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Considering making the sales force redundant and re-appointment them as self-employed commercial agents? Recent case law may help you to decide. By Roger Hinchliffe, Partner, Company and Commercial.
Many employers seeking to keep their valuable sales people without employing them may be considering terminating their employment and re-appointing them as commercial agents. If so, they need to consider carefully their liability to pay compensation or an indemnity to the agent on termination of the agency.
Commercial agents have a right to lump sum payments on termination of an agency agreement, regardless of breach of contract by the agent.
The Commercial Agents Regulations 1993 govern the outcome. A “commercial agent” is a self-employed intermediary who has continuing authority to negotiate the sale or purchase of goods (but not services) on behalf of his principal or, to negotiate and conclude such transactions of or in the name of the principal.
The Regulations provide that commercial agents shall be entitled to compensation or indemnity on termination of the agency agreement; this right cannot be excluded.
The parties should decide whether the agent would be paid compensation or indemnity and in the absence of agreement the agent would be entitled to compensation and not indemnity.
Which is the cheapest course of action to take? The House of Lords confirmed in the case of Lonsdale –v- Howard and Hallam Limited 2007 that the proper basis for calculating the compensation due to an agent on termination of an agency relationship governed by the Regulations is by reference to the loss of the value of the agency. There has been a tendency in calculating compensation to following the French courts’ approach where they tend to award two years loss of commission. Because this was a useful guide many agency agreements opt to pay compensation rather that an indemnity.
The recent EC case of Turgay Semen –v- Deutshe Tamoil GmbH tends to point employers in the other direction. the Advocate General gave his opinion that it is acceptable for member states to limit the indemnity payable to commercial agents on termination of the agency relationship to the level of commissions lost by the agent, provided that the method of calculating loss commissions truly reflects the future gains and losses of the principal and agent in the period following termination. Under English law there is a requirement that indemnity is due only if the agent has brought in “new customers” or significantly increased the principal’s business with existing customers. There is no similar qualification when “compensation” is agreed or payable.
Compensation or Indemnity?
If the agent takes on a mature customer list then his scope for bringing in new customers will be small and probably also his scope for growing the business with existing customers. In that event, his entitlement under the indemnity alternative would likely be small or indeed non existent. Under the compensation alternative the proper basis for calculating the compensation now rests by reference to the loss of the value of the agency. The value of the agency is the amount that a hypothetical purchaser would be willing to pay for it at the date of termination. In those circumstances then, indemnity would be the better choice. However, in considering the indemnity alternative, the possibility, in addition to a damages claim under Regulation 17(5), should be taken into account that it will only be available where the termination is by the principal for breach of contract.
We strongly advise that specific questions regarding the interpretation of the Regulations should be addressed to Roger Hinchliffe who is knowledgeable in the law realting to commercial agents.
Contact Us.
If you have any queries or questions about your agent's contracts or any other contract-related issue, please do not hesitate to contact Roger Hinchliffe on 0161 785 3501 or email:
roger.hinchliffe@pearson-hinchliffe.co.uk.
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