Compensation and Indemnity Payments for Commercial Agents and the Impact of Brexit

The Commercial Agents (Council Directive) Regulations 1993 (SI 1993/3053) apply to all commercial agents and give commercial agents certain rights on termination.

Under the Regulations where an agency agreement is terminated by the principal the agent will have the right to “compensation” or an “indemnity” in certain circumstances.  The agent may also have a common law right to claim damages in respect of the termination.

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 within 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, there is no cap on compensation payments.
• 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, so it is linked to the agent bringing in new customers or significantly increasing levels of business during the course of the agency. 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 the contract.
• An indemnity payment must 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.

We regularly advise agents on their rights to payment on termination of agency agreements.  In practice the amount payable for an indemnity is often lower than the amount of compensation payable; although, in some cases the indemnity payment can be higher (for example in the case of new agencies). Where an agent has a right to claim compensation, or an indemnity, on termination of the agency agreement a claim should be made by the agent promptly.  A claim for indemnity, or compensation, must be made within a year of termination otherwise the right to make a claim will be lost. It is therefore imperative that  agents who receive notice of termination from their principal seek advice and make a claim promptly. 

Commercial agents should also be mindful of the impact of Brexit.  When the UK leaves the EU, the protections currently provided to commercial agents under the Regulations are likely to be removed and it is unclear what protections (if any) will be available for agents in the future on termination.

Given the uncertainty around the impact of Brexit, UK based commercial agents would be well advised to review their existing contractual arrangements (if they have not already done so) with a view to identifying whether it is possible to incorporate stronger contractual provisions to give them better protection on termination, alongside any statutory protection that may exist, before any changes take effect.  Commercial agents may also wish to consider reviewing the choice of law clause contained within their agency agreements, which could also be amended to mitigate against the risks associated with Brexit.

If you require any further information about the termination of commercial agency agreements, compensation & indemnity payments, the impact of Brexit on commercial agency law, or choice of law clauses generally please contact Rachel Brown in our Litigation and Dispute Resolution team on 0207 216 5562.

This news was posted on 14 November 2017