Is Your Agent Entitled To Compensation On Termination?

Many businesses choose to appoint commercial agents to act on their behalf i.e. a self-employed intermediary with continuing authority to negotiate the sale or purchase of goods, or negotiate and conclude such transactions, on the business’s behalf and in the business’s name.

There are numerous benefits to doing so – they can save a business time, be more cost effective and sometimes even bring their own client following with them. However, it’s important to be aware that, in certain circumstances, a commercial agent will have a right to “compensation” or “indemnity” on termination of the agency agreement. Note that these rules apply only to agents fulfilling the legal criteria of a “commercial agent” under the Commercial Agents (Council Directive) Regulations 1993 (“Commercial Agents Regulations”).

When will compensation or indemnity be payable?

There are a number of situations when a business (called the “Principal”) will be required to pay its commercial agent (called the “Agent”) compensation or indemnity on termination of the agency agreement. The following circumstances are either expressly specified in the Commercial Agents Regulations or else have been considered by the Courts or are sufficiently common scenarios that are likely to give rise to compensation/indemnity:

Indeed, the only situations in which an Agent will not be entitled to compensation on the termination of the agency agreement are:

Compensation vs. Indemnity

On termination of an agency agreement in the above circumstances, the Agent will generally be entitled to compensation from the Principal. This is in recognition of the goodwill which the Agent has generated for the Principal throughout the duration of the agency agreement. Such compensation may be calculated on an “indemnity basis” (not to be confused with “an indemnity” under English law, which is different) or a “compensation basis”.

Compensation will be calculated on a compensation basis unless the parties have specifically opted for the indemnity basis. For the indemnity basis to apply, the agency agreement must expressly state this. Therefore, if an agency agreement is silent on this point, the compensation basis will apply by default.

How much (if anything) will be due to the Agent on termination?

The amount of compensation to which the Agent will be entitled will depend on whether this is being calculated on a compensation basis or an indemnity basis.

Compensation basis

Where the compensation basis applies, the Agent will be entitled to be compensated for the damage which he/she suffers as a result of the termination of the agency agreement. Such damage is deemed to occur particularly where the termination takes place in circumstances which either:

Such compensation is calculated on the basis of “the value of the agency which has been lost”. This can naturally be a difficult sum to quantify; although it is clear from case law that there is no cap on the amount which may be paid. In addition, the Agent may be entitled to further payment in lieu of notice.

Indemnity basis

Where the indemnity basis applies, the amount which will be payable is intended to compensate the Agent for the notional buy-out of his/her interest in the jointly-owned goodwill in the Principal’s business i.e. the goodwill which has been generated by the Agent. However, such compensation is conditional.

The Agent will be entitled to compensation on an indemnity basis only if and to the extent that:

Such compensation is subject to a cap of one year’s average gross commission. This will be based on the Agent’s commission over the five years before termination (or the entire duration of the agency agreement if shorter than this). As such, the compensation to which the Agent will be entitled might be less than this but may not be more.

Effects of Brexit

Since Brexit, the Commercial Agents Regulations (originally implemented in accordance with EU law) have remained in force; however, the British Government has voiced plans to scrap all EU financial regulations by the end of this year, potentially including the Commercial Agents Regulations. Should this take place, unless replaced with alternative legislation providing equivalent rights, it would seem that the entitlement to compensation on termination which Agents have enjoyed for the past 30 years may be a thing of the past.

Conclusion

Previously and for now, a Principal will tend to favour compensation calculated on an indemnity basis as there is a cap on the amount to which the Agent may be entitled. There is no such cap on compensation calculated on a compensation basis which could consequently be a significant sum. For this reason, too, an Agent is likely to prefer the compensation basis alternative under the current legislation. However, should the Commercial Agents Regulations be revoked and not replaced, it is probable that the only compensation to which Agents will be entitled will be that specified in their agency agreements, and the “right to compensation” may no longer be a right at all.