Commercial Agents are entitled to statutory compensation on termination of their agency agreements. Compensation can be substantial and is in addition to any existing contractual rights.

As a result of the Commercial Agents Regulations 1993, there are important questions for both principals and agents to consider before entering into or terminating agency agreements.

These include:

  • Do the Commercial Agents Regulations apply to the contract?  
  • How much compensation is payable and what is the basis of the assessment?  
  • In what circumstances is compensation payable?  
  • What steps can be taken (both on negotiating the contract and on terminating it) to: - limit any compensation (if principal); or ensure appropriate compensation is paid (if agent)  

It is important that the changes in the law are considered when addressing these issues. We are continuing to receive instructions from businesses which have made decisions on agency agreements, without obtaining up to date advice.  

Do the regulations apply to your contract?

Some principals are still unaware that the regulations apply to their contract. As a consequence, too many businesses are contacting us after they have terminated an agent's contract and an agent is claiming compensation from them.

Historically it was thought that it was possible to circumvent the provisions of the Commercial Agents Regulations by restricting the agent's ability to "negotiate" contracts. As a result, when contracts were drafted for principals they were often drafted in such a way so that the agent was prohibited from "negotiating" aspects of the contract so as to circumvent the Commercial Agents Regulations and the protection provided by them. In this way, it was thought that principals could avoid paying compensation provided for by the Commercial Agents Regulations. This is no longer possible.

In the case of P J Pipe & Valve Co. Ltd v Audco India Limited [2005] the Courts made it clear that they will not interpret the Commercial Agents Regulations in the manner previously envisaged. The regulations apply to all agents that make introductions, and play a significant role in introducing business to the principal, irrespective of whether the agents 'negotiates' with customers.

As a result of the PJ Pipe decision, the Commercial Agents Regulations are far more wide-reaching than originally considered to be the case and now apply to a number of contracts, which were thought previously to be exempt.

How much compensation is payable and what is the basis of assessment?

Lonsdale v Howard & Hallam Ltd - the level of compensation.

As most businesses are aware, the parties can agree in an agency agreement whether compensation should be paid on termination or an indemnity provided. If the contract is silent on the point, (or there is no written agreement) compensation is payable.

Both principal and agent need to be aware of the provisions of the regulations on termination and the liability of the Principal and make an informed choice at the stage the contract is entered into.

The case of Lonsdale v Howard & Hallam Ltd in July 2007 has a significant impact on the valuation on the basis of compensation. It set a clear precedent that an agent's entitlement to compensation is based upon the value of goodwill in the agent's business at the date of termination. The choice of indemnity or compensation should therefore be made on an informed basis and with care at the outset.

In what circumstances is compensation payable?

Compensation is payable on termination in a wide range of circumstances and can be payable whether or not the principal is in breach of contract for terminating the agreement. The purpose of this aspect of the regulations is to ensure that an agent who spends a number of years building a client base for the principal is adequately compensated for the value of that client base when the relationship between the principal and the agent comes to an end.

Compensation is often payable in circumstances which the principal may not necessarily expect, for example in the event the agent retires or is unable to comply with its obligations as a result of illness or infirmity.

In what circumstances is an indemnity payable?

As explained, as a pre-requisite, the contract must stipulate that an indemnity applies rather than compensation.  

An agent is entitled to an indemnity if and to the extent that he fulfils two tests. Firstly, the agent must have brought the principal new customers or significant new business with existing customers and the principal must continue to derive substantial benefits from this business. Secondly, the payment of an indemnity must be equitable having regard to all of the circumstances; including in particular the commission lost by the agent on such business.  

Level of indemnity

The upper limit of the agent's indemnity entitlement is given as one year's average commission, calculated by reference to the preceding five years.

How do the changes in the law affect my business?

There are two main changes, namely:

  • many contracts previously considered outside the ambit of the regulations now fall within it; and  
  • the basis of assessment of compensation has been clarified to some extent and in simple terms is the value of the goodwill of the agent's business. Notwithstanding this clarity, the indemnity basis is usually preferred by principals as it limits the compensation to one year's commissions.  

What steps should I take to protect my business?

Before entering into or terminating a contract where goods are marketed and supplied through a third party you should take legal advice.