Commercial Agents Regulations in a contract? Consequences of termination.
The Regulations give commercial agents certain rights that go beyond those implied under the common law of England and Wales. These include rights to minimum periods of notice and a right to a compensation or indemnity payment on termination of the agency agreement.
In order to benefit from the additional rights, it is important to determine whether the Regulations apply, see definition below:
“means a self-employed intermediary who has continuing authority to negotiate the sale or purchase of goods on behalf of another person (the “principal”), or to negotiate and conclude the sale or purchase of goods on behalf of and in the name of that principal”
The Regulations can apply to oral discussions so when you are discussing such matters it is imperative that a written agreement is put in place to set out the agreed terms.
It is important to note that this definition extends to both partnerships and companies and is not restricted to individuals. The agent must have continuing authority, therefore an agent who is authorised to complete a single transaction is not thought to have continuing authority. The definition anticipates two types of agents, agents who are authorised to negotiate and agents who are authorised to negotiate and conclude contracts on behalf of the principal. It is important to note that the Regulations only apply to sales and purchases of goods and therefore do not apply to services, please see our article as to whether software is goods or services. The Regulations also don’t apply to a number of agents, for example, an employee or an agent who is not paid, or no activity is being performed in the EEA.
Following Brexit where UK left the EU on 31 January 2020, the UK will continue to be treated for most purposes as if it were still an EU member state during what is known as the transition or implementation period, ending on 31 December 2020. Most EU law (including as amended or supplemented) will continue to apply to the UK, therefore the Regulations will continue to apply during the transition period, however, the long-term future of the Regulations is uncertain.
It is possible to expressly exclude certain provisions of the Regulations but you cannot exclude the Regulations in its entirety. Some of the provisions which cannot be excluded from the Regulations are in relation to termination. For example, minimum notice requirements for termination: one month for first year; two months for the second year; three months for the third year and subsequent years – you cannot agree shorter periods but you can agree longer periods.
Upon termination of the agency agreement (other than as a result of the agent’s serious breach and other certain exceptions) the agent may be entitled to a termination payment in the form of a “compensative payment” or “indemnity payment”. The purpose of the payment is so that the agent is compensated for the damages he suffers as a result of termination. After termination the agent has one year from the date of termination to bring a claim for a termination payment.
Compensation payment – this payment is based on the loss of the value of the agency, so this is the price a hypothetical purchaser would be willing to pay for the agency at the date of termination. Unlike the indemnity payment, there is no maximum cap for the compensation payment therefore this would be most favourable for agents.
Indemnity payment – in order to claim this payment the agent must satisfy the below three conditions:
- The agent must have brought in new customers or significantly increased the principal’s business with existing customers.
- Substantial benefits must continue to be derived by the principal from those customers.
- The payment for an indemnity must be “equitable” in all the circumstances.
The indemnity payment is then based on the extent to which the agent brought in new customers or extended the business with existing customers and can (if equitable to do so) be based on the commission the agent would have got over a set period for sales to these customers.
This payment is capped at one year of the agent’s commission, therefore this would be most favourable for the principal.
The compensation payment is the default position and therefore would apply unless the parties expressly agree that the indemnity payment applies. As the indemnity payment is likely to be more favourable to the principal, it is important to ensure that your contracts reflect this position, if that is the intention.
How can we help?
For strategic advice on the law of agency and advice on the terms of your agency agreement, please contact the commercial team at Herrington Carmichael LLP using the details provided below.
This reflects the law at the date of publication and is written as a general guide. It does not contain definitive legal advice, which should be sought as appropriate in relation to a particular matter.
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