure of the enterprise.

A sole trader decides how to organize and run his business. He will rise the capital for
the business by loans against his private property or using his private property itself. The
proprietor retains all the profits but shall be liable for all the losses up to the full extent of his
private fortune and any legal action in respect of the business will be against the proprietor.

A sole trader must comply with the same general obligations as all business in relation
to issues such as accountancy, competition law, employment law…A sole trader is self-
employed and although the business is likely to be small there is no limit to the size of the
business. He can have a large turnover and numerous employees.

A sole trader has unlimited liability, which means he is personally responsible for all
debts and liabilities of the business as we can see in art. 1911 of the Civil Code that reads
“The debtor is liable for the performance of his obligations with all present and future
property”. So, if the business fail the trader will have to meet its debts with his own property
and if he is unable to do so, he may be declared bankrupt.
Artículo 1911 CC: Del cumplimiento de las obligaciones responde el deudor con todos sus
bienes, presentes y futuros.

However, the Spanish legislation, permits certain limits to liability of the sole trader
in two different ways:

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 1. Limited Liability Entrepreneur status can be taken on by an individual
entrepreneur, regardless of their business or professional activity, to limit their liability for the
debt deriving from the conduct of their business which will prevent any such debt from
affecting their principal residence.
Ley 14/2013, de 27 de septiembre, de apoyo a los emprendedores y su internacionalización
(arts. 7-11)

The conditions to be met are: Registration of the sole trader as a Limited Liabity
Entrepreneur in the Commercial Registry corresponding to the registered office; the value of
the principal residence must not exceed €300.000; disclosure of his status of Limited Liability
Entrepreneur which requires that it has to be mentioned on all documents and the specific
registry particulars must be clear to third parties; and, finally, it is also necessary the
registration at the Property Registry.

2. Single Member Company

Real Decreto Legislativo 1/2010, de 2 de julio, por el que se aprueba el texto refundido de la
Ley de Sociedades de Capital (arts. 12-17).

1.2.Companies
Most business people prefer to share the organization and the profits and loss of a
business with others and become a member of a company. The different types of companies
in Spain are:

Sociedad Colectiva (General Partnership)

Sociedad Comanditaria (Limited Partnership) and Sociedad Comanditaria por

acciones (Limited Partnership by shares)

Sociedad de Responsabilidad Limitada (Limited Liability Company), Sociedad de

Responsabilidad Limitada Nueva Empresa (New Limited Liability Company)

Sociedad Anónima (Joint Stock Company/Corporation)

There are also treated as traders the persons with liberal professions such as lawyers, architects
or medicine doctors who organizes their activities in an association in a Professional Services Firm
(Sociedad Profesional).

The members of a company (SRL or SA) enjoy the protection of the limited liability.
This means that if the company has debts the partners cannot be made to pay those debts
beyond what they have already invested in the company as share capital. It protects investors
against the debts of the company.
The Spanish commercial code includes together with companies another form of doing business
with partners called: sociedades colectivas y comanditarias. We cannot find an exact correspondence
with the forms of doing business in Britain or in the US but the form we can show as the most similar
are called partnerships and limited partnerships. A partnership is strictly an association of individuals
who agree to conduct a business in common with view to making a profit. So each partner is really a
sole trader, but he or she agrees to enter into a contract with other likeminded traders in order to enjoy
certain benefits, such as share premises. The agreement between the partners is detailed in a contract
known as partnership agreement.

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 2. HOW TO BECOME A SOLE TRADER:

To be a sole trader there is no a special legal procedure. Essentially, an individual

decides to go into business under his own name and organizes the necessary means for its
purpose. There is no need to register the business organisation.
Art. 3 of Cco reads: There shall be the legal presumption of habitual exercise of commerce
from when the person intending to engage in business announces this by means of circulars, in the
newspapers, on posters, signs displayed to the public, or by any other means, for an establishment that
has any business transaction as the object thereof.

To become a sole trader an individual needs the legal capacity to enter into contracts.
You just need, says art. 4 Cco, to be “of legal age (18) and have free disposal of their assets shall
have the legal capacity for habitual practice of commerce”.

