Given the economic impact of the coronavirus pandemic, commercial agents may be at risk of having their agency agreements terminated by their principals. A commercial agent is an individual, partnership or company with continuing authority to negotiate, or negotiate & conclude, a sale or purchase of goods on behalf of its principal. A commercial agent is distinct from a distributor (who does not have continuing authority to negotiate contracts on behalf of the principal) and afforded greater protection than a distributor.

The Commercial Agents Regulations

The Commercial Agents (Council Directive) Regulations 1993 (SI 1993/3053) apply to all commercial agents and give commercial agents certain rights on termination. The Regulations apply regardless of whether the agency agreement is recorded in writing and ought to be carefully considered by any principals seeking to terminate agreements as a result of the coronavirus. Although the Regulations originate from an EU directive, they are national law and are expected to remain in place immediately after Brexit under the European Withdrawal Act 2018 until new legislation is passed.

What payment rights does a commercial agent have on termination?

Under the Regulations where an agency agreement is terminated by the principal the agent will have the right to a compensation payment, or indemnity payment, 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 written commercial agency agreement and the agreement contains a provision to that effect. If the contract does not specify that the agent is entitled 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.

How can we help?

Druces LLP regularly advises principals and agents on notice requirements and payment rights on termination of agency agreements. Principals seeking to terminate an agency agreement should carefully consider the implications of the Regulations and the payment rights of the agent before giving notice to terminate. Any agents who receive notice of termination should also consider their payment rights under the Regulations before accepting the notice. Where an agent has a right to claim compensation, or an indemnity, on termination of the agency agreement it is important that a claim is made by the agent promptly. Claims must be made within a year of termination otherwise the right to claim a payment will be lost.

If you require further information about rights arising from commercial agency agreements, compensation & indemnity payments or the impact of Brexit on commercial agency law generally, please contact:

• Neil Pfister – Corporate & Commercial at n.pfister@druces.com or +44 (0)20 7216 5589