18 September, 2007
Commercial agents have received legal protection for some time now by virtue of the Commercial Agents (Council Directive) Regulations 1993 (the "Regulations"). In general terms, the Regulations apply to any self-employed agent who has continuing authority to negotiate the sale of goods on behalf of the principal. One of the most contentious aspects of the Regulations has been the right of commercial agents to claim compensation in certain circumstances upon termination of the relationship.
There has however been a recent House of Lords decision which assists both principals and agents in providing further clarification on how to quantify compensation under the Regulations. The House of Lords took the view that the level of compensation should be the amount of loss that the agent had suffered as a result of the termination. Such damages will normally be the loss of the agency business, including whatever goodwill attaches to it and so the agent's compensation should reflect the value of the business at the date of the termination.
The Regulations provide that where an agent's contract is terminated the agent is entitled to an indemnity or compensation. Where the parties have agreed that an indemnity will apply on termination the method of assessment is simple: the indemnity is capped at one year's commission based on the average commission over the last five years. Alternatively, the fall back position where an indemnity has not been agreed is for the principal to pay compensation. However, it can be difficult for a principal to properly assess the agent's potential claim in damages at the outset of an agency contract (the compensation option) and therefore the decision as to whether to include an indemnity provision in the agency agreement or to fall back on the compensation position under the Regulations can also be difficult. For example where an agent has minimised its losses by contracting with a different principal, post termination of the agency relationship, the amount awarded on a compensatory basis may be substantially less than the amount the agent would have received on an indemnity basis.
Therefore when contemplating whether to take the option of an indemnity or compensation it is worth taking the following into consideration:
In this particular case the principal had ceased to trade and had closed his business and the commercial agent in this case was not entitled to any compensation. However the decision in this case must not be interpreted to meaning that principals will now have to pay less under the compensation alternative than was previously thought to be the case. The conclusion in this case was due to the fact that principal's business had ceased trading.
At the other end of the scale, principals whose businesses are highly successful may be required to pay significantly more than two years gross commission to their agents on termination.
If a case goes to court, it is now likely to be decided on the basis of the expert evidence. The old days of a simple two year formula have now gone and therefore it remains to be seen as to what impact the House of Lords decision will have on the market practice in the UK, however on the basis that businesses which are highly successful could end up paying in excess of two years commission under the compensation alternative, it is likely that the indemnity alternative (with its one year cap) will continue to be seen as the better option by most businesses who sell through agents in the UK. However for a business that uses a large number of agents, all of whom have relatively low earnings this, this could be an extremely attractive outcome!