10 April, 2008
The Commercial Agents (Council Directive) Regulations 1993 ('the regulations') govern agency agreements between a principal and a commercial agent where either party is an individual or a company.
The regulations define a commercial agent as a person or company: "who has continuing authority to negotiate the sale or purchase of goods on behalf of another person (the "principal"), or to negotiate and conclude the sale or purchase of goods on behalf of and in the name of that principal…"
The regulations aim to give commercial agents a minimum level of protection and security in their business, similar to what an employee would be entitled to in employment regulations. Where a principal terminates an agency agreement, the commercial agent is entitled to an indemnity or compensation.
In the event that the wording of an agency agreement provides for an indemnity, the regulations cap the maximum amount payable to the agent. This amount is not exceeding one year's commission based on an average remuneration over the previous five years or the term of the agency agreement, whichever is the shorter.
Unless the wording of the agency agreement sets out whether an indemnity or compensation is payable, the position is that compensation will be payable. The case of Lonsdale –v- Howard & Hallam Ltd  impacted on the value of compensation a principal would be ordered to pay. The French courts have adopted a broad brush approach and applied a general guideline of two year's gross commission as being the value of commission payable. However, the English courts believed this to be an inadequate way of dealing fairly with cases which came before it. In Lonsdale, the Court looked behind the rationale of the regulations and sought only to compensate a commercial agent for loss actually suffered. It was decided the value of goodwill in the agent's business would be the best way to determine its loss and that the valuation of goodwill be assessed in the same way as in the sale of any business on the open market.
The use of forensic accountants in assessing the goodwill of an agent's business has assisted solicitors since Lonsdale. In assessing the value of the goodwill, there is a need to consider whether the agency would have continued, whether there was a trend in the market for the goods in question and whether more than general expenditure had been incurred by the agent in its business, amongst other factors. Good forensic accountants can provide a report which can be used to outline what level of compensation may apply to an agent's business. There is no upper limit which applies to compensation paid to an agent.
Compensation or an indemnity becomes payable if the agent suffers damage on the principal terminating the agency agreement, whether reasonable notice was given to the agent or not. This can also arise if the agent dies or retires or if the agent breaches the agency agreement and the principal terminates but the breach is not so serious as to justify termination.
It is therefore important that principals consider the regulations and how they may affect its business and its relationship with its workers. It is also important to assess from the outset whether a worker within the business is a Commercial Agent as set out in the regulations. If a business does have an agency agreement in place it is important to consider the level of indemnity or compensation payable prior to terminating the agreement. They must also look carefully at the circumstances in Article 18 of the regulations which set out some of the circumstances when termination of the agreement does not involve the principal having to make payment of compensation or an indemnity to the agent.