Until the mid 1990s, the relationship between agents and principals was not governed by any specific legislation in the UK. This, however, changed in 1994, as a result of legislation passed by the European Union, which led to the Commercial Agents (Council Directive) Regulations 1993 (“the Regulations”). One of the main changes implemented by the Regulations was the statutory right for agents to be eligible for compensation (or indemnity if the contract expressly states this) from the principal on termination of the agency contract.
It is important for principals and agents to be aware that agents are entitled to compensation or indemnity, even if the agent has himself terminated the agency contract "on the grounds of age, infirmity or illness”, which includes retirement.
The test is whether, as a result of the agent’s age, the agent could not reasonably be required to continue his activities. If that is the case, then the retired agent will be entitled to compensation or indemnity pursuant to the Regulations.
There has been much debate over what the retirement age should be. In Abbot -v- Condici Limited and Another , when Mr Abbot retired at 65, the defendants argued that he should not be entitled to compensation because he was physically able to carry on working. The defendants argued that "age" did not necessarily mean 65, especially since there is no compulsory UK retirement age and the typical retirement age varies. The judge disagreed. "Age" is a separate criteria from "illness" and "infirmity" and if the age in question is a reasonable retirement age then the agent should be entitled to compensation regardless of his state of health.
The age of 65, which Mr Abbot chose, was in the judge's words "embedded as a retirement milestone" and it was therefore reasonable for him to stop when he did. Agents will, however, lose their right to claim compensation or indemnity if they do not notify the principal within one year of termination (or retirement) that they intend to pursue a claim for this entitlement.
Indemnity or Compensation?
Except where the agency agreement otherwise provides, the commercial agent is entitled to be compensated rather than indemnified.
Where an agent is entitled to be indemnified, the entitlement will if the following conditions are satisfied:
- new customers had been brought to the principal by the agent; or
- the volume of business with existing customers had been significantly increased by the agent; and 2.1 the Principal continues to derive substantial benefits from such business; and 2.2 the payment of the indemnity is equitable, having regard to all the circumstances and, in particular, the commission lost by the agent on the business transacted with such customer.
Indemnity payments should not exceed one year of the agent’s average remuneration over the preceding five years (or over the whole duration of the contract, if the period is less than five years).
The Regulations are silent as to the amount of compensation an agent is entitled to receive and they do not provide any explicit guidance as to how compensation is assessed. Historically, the English Courts adopted the French Law benchmark of two years average commission, but recent case law has departed from this approach. The Courts have not developed an entirely consistent approach when assessing the level of compensation and, instead, the Courts have assessed the level of compensation on a case by case basis, dependent on the circumstances in the particular case. The correct approach was, as a matter of law, settled by the House of Lords in Lonsdale v Howard Hallam in 2007.
In brief, the Court held that compensation was equivalent to the value of the agency business, as at the date of termination. The value was the amount which the agent could reasonably expect to receive for the right to continue to perform the duties of the agency and receive the commission which he would have received. In order to assess the “the value” of the agency business, a report is required from a forensic accountant. In the majority of cases, compensation payments generally exceed indemnity payments.