Termination of Commercial Agencies: Compensation regimes contrasted

Thursday 25 September 2014

In the second of this series of articles we looked at the contrasting position between commercial agents and employees when it comes to termination. We saw that, in contrast to the position with employees, it may be difficult to exclude an agent’s entitlement to compensation on termination. In this article we will look at what is meant by the word “compensation” when applied to a commercial agent, and contrast this with the compensation to which an employee may be entitled if his or her employment is ended.

Except where an agent’s entitlement has been excluded in one of the three circumstances described in the previous article a commercial agent will be entitled either to be indemnified or to be compensated for the termination of the agency contract, even if notice requirements have been followed.

The indemnity system is based on the German Commercial Code which, since 1953, has given agents a right to be indemnified. The indemnity is generally regarded as an amount representing a share of the goodwill built up by the agent during the agency. The Commercial Agents (Council Directive) Regulations 1993 (“Regulations”) are very prescriptive in relation to indemnity and place a limit of one year’s remuneration calculated on the average annual remuneration over the preceding five years (or less if the contract was in force for less than five years). The exact method of calculating the indemnity is based on both guidance of the European Commission as well as case law.

However, vitally, the indemnity approach is appropriate only where the agency agreement expressly provides for it. Principals will often choose this option as there is greater certainty and a maximum amount is payable.

If there is no written agency agreement, or no expressed stipulation in favour of indemnity, then on the termination of the agency agreement an agent will be entitled to compensation. The Regulations describe the agent as being entitled to compensation “… for the damage he suffers as a result of the termination of his relations with his principal …”.

For some 12 years there was significant doubt as to what was meant by the word “compensation”. There was a suggestion that the courts should adopt the French tariff approach of awarding two years’ average commission. However, this approach was disapproved by the House of Lords in the case Graham Lonsdale v Howard & Hallam Limited. That case established that the agent is entitled to receive compensation by reference to the value of the agency; in other words, one adopts normal business valuation principles to value the agency (in the hands of the agent) at the moment of expiry or termination of the agency agreement.

There is no limit on the amount of compensation to which an agent will be entitled on termination as a result of carrying out that valuation process – in just the same way that there is no limit on the amount of indemnity.

However, an employee who is unfairly dismissed (which is the contrasted position chosen for this article) is entitled to:

• pay during notice (or pay in lieu thereof, if notice is not worked)

• a basic award (calculated just like a redundancy payment and which could never exceed 30 weeks’ pay at the (current) capped limit of £464), and

• “such amount as the Tribunal considers just and equitable in all the circumstances having regard to the loss sustained by the complainant in consequence of dismissal insofar as that loss is attributable to action taken by the employer” – in other words a “compensatory award” (which is subject to the current maximum of £76,574 or a year’s gross salary, whichever is less).

It is difficult, in an objective sense, to draw comparisons between the regime of compensation under the Regulations and the regime for compensatory awards under the Act. However, it is perhaps worth bearing in mind that:

• an employee has to wait 104 weeks before accruing the right to claim unfair dismissal, and so a compensatory award, and

• although, as the old saying goes, there are “lies, damned lies and statistics”, the median compensatory award in the Employment Tribunal is still less than £10,000.

From an individual’s perspective, compared with commercial agency, employment doesn’t perhaps look that attractive. However, we’ll save a more detailed comparison of the respective benefits of the two regimes for the last article in this series.