But after a while, the new customers become established customers with whom the principal has relationships. Principals then often begin to wonder why an agent is necessary at all.
It’s at this stage that principals often think (or perhaps hope) that they can just terminate the contract and move on. But if the agent is a ‘commercial agent’ within the meaning of the Commercial Agents (Council Directive) Regulations 1993 (the “Regulations”), there are a number of obligations which bite on termination.
Mandatory notice periods
On termination, the Regulations entitle agents up to 3 months’ notice (though it may be less, depending on the duration of the agency contract). Terminating without giving at least the required notice is a breach of the Regulations entitling the agent to damages.
Indemnity and compensation
More significantly, unless one of the limited exceptions apply, the agent is entitled to a lump sum payment on termination.
Indemnity
An indemnity is due if there is a written contract that says an indemnity is payable on termination. If the contract is silent on the point, or there is no written contract, compensation is payable.
Principals often prefer indemnities because they are subject to a cap of one year’s annual average remuneration, whereas compensation is uncapped.
Compensation
Compensation is valued on the hypothetical basis that the agent’s agency business with the principal is being purchased by a hypothetical agent.
This is something that is calculated by a Court on the basis of witness and expert evidence. Generally, it is calculated as a multiple of the agent’s net annual income from the agency. Compensation is uncapped and can be substantial.
Death
If an agent dies during the term of the contract, their estate is entitled to claim compensation or an indemnity.
Avoiding indemnity and compensation payments
There are very few circumstances in which compensation or an indemnity will not be payable.
These include where the principal has terminated because of the agent’s serious breach of contract, or in some circumstances, where the agent has terminated the contract. That said, the agent can terminate the contract and remain entitled to compensation or an indemnity in some situations.
One-year time limit
Agents who wish to pursue their right to compensation or an indemnity must notify their principal of that intention within one-year of termination. If they do not do so, they will lose what is very likely to be their most valuable claim on termination.
Commission due to agent on post-termination sales
The Regulations entitle agents to commission on transactions entered into within a reasonable period after termination where those transactions are mainly attributable to the agent’s efforts. An agency contract may attempt to exclude the right to such post-termination commission. Whether that is permissible under the Regulations is yet to be definitively decided by the courts.
Navigating the termination of any contract can be tricky, even more so in the case of commercial agency contracts. Compensation payments can be substantial, and therefore it is prudent for parties to carefully consider their positions before taking any steps.
Ben and Andy are experts on commercial agency law and frequently advise both agents and principals on commercial agency matters, as well as acting on claims arising out of commercial agency contracts. Ben is also the co-author of ‘Commercial Agency – A Practical and Legal Guide’ by Oliver Segal QC & Ben Griffin – Law Brief Publishing.'
