The High Court has reviewed a compensation/indemnity clause in a commercial agency agreement, and, contrary to precedent, agreed to sever the clause rather than declaring it invalid in its entirety.
The clause in this case read as follows:
6.3(a) Upon expiry or termination of this Agreement for any reason:
(a) If and to the extent that the ….[Commercial Agents] Regulations apply, [the Claimant] shall (if and to the extent so entitled in accordance with the provisions of the Regulations) have the right to be indemnified as provided for in regulation 17 of those Regulations. For the avoidance of doubt, [the Claimant] shall have no right to any compensation under those Regulations upon termination or expiry of this Agreement provided that if the amount payable by way of indemnity under this Clause would be greater than the amount payable by way of compensation, [the Claimant] shall ….have the right to receive compensation instead of an indemnity under the regulations ….
The intention behind this clause was that on termination the agent would be entitled to an indemnity from the principal unless compensation would be less. Often, compensation results in a greater payment being made to the agent.
The agreemtent also contained this severance provision:
7.5 In the event that any provision of this Agreement is held to be invalid or unenforceable, such provision will be deemed to have been severed from the Agreement, while the remainder of the Agreement will remain in full force and effect.
In an earlier case, the High Court had held that the whole of a clause which had been drafted in the same way as clause 6.3(a) was unenforceable. The result was that the default position in the Commercial Agents Regulations applied to a compensation payment from the principal (this was greater than the indemnity payment would have been). However. in this case, the High Court held that the second sentence of clause 6.3(a) could be severed from the agreement with the first sentence remaining valid and enforceable. This meant that the agent remained entitled to an indemnity only.
This case is not necessarily an example of the court refusing to follow precedent – in the earlier case the possibility of severance had not been argued. This latest ruling will come as some comfort to principals that an attempt to minimise the payment that must be made to an agent on termination may avoid being struck down as unenforceable in its entirety, provided severance is possible and is provided for in the agreement.