The Commercial Agents (Council Directive) Regulations 1993 (as amended) govern the relationship between commercial agents and their principals. A commercial agency will arise where one party gives authority for a self-employed intermediary to negotiate the sale or purchase of goods on its behalf. Broadly speaking, the objective of the Regulations is to improve and protect the position of agents and to set out with clarity, the duties owed between the parties where there is a commercial agency.
This article will examine an important consequence of the Regulations, which is an agent’s entitlement to receive compensation from its principal upon termination.
Compensation or indemnity?
When a commercial agency ends the agent is treated as having suffered a ‘loss’, as his right to receive commissions under the contract is discontinued. In recognition of this, the Regulations stipulate that an agent is entitled to receive ‘compensation’ or an ‘indemnity’ upon termination of the agency relationship.
Compensation is the default option, and is a favourable one from an agent’s point of view because the value of any such sum is uncapped. By contrast, the indemnity alternative is capped at the value of one year’s commission, and is only payable in any event if it can be shown that the principal will continue to derive ‘substantial benefit’ from business introduced by the agent.
Unless the agency agreement states otherwise, the position under rule 17(2) of the Regulations is that the agent is entitled to compensation. This is a crucial effect of the Regulations and one to which principals and agents should be equally alert. Calculating the value of such compensation however, can be a complex, and in some cases, contentious matter.
Putting a price on termination
The amount of compensation payable to an agent is calculated by reference to the loss of the value of the agency. The key case here is Lonsdale v Howard & Hallam Ltd (2007). Critically, Lonsdale established:
i. The damage suffered by an agent upon termination is the loss of the value of the agency relationship. The ‘value’ is the future income that the agency would have generated for the agent were it not for the event of termination ; and
ii. The agency should be valued on a net basis
Lonsdale also set out certain assumptions that should be made when a valuation is carried out, and stated that consideration must also be given to other factors. These include whether the market in which the agent carried out its business is improving or declining at the date of termination, and whether the outgoing agent is likely to solicit customers to a competing principal.
The issue of valuation is not straightforward. Settling upon an accurate valuation will necessarily depend upon the abstraction of a hypothetical purchaser and the careful consideration of a range of complex economic issues. It is in the interest of an outgoing agent to demonstrate that his commercial agency contract is valuable, and it is the objective of his principal to show otherwise. It is not uncommon for parties to substantially disagree as to the value of a commercial agency, and therefore the price of any compensation payable. Where matters are litigated upon, it is typical for parties to instruct independent experts to navigate the complex process of valuation.
Protection for Agents
On the face of things, a valuation can be conducted and agreed, and the agent can receive his compensation without acrimony. However, there are options available to a principal by which he may seek to minimise his liability to an agent. For example, where a commercial agency is not exclusive (i.e. the principal is free to transact with other agents or sell products on its own behalf within the territory), a principal could credibly argue at the point of termination, that his intention would be to compete with the agent directly, or conduct business with additional agents. The effect of such a projection would be to devalue the future income of the agency and reduce the compensation payable to the outgoing agent.
Fortunately for commercial agents, Regulation 4 of the Regulations stipulates that ‘in his relations with his commercial agents a principal must act dutifully and in good faith’. As such, a principal is precluded from acting in a manner which is at the deliberate expense of his agent. It follows that compensation should be calculated by reference to commissions payable where the contract is performed in the manner the parties intended, and not where the principal carries out his contractual obligations with a view to minimising his liability to the agent.
The issue of good faith was helpfully dealt with in the case of Page v Combined Shipping (1997). In Page, the Court held that compensation payable was based on the commission which the agent would have earned if the contract had continued to be performed in the normal manner in which the parties had intended, and not by reference to the commission which the agent could have earned if the defendant had carried out his contractual obligations with a view to minimising his liability to the agent.
The Regulations are fundamental in governing relations between the parties where a commercial agency is present. Both agents and their principals should be well-briefed on the consequences of the legislation, particularly with respect to termination and the default requirement for compensation to be paid.
If you are a prospective or current party under a contract for commercial agency and require further guidance, our Dispute Resolution department can offer expert advice.
For more information please contact the head of our Dispute Resolution team on 0191 384 2441.