Compensation or indemnity
The Commercial Agents Regulations provide for an agent to be entitled to claim compensation or an indemnity on the termination of an agency agreement (subject to a number of exceptions).
If an agent has a right to claim compensation then at some point it will be necessary for the amount of the compensation entitlement to be valued. The leading case on valuing an agent’s compensation entitlement – Lonsdale – provides for the value to be the amount that a notional third party purchaser would pay for the agency immediately before its termination.
This should be contrasted with an indemnity payment. This payment is calculated very differently to compensation in that:
- the agent will only be entitled to an indemnity payment if and to the extent 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 such customers.
- There is also a requirement for the payment of the indemnity to be equitable in the circumstances.
- The maximum amount payable by way of an indemnity is capped – which is not the case with compensation.
Unless the principal can establish that the agent is in serious breach of the agency agreement, the terminated agent will have an entitlement to a payment either of compensation of indemnity. However, there are some steps that a principal can take to try to minimise the amount claimed by an agent by way of compensation or indemnity.
Minimising the entitlement
The agent will only be entitled to an indemnity payment if the parties have agreed that the indemnity regime will apply to the agreement. If this is the case then the agent’s entitlement will depend on the extent that the agent has brought the principal new customers or significantly increased the volume of business with existing customers.
It follows therefore that the principal should keep a careful record of the customers given to an agent at the start of the agency relationship, and those introduced by an agent during the course of the agency relationship, and the level of business done with each customer over the course of the agency relationship. It should then be possible to exclude from the indemnity calculation commission paid to the agent on sales to customers which do not satisfy the above criteria. It follows that the better a principal’s records, the stronger the principal’s chances of reducing the overall indemnity entitlement!
In the absence of there being an agreement for the agent to be paid an indemnity, the agent will be entitled to compensation.
Whilst there is less that can be done by a principal to reduce the value of the compensation entitlement, if the grant or continuation of the agency is dependent on particular circumstances, then it is important to make clear to the agent that this is the case and that the agency agreement will terminate if those circumstances change. For example, if the principal is a distributor of products manufactured by a supplier, it should be made clear in the agency agreement that the agency will terminate if the principal loses the distribution rights for the relevant products. If the agent then makes a claim for compensation, the principal can seek to rely on a case where the principal was a distributor of Pandora jewellery in the UK, and appointed Mr and Mrs McQuillan as jewellery agents to service the territory. On termination of the McQuillans’ agency agreement, the court heavily discounted the compensation payable due to the risk of termination by Pandora of the distributorship agreement with the principal (the distributorship agreement could be terminated on two years’ notice).
However, it should be noted that it can be questioned whether McQuillan v McCormick was correctly decided. It is the case that the judge claimed to be following the Lonsdale judgment, in which the compensation payable was discounted heavily due to the closure of the principal’s business. However, was the judge in McQuillan v McCormick mistaken in discounting the compensation payable to Mr McQuillan due to the risk of the principal’s business with Pandora disappearing? Should such a heavy discount only have been applied if Pandora had actually given notice to terminate the distributorship agreement with the principal, and not simply for the risk that Pandora might do so at some point in the future?
What of the situation where the principal is dependent on one or two customers introduced by the agent? In this situation the principal is a “captive supplier”. As such how much would the notional third party purchaser pay to acquire the agency where the commission income stream could simply cease as a result of the decision of either or both customers at short notice?
Equally how is compensation payable to an agent on the expiry of a fixed term agency agreement to be valued. The case of Whitehead v Jenks & Cattell Engineering Limited established that an agent whose fixed term agency agreement expires is entitled to compensation. However, a notional third party purchaser is likely to pay very little, if anything at all, for an agency which is about to expire, and it is unclear how the value of the compensation payment is to be determined.
Take home points
A principal should, if possible, agree at the outset of the agency relationship for the agent to be entitled to an indemnity payment on termination. Fewer questions remain regarding the calculation of an indemnity payment as opposed to the calculation of a compensation payment, and there are more ways in which the principal may be able to convincingly reduce the value of the payment to be made.
Where indemnity is not agreed by the agent or no election is made, a principal should consider setting out in the agency agreement whether particular circumstances exist and that the agency will terminate if those circumstances change.
