Thirty years ago, just on these very days, the UK adopted the Commercial Agents Regulations, their first dedicated legislation intended to cover some basic aspects of contract between a principal and an self-employed business intermediary who promote trade of goods or service to the benefit of a former, under a continuing authority[1]. This happened on the wake of an EC directive (no 653 of 1986), whose aim was to set minimum standard in the field all over the community (in pratice, the whole European Economic Area); but also, to introduce some protections to the benefit of agents, as the weaker party in the contract.

In particular, the Directive 653/86 provided for an ‘indemnity’ or ‘compensation’ on normal termination of the contract[2]. A severance pay-out construed as an alternative, indeed; since indemnity and compensation design utterly different concepts: “indemnity” is the value of the goodwill created by the agent that a principal may continue to enjoy, after termination of the relationship; whereas “compensation” is the loss that agent may suffer because of said termination. More precisely, pursuant to the Directive-

  • an “indemnity” must be calculated taking in to account “if and to the extent that (i) [the agent] has brought the principal new customers or has significantly increased the volume of business with existing customers and the principal continues to derive substantial benefits from the business with such customers, and (ii) the payment of this indemnity is equitable having regard to all the circumstances and, in particular, the commission lost by the commercial agent on the business transacted with such customers; and (iii) The amount of the indemnity may not exceed a figure equivalent to an indemnity for one year calculated from the commercial agent’s average annual remuneration over the preceding five years and if the contract goes back less than five years the indemnity shall be calculated on the average for the period in question” (Directive 17(2)).
  • a “compensation”, instead, must be calculated taking into account “the damage [the agent] suffers as a result of the termination of his relations with the principal. Such damage shall be deemed to occur particularly when the termination takes place in circumstances (i) depriving the commercial agent of the commission which proper performance of the agency contract would have procured him whilst providing the principal with substantial benefits linked to the commercial agent’s activities; (ii) and/or which have not enabled the commercial agent to amortize the costs and expenses that he had incurred for the performance of the agency contract on the principal’s advice” (Directive 17(3)).

The fact was that there were two notable traditions to deal with (the ‘German school’, privileging indemnity schemes; and the French one, more familiar with the compensation concept)[3], and the Directive adopted a Pilate-like approach by giving the member State the freedom to choose between the two systems.

In fact, not having any tradition of severance pay-out for commercial agents, the UK Regulations adopted a peculiar stand on the point – instead of selecting one of the two systems, they set the principle that it was up to the contract parties to choose (with the by-default rule that, failing any determination, the French school would prevail:

UK Regulations, art. 17(2): “Except where the agency contract otherwise provides, the commercial agent shall be entitled to be compensated rather than indemnified.” and (Regs 17(6): “[…] the commercial agent shall be entitled to compensation for the damage he suffers as a result of the termination of his relations with his principal.”.

In 1996, the first opportunity to interpret the Directive was made in the case Page v Combined Shipping and Trading [4]. A principal had terminated an agency contract concerning essential oils (actually the contract was construed as a distributorship with a joint sharing of net profits), because of its parent company had allegedly decided to disinvest, and exit from the market. The principal was exempted by the first instance judge to pay any indemnity, but then condemned in appeal to pay a compensation under Regulation 17(7) calculated by reference to the amount of commission he would have earned if the contract had been performed in accordance with the parties’ original intention. It was a contract that had been terminated 3 years in advance on its perspective term. BTW, the principal is still active today…

A more elaborated set of principles were then established in 2006 in the Lonsdale case where, again, the principal (a shoes manufacturer) had dismissed all their agents due to a decision to close its business[5]. The Court of Appeal stated that “an agent has a share in the goodwill in the principal’s business which they helped to create” and therefore a ‘compensation’ must refer to “the loss of the benefit of the ‘right to future commissions which proper performance of the agency contract would have procured” to the agent, that loss to be calculated as ‘the amount the agent could reasonably expect to receive for the right to stand in his shoes, continue to perform the duties of the agency and receive the commission which he would have received”. Of course, all this assumes that the agency is to continue for a reasonable time, taking in to account the obvious fact that it will not for ever, and that the fictitious agency volumes may vary according to the market situation. In conclusion, a proper figure of said loss is to be determined case by case, by an expert appraisal. An example of compensation determination is given in a case concerning termination of an agency for the promotion of teas, where a multiplier was applied to hypothetical annual earnings, net of likely costs[6]. In the same vein, see also the HC (Chancery Div.) decision in a claim brought by the past agents of a company selling gas and energy to domestic customers[7].

It must be said that in France, the problem has been practically resolved by adopting a rude attitude, i.e. by giving the agent a lump-sum equivalent to a couple of years proceeds, calculate on the average of those accrued in the latest three to five contractual years. However, it has been held that each country has to assess the “compensation” its way, i.e. “compensation payable in other member states no guide to what is payable in Great Britain”. So, the French tradition is to no avail.

The UK Regulations came into force on 1 January 1994. In the after-Brexit UK, the Regulations continue to apply, as “retained EU law”. This has been confirmed very recently by the 2023 Retained EU Law (Revocation and Reform) Act (that has notably removed the general ‘sunset’ term contained in the relevant bill, that would have otherwise cancelled all the retained EU law by the end of Dec 2023).

So, it is likely that in the coming years the above described principles for setting the agent final compensation remain the same. On the other hand, there is the actual possibility that, from now on, an increasing divergence either active and passive, arises between the EU and the UK laws in the future legal treatment of agents.

In any event, agents and principals must be aware of the fact that, if a case now comes under the scrutiny of a court in the UK, this will be interpreted along the principles set by the English, or Scottish or NI law as the case may be (not by the EU Court of Justice’s).

 

 

Those who are interested in receiving (free) full copy of the annotated decisions, please write to newsletter@lexmill.com.

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[1] Commercial Agents (Council Directive) Regulations 1993 (SI 1993/3053) implementing Council Directive 86/653 on the Coordination of the Laws of the Member States Relating to Self Employed Commercial Agents Dir 86/653 [1986] OJ L382/17.

[2] Here, ‘normal’ means a termination (i) by notice by principal, (ii) on expiry of the contract term, (iii) as a result of the agent’s death or inability to continue his activity on grounds of age, infirmity or illness, (iv) by initiative of the agent following a principal’s breach of contract. By converse, no indemnity/compensation is due in case the contract is terminated by principal on account of a repudiatory breach by the agent; or in case the agent simply quits without justification. There are some addition instances where an agent is granted no indemnity/compensation, namely (i) in case the agent gives the principal no notice of intention to pursue it, within one year of contract termination (Regs 17(9), or (ii) both parties agree, after the contract termination, that no indemnity/compensation is due.

[3] Actually, there was a third one too, the ‘Italian school’, that provided for an easy-to-calculate percentage on the overall amount of accrued remuneration. Possibly due to a timid presence at the table, Italy was not able or did not even tried to have their system accredited as an option.

[4] Page v Combined Shipping and Trading Co Ltd [1997] 3 All ER 656.

[5] Lonsdale v Howard & Hallam Ltd [2007] UKHL 32.

[6] Alan Ramsay Sales and Marketing Limited v Typhoo Tea Limited [2016] EWHC 486 (Comm).

[7] Green Deal Marketing Limited v Economy Energy Trading Ltd [2019] EWHC 507.

<img src="" class="rounded-circle shadow border border-white border-width-4 mr-3" width="60" height="60" alt="Carlo Mosca">
Author: Carlo Mosca

A lawyer specializing in international commercial transactions. Lexmill's owner.

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