However, following art. 5 Cco we see that although minors have not capacity enough
to enter into a new business, they can continue the business they inherit from their parents or
predecessors. To do so they need to be assisted by a legal tutor or guardian. The same rule is
set for the incapable. That means that they cannot become a trader by themselves (on their
own, personalmente) but they can be traders, and their own properties will be seized in case
of unpaid debts: they are liable for the debts coming from the business.
(NOTE: Arts. 6 to 12 that stablished a special regime in case the married sole trader in order
to protect the patrimonial assets of the married couple of the trader, has been deleted last September
2022)

Prohibitions: the Commercial Code (art. 13 and 14) established several prohibitions
to enter into business. They are rules not only for sole traders but for all those who are engaged
in business as agents or representatives of the trader. However, the prohibitions set in these
articles must be completed with those other established in other legal bodies. We can think
about civil servants, government staff, and in general all those persons that can get advantage
of their position or especial information.

Employees, agents, proxies: the sole trader may employ other people in the business
organization but they are only his employees, representatives or agents working or
collaborating with him in the business.

3. TRADERS’ LIABILITY

3.1 General liability

Any person when acting in his own name is liable - economic responsibility for debts
- and also traders are liable for the economic consequences of their acts. As we have already
said: the debtor (individual or company) is obliged to pay all its debts with all present and
future properties.

They are liable for their contractual obligations. When they enter a contract they
agree voluntarily on its terms, so that they will have to perform all their obligations. If they
fail to perform their obligations the other party can use the contractual remedies provided by
the law for the breach of contract.

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 They are also liable, like any other person, for damages caused by their acts and art.
1902 Civil code establishes that “The person who, as a result of an action or omission, causes
damage to another by his fault or negligence shall be obliged to repair the damaged caused”.
Artículo 1902. El que por acción u omisión causa daño a otro, interviniendo culpa o
negligencia, está obligado a reparar el daño causado.

In the same way they are liable as a result of the actions or omissions of those persons
for whom they are liable, and art. 1903 of the Civil code imposes this obligation to “the owners
or managers of an establishment or undertaking shall be liable for damages caused by their
employees, in the service in which they are employed or in the performance of their duties”.

There are two further rules. The first one, in the same art. 1903, says that “the liability
provided in the present article shall cease if the persons mentioned therein should evidence
that they acted with all the diligence of an orderly paterfamilias to prevent the damage”. The
second one, in art. 1904, states that “The person who pays damages caused by his employees
may recover from the latter the amount paid”. Both of them are a remedies aimed to achieve
that the employee who caused the damage pays for it.

3.2 Liability under consumer protection

3.2.1 Damages caused by defective products
Council Directive 85/374/EEC of 25 July 1985 on the approximation of the laws, regulations
and administrative provisions of the Member States concerning liability for defective products;
RDLegislativo 1/2007 que aprueba el Texto Refundido de la Ley General Defensa Consumidores y
usuarios, (LGDCU) arts. 128-149).

European legislation protects consumers against damages caused by defective

products. The main principle is liability without fault that means that where a defective
product causes damage to a consumer, the producer may be liable. Injured persons can
therefore seek compensation with regard to products put into circulation in the internal market.

Following the Directive, Spanish Consumers Act (LGDCU) establishes in art. 135 that
“Producers shall be liable for damages caused by defects in the products that they manufacture
or import”. The rules regarding liability for defective products cannot be modified and any
limitation or contractual clause may allow the producer to limit his liability in relation to the
injured person and shall be ineffective in respect of the injured party (art.128).

Producers are meant to be: the producer of a raw material, the manufacturer of a
finished product or of a component part; the importer of the product; any person putting their
name, trade mark or other distinguishing feature on the product; any person supplying a
product whose producer or importer cannot be identified. Where two or more persons are
liable for the same damage, they shall be liable jointly and severally.

Defective products are all products where they do not provide the safety which a
person is entitled to expect, taking all circumstances into account, including: the presentation
of the product; the reasonable use of the product; the time when the product was put into
circulation.

