Commercial Agents
If your business uses agents to promote or sell your products or if you are such an agent, you need to be aware of the Commercial Agents Regulations 1993 ("the Regulations") which can significantly extend your legal rights and obligations.
It is important that you take a pro-active approach and address the issues which are likely to arise. A well drafted commercial agency agreement will offer you a good level of protection.
This factsheet sets out the main points that both agents and principals need to know when entering or terminating a commercial agency agreement.
- Are you, or is your agent, a "commercial agent" for the purpose of the Regulations?
- A commercial agent is a self-employed individual, partnership or company who has continuing authority to negotiate the sale or purchase of goods on behalf of another business (known as the "principal").
- A commercial agent does not need to be authorised to conclude sales on behalf of their principal and it is usually sufficient that they are authorised to introduce customers to the business.
- A party that buys products from a business and then resells them would not generally be a commercial agency. Also, agents who sell services rather than goods or are just instructed to conclude a single transaction are not subject to the Regulations.
- The Regulations apply to commercial agencies where the contract states English law applies or where performance of the commercial agent`s duties takes place in the UK unless the parties have agreed that another EU Member State`s law applies. Similar regulations apply to commercial agency agreements in other EU Member States.
- Your Rights and Obligations under the Regulations
- If your arrangement is a commercial agency, you will have a number of rights and obligations under the Regulations, many of which you are not allowed to exclude in your agency agreement.
- It is important to be aware of the Regulations when you enter a commercial agency agreement. A list of the most important rights and obligations under the Regulations is set out on page 3 of this factsheet.
- What happens if the agent or principal terminates the commercial agency?
- The general rule is that, if the principal serves notice terminating the contract, the agent is entitled to receive his commission/remuneration for the remainder of the contract until the date of termination and also to be paid "compensation" (or "an indemnity" if the contract so provides) in recognition of the goodwill and business that the agent has built up for the principal. We explain later in this factsheet how the compensation and indemnity are calculated.
- The agent must give the principal notice of his intention to claim compensation/an indemnity within one year of termination or will lose this entitlement.
- If the principal terminates the agency agreement because the agent has committed a serious breach of contract, the principal may be able to avoid paying the compensation/indemnity.
- Generally, if the agent terminates the agency agreement, he has no right to compensation or an indemnity, save in the following situations:
- The agent has reached retirement age and is retiring from his agency business
- The agent is terminating due to ill-health where it would be unreasonable to expect him to continue working or the agent dies
- The agency comes to the end of its fixed term
- The agent terminates because the principal has committed a serious breach of contract.
- How is "compensation" calculated?
- For many years, the method of calculating compensation under the Regulations was unclear, but the House of Lords has recently settled this issue in the case, Lonsdale v Howard & Hallam Ltd 2007.
- Compensation is now worked out by calculating the value of the agent`s business (or the part of the business which is being terminated) at the time the agency agreement was terminated. In other words, it is the price the agent could have reasonably expected to receive if he had sold the business at the time with the right to continue performing the duties of the agency and to receive commission.
- The valuation should also take into account the likely future performance of the principal`s business, so if this is in decline the compensation award can be reduced. The fact that the agent may have found other work following termination of the agency agreement, however, is not relevant.
- In many cases, this calculation will require the agent to instruct an accountant to value their business using standard methods of business valuation.
- Alternatively, if the agency has little or no value applying the above test, the agent can instead or in addition recover any expenses he has incurred on the advice of the principal that he has not been able to recover during the life of the agency agreement.
- How is the "indemnity" calculated?
- As mentioned above, an indemnity will be payable by the principal, rather than compensation, where this is expressly provided for in the agency agreement.
- The starting point is that the indemnity is calculated as 1 years` remuneration based on the average of the agent`s previous five years` earnings (or, if the contract was less than five years, over that shorter period).
- This is the maximum that can be awarded. The actual indemnity payable will be influenced by the volume of new customers the agent has brought to the principal, whether he has significantly increased the volume of business with existing customers and whether the value of the indemnity is fair having regard to all the circumstances including the amount of commission the agent has lost.
List of important rights and obligations under Regulations
- Rules that cannot be excluded by the parties:
Click here to view table.
- Rules that can be varied or excluded by the parties
Click here to view table.
