Although the Commercial Agents Regulations implemented the EU Agents Directive into English and Welsh law and Scots law, the UK government at the time took the decision to provide principals and agents with a choice as to the payment to be made to a terminated agent.
As such, unlike the laws of the 27 EU Member States, the Regulations provide that on termination, an agent will be entitled either to compensation or indemnity unless the agency agreement has ended as a result of the agent’s breach.
However, for indemnity to apply to the agency agreement, principal and agent must agree to do so. If they do not, compensation will apply by default.
This is an important issue for principals, as the results of a study by the Fox Williams’ agentlaw team showed that a principal liable to pay compensation to a terminated agent will usually be exposed to a larger payment than when a terminated agent is entitled to an indemnity.
Why does indemnity usually result in a smaller payment to the agent?
The reasons why indemnity usually results in a smaller payment to the agent are to be found in the factors for indemnity set out in the Regulations and the corresponding provisions of the EU Agents Directive. Accordingly, for an agent to be entitled to an indemnity payment, it is necessary that the agent has:
- Brought the principal new customers; or
- Significantly increased the volume of business with existing customers; and
- The principal continues to derive substantial benefits from the business with such customers; and
- The payment of this 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.
Further, the indemnity is subject to a maximum or cap. The amount of the indemnity payable to a terminated agent cannot exceed the average annual commission over the preceding five years. If the agency agreement goes back less than five years the indemnity shall be calculated on the average for the period in question.
As a result, however stellar the performance, the agent will not benefit from the multiplier applied to the net income stream (multiplicand) that provides the starting point where the terminated agent is entitled to compensation and not indemnity.
Can principals improve their position – and reduce the amount of the indemnity?
Principals should be able to improve their position.
The starting point is to note that some years ago, the EU Commission in a report provided guidance as to the formula (based on German law) to be used in determining the amount of the indemnity.
Key to this formula when it is uncertain whether the agent has significantly increased business with existing customers, is to have a record of the amount of business being done with such customers immediately before the start of the agency. Often an agency agreement will have a schedule setting out customers and sales immediately before commencement.
In proceeding in this way, the opportunity for disagreement as to what the agent has achieved at the end of the agency in respect of such customers may be reduced.
It may be possible to persuade the agent to accept that part of the commission paid on sales achieved by the agent is to be treated as a pre-payment of the indemnity following termination. If accepted by the agent, then it will be desirable to set out in the agency agreement:
- The commission on sales in the usual way; and
- A small amount of further commission which is paid to the agent and is stated in the agency agreement to be a pre-payment of the indemnity in advance of termination.
However, there are various issues with proceeding in this way, not least the position taken by some courts in the EU which have required the principal to show that without the pre-payment element, the commission payable to the agent would have been lower.
There is also the disadvantage that if the agent becomes bankrupt it may not be financially worthwhile for the principal to try and recover the pre-payment made.
Alternatively, the agent can be required to purchase the existing customer base of the principal at an agreed price at the commencement of the agency. However, payment of the price by the agent is left outstanding and is instead set off against the amount payable by the principal following termination of the agency.
But overhanging these possible ways of proceeding is a judgment of the European Court of Justice. This judgment confirmed a provision in the Agents Directive (and, by extension, the Regulations) that where principal and agent have agreed before termination of the agency agreement on the amount of the indemnity, the agreement will be unenforceable if the amount agreed is less than that to which the agent would otherwise have been entitled after termination.
What else to watch for
In addition to the above European Court judgment, it is possible that where a UK principal enters into an agreement with an EU agent to limit the indemnity as set out above, the agreement could be challenged under the national law of the EU member state in which the agent is located.
And what of distributors?
It is the case that there is no English law corresponding to the Commercial Agents Regulations which provides specific statutory entitlements to a distributor on termination of the distributorship agreement.
However, in some EU member states terminated distributors are entitled to a payment which corresponds to an agent’s indemnity. It is, therefore, possible to see the opportunity for a supplier which has an existing customer base to appoint a distributor and to agree with the distributor that such base will be purchased by the distributor with payment being deferred until termination of the distributorship agreement and instead being set off against any payment to which the distributor is entitled.
