Commercial Department Bulletin:- November 2007
Commercial Agents – Compensation
Commercial Agents
There are many different ways in which a business which sells products can arrange for its sales to be carried out. For example, it can employ salespersons; it can set up franchises; it can appoint distributors, who buy its goods for re-sale; or it can appoint commercial agents.
The defining point of a commercial agent is that they sell products as agent, rather than on their own account.
The statutory definition is “a self-employed intermediary who has continuing authority to negotiate the sale or purchase of goods on behalf of another person (the ‘principal’) and to negotiate and conclude the sale or purchase of goods on behalf of and in the name of that principal”.
The Commercial Agents Regulations 1993
For many years commercial agencies were unregulated but these Regulations, implementing an EC Directive, introduced a range of measures. They have throughout been rightly criticized as an unclear jumble of ill-defined provisions. Sometimes poorly drafted legislation comes to be interpreted by the courts so that, eventually, its meaning and effects come to have some certainty. This has not tended to be the case here, though, possibly because those affected have avoided litigation precisely because of the poorness of the Regulations. The result is that, despite the Regulations’ age, there remains virtually no case-law on them to indicate how they should be applied.
One of the measures which the Regulations introduced was the concept of compensation for a Commercial Agent when the principal ends the agency.
Usually, in English law, a party to a contract who ends the contract has no liability to the other party provided the way they ended the contract did not breach the contract. If there was a breach then, subject to certain restrictions, damages would be awarded so as to put the other party in the same position as if the contract had been ended without breach. The only exception to that rule is where statute provides for prescribed compensation to be payable regardless, for example if an employee is dismissed unfairly (though not in breach of contract).
But the Regulations said that, when the Principal ends the agency, it must pay the agent either an indemnity or compensation. Except for limited circumstances, this is the case even if the agent is given proper notice of termination and even where a fixed term contract expires.
So if the entitlement arises regardless of there being no breach of the agency, how is the amount assessed? And which should it be in any particular case – an indemnity, or compensation?
Indemnity to Agents
Where the parties have agreed in advance that there is to be an indemnity rather than compensation, it is now settled that the amount of the indemnity is up to one year’s commission, based on the average over the previous five years.
If an indemnity has not been agreed in advance, the principal must pay compensation instead.
Compensation for Agents
The Regulations gave virtually no guidance how compensation should be calculated.
Until recently, the usual benchmark had come to be two years’ gross earnings, which is the position in France and had also been applied in Scotland.
However, a Court of Appeal case, recently confirmed by a House of Lords decision, says that the level of compensation should be the amount of the loss that the agent suffered as a result of the termination of the agency.
The amount of the loss should be regarded as the value of the agent’s business, calculated by reference to an assessment of the value of the principal’s business. If the principal’s business is expanding, then the agent’s business is likely to be considered to be worth more. By contrast, if the principal’s business is declining then that will reduce the value of the agent’s business and consequently the amount of compensation payable.
Consequences
In some cases, particularly where the principal’s business is declining, the principal is likely to have to pay less compensation than previously. In other cases, however, the amount of compensation is likely to be greater than previously, and it will be far more difficult for the principal to calculate at the start of, or during, the agency how much the compensation payment is likely to be.
If you are contemplating establishing a business as a Commercial Agent, or arranging for
someone to become a Commercial Agent to sell your products, then it is vital that you take specialist legal advice on all aspects, including what will happen at the end of the agency.
This bulletin is not intended to be comprehensive or to provide specific legal advice. It should not be relied upon in the absence of specific advice given in relation to particular circumstances.
For further information on this or any related topic please contact Philip Cuerden or Carina Sparkes.
South Cheshire's leading Law Society accredited law firm
South Cheshire House, Manor Road, Nantwich, CW5 5LX
Tel: 01270 611106 Fax: 01270 610515 or 610085
www.bowcockcuerden.co.uk
Bowcock Cuerden LLP …. taking care of your business
©Bowcock Cuerden 2005
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