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Compensation and indemnity payments for commercial agents after termination of a commercial agency agreement

The Commercial Agents (Council Directive) Regulations 1993 (SI 1993/3053) apply to all commercial agents and give commercial agents certain rights on termination. A commercial agent is defined in the Regulations, subject to limited exceptions, as a self employed intermediary who has continuing authority to sell or purchase goods on behalf of another person (the principal), or to negotiate and conclude the sale or purchase of goods on behalf of and in the name of that principal.

Disputes can arise on the conclusion or termination of a commercial agency agreement. The right that tends to lead to the most disputes is regulation 17. Regulation 17 gives a commercial agent the right to a compensation or indemnity payment if the principal terminates its contract for any reason other than for a default by the agent justifying immediate termination. The agent may also be entitled to such a payment if it terminates the contract on grounds that there has been default by the principal justifying immediate termination, or if the contract comes to an end on the expiry of a fixed term.

The differences between compensation and indemnity payment

There are a number of differences between compensation and indemnity payments. The key differences are as follows:

  • An agent will only be entitled to an indemnity payment if there is a provision to that effect in the commercial agency agreement. If the contract does not specify an entitlement to an indemnity, the agent will only be entitled to a compensation payment.
  • An indemnity payment is capped under the regulations at one year’s average annual remuneration over the last 5 years of the contract, or over the duration of the contract if shorter. In contrast, the regulations do not cap compensation payments and there is no limit on the amount of compensation that the Courts can award an agent on termination.
  • An indemnity payment is intended to reflect the benefits the principal has gained and continues to receive from the agent’s work after termination of the contract. An indemnity payment is therefore linked to the agent bringing in new customers or significantly increasing levels of business. In contrast, a compensation payment is not linked to new customers or increased levels of business. A compensation payment is intended to reflect the loss suffered by the agent as a result of the termination of its contract.
  • An indemnity payment should be equitable. In contrast, there is no requirement for a compensation payment to be equitable and an agent may be entitled to a compensation payment even where the principal receives no on-going benefit from the agent’s activities after termination of the contract.
  • Granting an indemnity payment does not prevent the agent from seeking damages. There is no equivalent provision for compensation payments.

The amount payable for an indemnity will normally be lower than the amount of compensation payable; however, in some cases the indemnity payment can be higher, particularly in the case of new agencies. To try and avoid this risk, some principals have sought to include clauses within their agency agreements to provide that the agent will only be entitled to an indemnity payment if it will be less than the amount of compensation payable and if the indemnity payment will be more than the amount of compensation payable the agent will only be entitled to the lesser sum as compensation. Such clauses have been held to be invalid on the basis that they are incompatible with the regulations. The regulations do not anticipate that the principal will be able to choose the cheapest option at the point of termination. They envisage that the principal and the agent will make a choice between an indemnity or compensation at the time the contract is made.

Case study – Brand Studio Limited v St John Knits, Inc

In the recent case of Brand Studio Limited v St John Knits, Inc [2015] EWHC 3143 the High Court was asked to consider this type of clause. The clause in question provided the agent with a right to an indemnity under regulation 17, but it also contained a compensation provision as an alternative in the event that the sum payable as compensation would be less. It was common ground between the parties that the compensation provision was invalid; however, the agent argued that the entire clause (including the indemnity provision) should be severed from the contract leaving it entitled to a non-contractual compensation payment (which in this case was more than the indemnity). The principal argued that the compensation provision could be severed from the contract, without severing the entire clause, leaving the agent with an entitlement to an indemnity rather than compensation.  

The High Court considered the issue of severance and held that the clause was unenforceable in its entirety. The Judge also concluded that the unenforceable compensation provision could be severed from the contract, leaving the agent with an entitlement to an indemnity without changing the character of the contract. This prevented the agent from receiving a windfall in the form of compensation.  

This decision reinforces the view that clauses seeking to give an agent the right to an indemnity payment, but only if it proves to be less than a compensation payment, should be avoided in commercial agency agreements.

Finally…

Over the next few months principals may consider terminating their agency contracts in the EU as a result of the prospect of Britain leaving the EU and concerns about the global economy. We regularly advise principals and agents on all aspects of commercial agency law in the UK, including the claims that can arise on termination.

If you require any further information about the termination of commercial agency agreements, compensation and indemnity payments or commercial agency law generally, please contact Rachel Brown in our Litigation and Dispute Resolution team on 020 7216 5562.

This briefing was posted on 8 March 2016.