The injured person does not have to prove the negligence or fault of the producer or
importer, but he carries the burden of proof, so that he must prove: the actual damage; the
defect in the product; the causal relationship between damage and defect. However, there are

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several situations in which the producer is not recognised as liable although the producer has
to prove he was in such situation, i.e., he did not put the product into circulation; the defect
appeared after the product was put into circulation or the state of scientific and technical
knowledge at the time when the product was put into circulation was insufficient to identify
the defect (art. 140 LGDCU). In addition, the may be reduced or removed if the damage is
caused jointly by a product defect and the fault of the injured party or of another individual
who shall be civilly liable for said damage (art. 145 LGDCU). There are some limits to liability
in case of: - damages to property and in case of - death and personal injuries caused by
identical products with the same defects (art.141 LGDCU).

The injured person has three years within he can claim for compensation; this is a
limited period starting from the date on which the injured person became aware of the damage.

3.2.2 Damages caused by services

Service providers shall be responsible for damages caused to consumers and users,
except where they can prove that they have complied with the demands and requirements
established in regulations and with all other care and diligence required by the nature of the
service (art. 147 LGDCU). There are certain services that require an extra guarantee of certain
levels of effectiveness or safety determined in objective conditions (i.e., healthcare services,
repair and maintenance services for household electrical appliances, lifts and motor vehicles,
property renovation and repair services, electricity and gas inspection, installation and similar
services, and those relating to means of transport). In these cases, the liabilities deriving from
this article shall be limited to the sum of €3,005,060.52 unless specific regulation (art.148
LGDCU).

4. AGENTS

Traders and companies enter into contracts with different persons to establish a
variable range of relationships for the development of the business. They are what in Spanish
we called colaboradores of the trader. They are agents. Agency is the relationship which exists
between two persons: the agent and the principal by means of which the agent is empowered
to represent the principal and brings the principal into a relationship with a third party. Third
parties are everyone with whom the agent deals on behalf of the principal.
An agent may be: an employee of the principal, an independent contractor used for his
particular expertise, representing the principal in certain business transactions.
An agent may act: solely for one principal or for several principals.

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 And agent may be authorised: to act in one transaction or may act regularly for a principal
carrying out a range of business transactions.

TYPES OF AGENTS IN SPANISH LEGISLATION

Under the regulation of the Commercial code we find the rules for the employees,
those who work under the direct orders of the trader: mercantile factors and other employees
(dependientes y mancebos). They are linked with the trader by a labour relationship, and
represent and act as agents.
Arts. 281 to 302 Cco.

We can also find in the Spanish business law different types of self-employed persons
collaborating with the trader. These are brokers (corredores), commercial agents, agents in
commission. They are traders or professional who enter into contract with the trader and give
him their professional services. All of them have special regulations for the development of
their professional activities.
Agents on commission: arts. 244 to 280 Cco.
Commercial agents: Ley 12/1992, de 27 mayo, sobre contrato de agencia.

4.1. General rules for agents

An agent must have legal authority to act on behalf of the principal. The authority
arises when an agent relationship is created usually by express agreement – oral or written in
an ordinary document or in a notarial deed- or implied agreement. It can also arise by
subsequent consent of the trader who will give his ratification to the actions of the factor.

A contract made by an agent with a third party is binding only where the agent was
acting within his authority. The authority of an agent may be actual o apparent (ostensible).
Actions by an agent which are not authorised and outside the agent’s authority will not be
binding on the principal. The principal may, however, ratify the contract.

Between the agent, principal and third party the relationship is as follows. The general
rule is that once the agent has created a contract between a third party and his principal, he
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has no further responsibility. The principal and the third party are bound to each other. If the
agent acts as if he were an agent but no principal exists, he is liable on the contract made with
the third party. If the agent acts outside his authority, he will be liable for breach of warranty
of authority and the third party may claim compensation for the damages suffered.

The duties of an agent are, in general, to act in accordance with his principal’s
instructions, with reasonable care and skill and must perform their roles as loyal
representatives, operating in good faith and in the best interest of the principal. This include
avoiding conflict of interests, maintaining confidentiality about the business and not acting
with no other purpose than that for which he was granted.

The rights of the agent are, to receive instructions and information of the business he
has to perform and to be paid if previously agreed.

5. FACTORS, AND OTHER EMPLOYEES AND ASSISTANTS

The law governing factors and assistants is the Commercial Code in articles 281 to
297.

