Member Article

Counting the costs of the commercial agents regulations

With Watson Burton LLP Law FirmAn agency contract exists where one party, the agent, has authority from another party, the principal, to introduce orders from a third party, the customer, or to create a legal relationship between the principal and the customer. Firms who use agents in their business should be wary of the impact of the Commercial Agents Regulations 1993. The Regulations apply to self-employed intermediaries who are granted continuing authority to negotiate, or to negotiate and conclude, the sale or purchase of goods (but not services) on behalf of its principal. The Regulations grant rights to the agent and impose duties on the principal. One of the most important rights an agent has is to statutory compensation for damage suffered as a result of the termination of the agency contract (including when the agency expires).The compensation provisions are born out of a realisation that an agent is likely to suffer damage on termination as a result of a loss of commission which it would have otherwise earned, or, because the agent would be prevented from amortising the costs and expenses incurred in the performance of the agency. The basis for calculating the level of compensation is left to the parties to decide and in the absence of agreement, the agent is entitled to a ’‘compensation’’ payment rather than an ’‘indemnity’’ payment. With regard to the level of the compensation payment, it has recently been held in Lonsdale v Howard & Hallam Ltd [2006] EWCA Civ 63, that this would depend on the facts of the case and should be a fair amount which, inter alia, reflects the goodwill which the agent has created for the principal. It was also held that it was not necessary for the principal to have benefited from the activities of the agent prior to termination as the circumstances will be looked at prospectively as well as retrospectively. Whilst the decision in Lonsdale recognises that the starting point for compensation payments - namely, either the total of the last two years’ commission or the sum of two years’ commission calculated over the average of the last three years - might not lead to a just result, it is still generally considered that the indemnity option will be preferable from a principal’s point of view. The reasons for this are that the Regulations put a cap on the amount payable and provide that payment should only reflect the extent to which the agent has ’‘brought in’’ new customers or significantly increased the principal’s business with existing customers. On the basis that a compensation payment will be due to the agent unless agreed otherwise, it is strongly advisable that a formal agreement is entered into with the agent at the outset. If you have any questions on this article or other Corporate/Commercial issues, please contact Craig Turnbull at Watson Burton LLP (email craig.turnbull@watsonburton.com).

This was posted in Bdaily's Members' News section by Ruth Mitchell .