Looking for the best of all worlds can leave you in a worse position

April 14, 2014

Wanting to have your cake and eat it is quite normal. For a business facing a situation where it must make a statutory payment it is understandable. Where the payment arises under the Commercial Agents Regulations – where even after 20 years of existence on the statute book many principals question why a payment should be made when the agent has already been remunerated for his services – such a payment can feel galling.

But as a recent court judgement shows, principals should be careful as to what they wish for. The Regulations allow principals and agents to elect as to whether an indemnity will be payable on termination (excepting a termination for breach by the agent).  If there is no election, then compensation is payable by default.

The assessments of the two entitlements have many similarities although there are important differences.  However, for a principal the key advantage of an indemnity is that the amount payable to an agent has an easily calculated top limit. In contrast, compensation has no maximum. 

But how about if on termination compensation is lower?  In this situation has the principal missed a trick – do you have to opt for certainty which might turn out not to be to your advantage or is there a third way?

The Court considered this in the very recent case of Charles Shearman v. Hunter Boot Limited [2014] EWHC 47 where we acted for Charles Shearman.

The principal, Hunter, had included in its agency agreement clauses which stated that:

  • The agent would be entitled to an indemnity provided that the amount payable for compensation was not lower.
  • If compensation was lower, then that’s what the agent would be entitled to.

Perfect outcome for a principal? Facing a claim for compensation from Mr Shearman, Hunter applied for a declaration from the court that its provisions were enforceable and, therefore, could be relied on by Hunter.

Unfortunately for Hunter, the Court backed the agent.  What was the problem?  Put simply, the Court said that the drafters of the European Directive (which was enacted into English law by the Regulations) had not intended to allow an approach whereby the agent had the worst of all worlds.  The Court considered the purpose of the Directive was to protect the agent and that to allow a system where all that would be known at the outset of the contract was that the principal would pay the cheapest price did not give effect to this. 

Arguably, by trying to play the Regulations, Hunter actually hampered its own position in relation to quantum (Liability, whether Hunter was justified in terminating Mr Shearman, remained in issue between the parties).  By including a provision that sought to put it in the best position in all eventualities, in the Court’s Judgment it lost the protection of the election for an indemnity!

Subsequently the parties settled their dispute on confidential terms.

Such court decisions emphasise that looking for the best of all worlds (as Hunter sought to do) can leave the principal in a worse position.


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