Last month, the Court of Justice of the European Union (“CJEU”) gave its judgment in a case concerning the mobile phone company O2 Czech Republic and its former agent, QT.
The key question for the Court was the scope of the agent’s entitlement to an indemnity under the European Agents Directive (the “Directive”) following the termination of the agency agreement.
O2 had entered into an agency agreement with QT concerning the sale of mobile telephones, mobile telephone accessories, and other products and customer services.
Throughout the term of the agreement, QT successfully concluded contracts with customers for O2 for which the agent received “one off” commission payments for each individual contract that was concluded.
The agency agreement was terminated by O2 on 31 March 2010 and QT received commission from O2 on transactions that had been completed up to the expiry date of the agency agreement.
However, the extent of QT’s entitlement to an indemnity was disputed as QT claimed that commission for hypothetical future transactions between O2 and its customers following termination of the agreement should also be taken into account
So what does the Directive say?
The Directive states that, upon termination of an agency agreement, an agent is entitled to be indemnified if and to the extent that:
- It has brought the principal new customers or has significantly increased the volume of business with existing customers, from which the principal continues to derive substantial benefits from; and
- The payment of an indemnity is equitable having regard to all the circumstances and, in particular, the commission lost by the commercial agent on the business transacted with such customers.
The right to an indemnity under the Directive is separate to another right of an agent under the Directive, namely the right to receive commission in respect of commercial transactions which are negotiated by the agent before, but concluded (that is, entered into) after, the agency agreement has terminated.
The CJEU was satisfied that the agent was entitled to compensation in respect of commission which the agent would have hypothetically received in respect of transactions which the principal would hypothetically carry out with its customers following termination of the agency agreement.
In reaching this conclusion, the CJEU gave significant weight to the rationale behind the indemnity provisions in the Directive, that is, compensating the agent for the loss of the goodwill which it has generated for the principal and which the principal will enjoy after termination of the agency agreement .
Failing to take account of commission in respect of future transactions following termination of the agreement would, in the CJEU’s view, risk depriving an agent of a considerable share of the profits earned by the principal following termination. The CJEU was satisfied that QT had generated sufficient goodwill for O2, in respect of both maintaining O2’s existing customer base and also generating new customers for O2.
With reference to this view the CJEU considered the meaning of “commission lost” by the agent.
In doing so, it was careful to distinguish between the effect of the provisions in the Directive which cover the agent’s entitlement to commission in respect of transactions which are entered into before or following the termination of the agency agreement from the hypothetical commission which the agent would have received had the agency agreement continued.
It decided that, “commission lost” relates to the goodwill which would have been generated by the agent had the agency agreement continued. This therefore supported the agent’s claim for commission based on the conclusion of “hypothetical” transactions concluded following the termination of the agency agreement.
In reaching this view the CJEU also confirmed a report prepared by the European Commission some years ago which was intended to facilitate a uniform interpretation across the EU of the indemnity provisions of the Directive.
What does this mean for agents and principals in the UK?
It has been thought that generally the entitlement of an agent to compensation under the Commercial Agents Regulations (which implemented the Directive) following the termination of the agency agreement is better than the remedy of indemnity – and vice versa for a principal. One of the reasons for this being that compensation is uncapped whilst indemnity is subject to a cap.
The view has also been expressed that a way of testing whether a proposed amount of compensation is appropriate is to calculate what the terminated agent would have been entitled to if principal and agent on entering into the agency agreement had elected for indemnity. If the test results in a similar figure then it may be claimed that the compensation figure is correct.
However, sometimes this test has presupposed that the entitlement to post-termination commission should be ignored as it would lead to the double counting of post-termination commission and commission lost as was recognised by the CJEU.
It follows that the CJEU’s judgment has exposed the defect in the above view – and despite views which have been expressed in the English courts from time to time – an agent’s entitlement to post-termination commission is separate from the taking account of commission lost for the purpose of calculating indemnity. Put another way, it is not a question of double counting.
Therefore we recommend that:
- UK principals should always consider whether an election for indemnity (as opposed to compensation) under the Regulations will provide for a smaller exposure following termination;
- UK agents should be alert to being subject to a capped indemnity entitlement; and
- Both UK principals and agents when entering into agreements with agents and principals outside of the UK, should consider how best to minimise their exposure (principals) or maximise the entitlements (agents).