This alert sets out some of the essential terms of commercial agents' contracts in the European Economic Area (EEA), focusing particularly upon the UK. It contains both drafting tips and what to look out for when commercial agency arrangements are terminated.
The starting point - the Commercial Agents Regulations
The Commercial Agents (Council Directive) Regulations 1993 (Regulations) implemented in the UK the EU Directive which sought to regularise the rights of commercial agents across Europe.
However, significant differences still arise within each relevant European jurisdiction, e.g. the right to compensation upon termination in France is very different from the right to compensation for a commercial agent in the UK.
Some specifics to note about the impact of the Regulations are:
- All agency arrangements in Europe are caught by the Regulations even if they are oral.
- The Regulations only apply to sale of goods agreements - services do not fall within the Regulations in the UK.
- Regulation 15 stipulates minimum notice periods although these can be overridden by express provision and/or local law.
- An agency contract for a fixed period which expires is converted into an agency contract for an indefinite period if both parties continue to perform it (Regulation 14).
- The right for an agent to receive compensation or an indemnity under the Regulations arises on expiry or termination even if there was no expectation that the agreement would ever be extended or renewed.
- The right to compensation/indemnity arises regardless of whether the principal is in breach of contract or not.
- You cannot derogate from the majority of the Regulations. However, there are some helpful areas where you can (see below).
Claims against principals when a principal agency relationship terminates
Whenever a commercial agency relationship which operates within the EEA expires or is terminated, then typically the following claims are made:
- If there is an express right to an indemnity under Regulation 17, then a sum not exceeding one year's average annual remuneration over the preceding five years is payable.
Drafting tip: consider drafting in an indemnity since it gives certainty as to the compensation payable on termination/expiry of an agency relationship.
- Even if there is an indemnity, that does not prevent a claim for damages for breach of the agency contract.
- If there is no express indemnity, then there is a right to compensation under Regulation 17. In France, for example, there is a rule of thumb that compensation should be two years' lost commission. In the UK, however, the House of Lords in Lonsdale -v- Howard and Hallam Limited held that the proper basis for calculating compensation is by reference to the loss of the value of the agency. Expert valuation evidence will now be needed in every case in order to determine the compensation payable. The situation is therefore more uncertain and one cannot draft around this.
- A claim for commission based upon transactions concluded after the agency contract has terminated but attributable to the efforts of the agent prior to that time; or where the order has been received before the termination but the invoice is payable afterwards (Regulation 8).
Drafting tip: this is one of the few areas which can be expressly excluded by agreement under the Regulations. Principals should do so.
- A claim for a statement of commission due under Regulation 12. An agent is entitled to demand all information which he needs in order to check the amount of commission due to him.
Defences to these claims
- Has the agent notified the claim within one year following termination? If not, the compensation/indemnity claim is time barred (Regulation 17(9) - any underlying claim for damages for breach of contract can still be made though).
- Was the agency contract terminated for repudiatory breach or in other circumstances of default by the agent which justified immediate termination? If so, the right to indemnity or compensation is lost under Regulation 18.
- The commercial agent loses the right to indemnity or compensation if he himself terminates the agency contract, unless such terination is justified in the circumstances set out in Regulation 18 (b) (which includes circumstances attributable to the principal).
- If the commercial agent assigns the agency contract to another person, then he loses the right of indemnity or compensation.
Over the past few years, we have seen an increased number of commercial agents' claims. They tend to be expensive to fight in the UK because of the need for expert evidence with regard to the compensation payable. Because of the impact of the indemnity/compensation provisions under the Regulations, principals need to think carefully whether to enter into an agency relationship or whether to have a distributorship arrangement instead. Other considerations, which fall outside the ambit of this alert, apply here because there are tax, competition law and commercial considerations (e.g. control/credit risk) which need to be taken into account.