6.1. Factors
A factor is an agent appointed by the trader with general authority to engage in
business in his name and on his account (art. 281 Cco). He is the director or manager of the
business and his authority includes a wide range of actions in respect of the business as if he
were the owner. He is authorised to manage, direct and to enter into contracts concerning its
business (art. 283 Cco).
His general authority can be limited. However, in order to let third parties be aware of such
limits they need to be recorded in the Mercantile Register. If limits are not registered third parties may
not be aware and shall not be bound to the principal by the actions of the factor. In this cases, when the
factor belongs to a known firm and his acts are related to the business, the authority of the factor should
be understood to act on behalf of the principal and the principal shall be bound as if no limits exists
(art.286 Cco.).
It is also important that limits are not as large as to make the general authority into a particular
one, so that he losses the condition of general manager or general director he has.

Directors or mercantile factors have the authority to act in the name of the principal.
This authority can arise by prior consent of the trader given in a written or oral way or even
can arise by subsequent consent of the trader who will give his ratification to the acts of the
factor.

The factor shall negotiate and enter into contracts on behalf of their principals, and on
all the documents they sign in that capacity, they shall state that they are doing so with powers
or on behalf of the person or company they represent (art. 284). Any claim to compel them to
fulfil shall be enforced on the assets of the principal, establishment or company, and not those
of the factor, unless there is confusion with the former (art. 285 Cco). If the factor negotiate
using his own name he will be bound with the third party (art. 287 Cco).

Factors may not deal on their own behalf, nor take an interest on their own behalf or
that of others in negotiations of the same kind as performed on behalf of their principals,
unless these specifically authorise them to do so. If they negotiate without that authorisation,
the profit from the negotiation shall be for the principal and the losses shall be borne by the
factor. If the principal has granted the factor authorisation to deal on his account, or in
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partnership with other persons, he shall not be entitled to the profits, or share in the losses
suffered. If the principal has provided the factor a share in any operation, the share he has in
the profit shall be, except for agreement to the contrary, proportional to the capital he provides;
and if no capital is contributed, he shall be considered a working partner (art. 288 Cco).

Trade factors and assistants shall be held liable to their principals for any damage they
may cause to their interests, due to have proceeded with malice, negligence or breach of the
orders or instructions they may have received in performance of their duties (art.297 Cco)

The termination of authority between the factor and the principle comes from several
situations. In the first place, completion of fixed term or task (art. 299 Cco); secondly by
mutual agreement, thirdly, by revocation of the authority made by the principal. The
relationship comes also to an end in case of death or insanity of the factor but the death or
insanity of the principal is not enough reason to extinguish powers of the director, who will
continue as a factor or director with the successors of the principal until there is a revocation
of the factors authority (art.290 Cco).

When the relationship comes to an end the contracts and acts entered into prior to
termination – it must be notified to the factor- are valid. If the factor continue in his actions
the principal shall not be bound to third parties by the acts of the factor.

6.2. Employees and assistants

Traders may entrust other persons, apart from factors, the performance of a specific or
a series of formalities of the business they perform, in a constant manner, in their name and
on their behalf, by virtue of a written or verbal arrangement; recording this in the Regulations
of their companies, and notifying private individuals by public announcements or by means
of circulars to their correspondents (art. 292 Cco).

6. COMMERCIAL AGENTS
The law governing commercial agents in Spain is 12/1992, of 27 May, on the Agency
Contract (Ley sobre contrato de agencia) , and by Royal Decree 118/2005, of 4 February, on
the General Regulation of Associations of Commercial Agents of Spain and their General
Council. The Commercial Agents Act was introduced to conform with the Directive
86/653/CEE, 18 December 1986 on commercial agents. Following the Directive the Law
12/1992 defines the commercial agents falling under its scope, and establishes the rights and
obligations of commercial agents and their principals, the rules for the remuneration of the
commercial agent, the conclusion and the termination of the contract and the restraint of trade
after the termination of the contract.

The agency contract seems an effective manner for traders to save money and time: by
contracting a commercial agent, independent and specialized in the market, he seeks to
increase profitability and the innovation capacity of his company. The different rules in the
Act are mandatory unless otherwise established in the proper law.

Commercial agents are appointed by traders through an agency agreement which is a

contract whereby an independent trader, the agent, permanently undertakes, for valuable
consideration, the assignment of preparing or subscribing contracts with third parties in the
name and on behalf of another trader, the principal.

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7.1. The contract
The contract between the principal and his agent is characterised, on the one hand,
by its duration and, on the other, by the function of negotiation and promotion for the purchase
and sale of goods. If agents are authorised to do so, they can also conclude and sign the
contracts on behalf of the principal.

Agents may perform their tasks within the business office or visiting clients. Agents
may work for several businesses or for only one principal. In this cases sometimes can be
difficult to distinguish whether an agent is an employee or a trader himself. Agents may work
exclusively for the principal, however exclusivity is not essential to the contract but only
agreed in accordance to the interest of the trader’s business.

For the valid conclusion of the contract, the contract does not need to be written.
However, the agent and the principal are entitled to receive from the other on request a signed
written document setting out the terms of the agency contract including any terms
subsequently agreed (art. 22).

One of the basic features of agency is that the relationship is a long term one. The
period of duration of the contract can be established by fixing a determinate period of time or
by an indefinite period. This is of great importance for extinction of the contract
The fixed-term contract extinguishes upon expiration of the term for which it had been
concluded (art.24, 1). Where an agency contract is concluded for an indefinite period either party may
terminate it by notice to the other party with at least one month notice for every year of performance of
the contract up to a maximum of six months. (art.25). An agency contract for a fixed period which
continues to be performed by both parties after that period has expired shall be deemed to be converted
into an agency contract for an indefinite period (art.24.2).

7.2. Duties and rights of the parties

7.2.1. Duties of agents

Agents and principal must act duty fully and in good faith to each other. The principal
must provide his commercial agent with all the necessary documentation relating to the goods
concerned and give all the information necessary for the performance of the contract. In
addition, he must inform the commercial agent within a reasonable period of his acceptance,
refusal, and of any non-execution of a commercial transaction which the commercial agent
has procured for the principal (art.10, a, b). The principal shall also pay the agreed
remuneration (art. 10, c) following the requirements established in arts. 12 to 17 of the Act.

Agents must look after his principal's interests and act dutifully and in good faith. In
particular, he must make proper efforts to negotiate and, where appropriate, conclude the
transactions he is instructed to take care of; communicate to his principal all the necessary
information available to him; comply with reasonable instructions given by his principal. He
also must accept in the name of the principal all the claims from clients about the goods sold
and keep a separate accountancy for each of the principals on behalf of whom he acts.

7.2.2. Rights of agents

Commercial agents shall be entitled to the remuneration. Remuneration may be
wholly or in part by commission on commercial transactions concluded during the period
covered by the agency contract. In the absence of any agreement on this matter between the
parties, remuneration will be in accordance to the usages that are customarily allowed in the
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place where he carries on his activities. If there is no such customary practice a commercial
agent shall be entitled to reasonable remuneration taking into account all the aspects of the
transaction.

Upon termination of the contract, commercial agents are entitled to compensation for
clients if his previous activity were still producing substantial benefits to the principal. Two
main conditions need to be fulfilled. The first one, the agent must has brought new customers
to the principal or has significantly increased the volume of business with existing customers.
The second, the payment must be equitable taking into account all the circumstances and, in
particular, the commission lost by the commercial agent on the business transacted with such
customers (art.29).
Compensation shall be due whether agency is a fixed period or indefinite contract.
Compensation shall also arise where the agency contract is terminated as a result of the commercial
agent's death.
Compensation shall not be payable: 1) where the principal has terminated the agency contract
because of default attributable to the commercial agent which would justify immediate termination of
the agency contract under national law; 2) where the commercial agent has terminated the agency
contract, unless such termination is justified by circumstances attributable to the principal or on grounds
of age, infirmity or illness of the commercial agent in consequence of which he cannot reasonably be
required to continue his activities; and 3) where, with the agreement of the principal, the commercial
agent assigns his rights and duties under the agency contract to another person (art 30).

Compensations for damages may be granted to the party which unilaterally

terminates the agreement. The agent loses his right to compensation for damages if he does
not meet his legal or contractual obligations and also if he assigns his rights and obligations
to a third party.

On the other hand, Spanish law acknowledges indemnity from possible prejudices
caused by the termination of an indefinite contract but it is worth remembering that the
termination of a contract for an indefinite period of time is subjected to prior notice and if this
is not observed it is tantamount to total or partial breach and extinguishes the rights to
compensation which the negligent party may have had.

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