Compensation Versus an Indemnity: Some Essential Differences

The core explainer: what each payment is, how they are calculated, and why the amounts can differ so much.

Whereas most agents will be aware that:

1). Compensation and indemnities are alternative bases for calculating the amount of any ‘compensatory’ payment due to an agent following the termination of his agency

And that:

2). The agent’s entitlement to a ‘compensatory’ payment would always by default be to compensation (as opposed to an indemnity) unless there was an agreement in place between the parties which incorporated a provision expressly actually opting for an indemnity

Many agents may not however be aware as to the essential differences between the two bases for calculation, such as that:

Whereas the amount of an award of compensation is not limited by the Regulations, the amount (however) of an indemnity cannot exceed more than a year’s average earnings from the agency in question (with the calculation of that average being based on the last 5 years’ earnings, or on the relevant number of lesser years where the agency didn’t last for at least 5 years); and that:
The basis of calculating the amount of an indemnity entitlement is fundamentally different to how compensation is calculated.

As to the basis for calculating an indemnity, that (in general terms) is to (firstly) assess the extent to which the agent introduced new customers (and therefore new business) to the principal, and/or otherwise significantly increased the volume of business with already existing customers, and (secondly) to then assess the extent to which it appears likely that that new business will continue to benefit the principal post termination (based on an analysis of the last 12 months’ trading).

Whereas the further steps for arriving (as accurately as possible) at the correct amount of the indemnity are relatively complicated, the fundamental purpose of the indemnity calculation process is ultimately to establish a figure which ‘rewards’ the agent for the fact that he has (significantly) increased the principal’s business, and so (and at the same time) ‘compensates’ him on account of the fact that he will no longer however be receiving commissions in respect to that new business which he generated (i.e.: because the agency has been terminated).

By contrast, the amount of any compensation payment reflects and (following the decision of the House of Lords in 2007, in the case of Lonsdale v Howard & Hallam) is based on something completely different to an indemnity, which is the hypothetical sales value of the relevant agency, as at its point of termination. In other words: how much a willing third party would have paid for the relevant agency (had it not terminated, but instead continued).

In therefore calculating the amount due by way of ‘compensation’, it is essentially a process of establishing and multiplying together two basic numbers, which are the so-called ‘multiplicand’ and ‘multiplier’. Whereas the ‘multiplicand’ broadly reflects the level of the agent’s maintainable net earnings from the agency in question (and is calculated in a particular and sometimes complex way), the ‘multiplier’ is a digit the size of which reflects the overall impact of a number of commercial factors (all of which are deemed would be of importance to any prospective (hypothetical) purchaser of an established business), such as (a) whether the agency was growing or declining (and, in either circumstance, whether that growth or decline was reflective of a permanent trend, and of a market which was developing or contracting), (b) what appears to be the state, overall, of (and prospects for) the principal’s business, and potentially (c) the terms and consequences of any relevant clauses which may exist in any written agency contract between the principal and agent.

In contrast (therefore) to the aim of the indemnity calculation (i.e.: very generally speaking, to compensate the agent for the fact that he will no longer derive an income from business which he introduced, and which the principal is seen as nevertheless likely to continue to gain a benefit from, going forward), the purpose of compensation is (instead) to treat the terminated agency as an asset lost to the agent, and for which he should therefore receive a fair amount of money reflective of what he might have received on the open market had he instead sold the agency as at the point of termination rather than it having terminated.

As to which of the above two bases is fairer or more equitable is a matter of opinion, but, in either case, they are just one of a number of potential claims an agent has, following the termination of an agency (subject always to relevant time deadline or limitation periods).

© David Bentley, Bentley Agency Law Limited, Bentley & Co Solicitors, 7 Littlemoor Road, Pudsey, Leeds, LS28 8AF
T: 0113 236 0550 e-mail: db@bentleyandco-solicitors.com
The ONLY law which we practice is the law as it relates to commercial agents.
Please note that, as far as we can, we take cases on a “success related fee”.

Please ensure that you obtain legal advice before acting in reliance upon anything in this article, particularly since each individual’s circumstances may necessitate a unique approach, and also on account of the fact that the law may of course at any time change. Furthermore, please be very clear that the answers given in this column may not cover or otherwise refer to all possible angles, aspects, relevant information and/or points of law and so that all or any information which is given above needs in every instance to be referred for legal advice for clarification and amplification, before being relied upon.

Termination: When will I be entitled to Compensation or an Indemnity?

The prior question: when a terminated agent is entitled to any award at all, and the main exceptions.

Commercial agents and their principals will be familiar with the general rule under the Commercial Agents Regulations 1993 that a commercial agent is entitled to receive compensation or, if provided for in their agency agreement, an indemnity, if their agency agreement is terminated by their principal. If the agency agreement says nothing about what happens on termination, then the entitlement will be for compensation rather than an indemnity. (We refer to compensation and the indemnity as “an award” in the remainder of this article).

The same entitlement to an award applies where the agency agreement comes to an end because the commercial agent retires on grounds of age or ill-health or if the commercial agent dies during the term of the agreement, in which case their rights pass to their estate. Even where a fixed term agency agreement comes to an end, it seems an award will be payable, although the Regulations are not entirely clear on this situation.

The termination of an agency agreement does not always entitle the commercial agent to an award. The main exception is where the commercial agent, rather than the principal, terminates the agency agreement, which generally results in the agent losing their rights to any payment. However, if the commercial agent’s termination of the agreement is justified due to a default on the part of the principal they will still be entitled to an award. Similarly, a principal can avoid paying an award to their agent if the agent’s conduct justified the principal immediately terminating the agreement.

Exactly how serious the commercial agent or principal’s default needs to be before the other party can take advantage of this exception to the general rule is one of the more difficult questions under the Regulations. The Courts have made it clear that a simple breach of the agency agreement by either party is not sufficient. It has to be what is called a repudiatory or fundamental breach of contract, which is a breach which goes to the very heart of the contract, to qualify.

Identifying whether a fundamental breach has occurred is not straightforward, and it is not recommended that any principal or commercial agent seeks to take advantage of these exceptions to the general rules without first taking legal advice, as each case will depend on its specific facts and the terms of the agency agreement. A number of cases where fundamental breach has been alleged have come before the Courts.

Recently, a principal successfully avoided paying an award because its agent had persistently refused to comply with the principal’s instructions to provide weekly reports and to work exclusively for the principal (subject to written approval from the principal). In another case, an agent terminated their agency agreement because their principal had reduced their sales territory (as they had been entitled to do under their agency agreement), and had been late or failed to pay commissions, and was unsuccessful in their claim for an award.

The final exception to the right of a commercial agent to receive an award is where the agent assigns their agency to a third party, by sale or gift, with the consent of their principal, in which case they forfeit their right to payment of an award on termination.

Christopher Tayton, Clarkslegal LLP. Chris is a dispute resolution lawyer working out of the firm’s Reading and London offices. Chris has particular expertise in the Commercial Agents Regulations (acting for both principals and agents), advertising law and restrictive covenants in employment contracts. He also advises on IT and software related claim, and is a member of the Society for Computers and Law.
Head Office: Thames Valley Office: One Forbury Square, The Forbury, Reading RG1 3EB
Tel: 0118 9604691 www.clarkslegal.com

Disclaimer: This column does not contain legal advice and is for general guidance only. Agentbase, Clarkslegal LLP and the writer accept no liability in connection with the general guidance given in this column.

Indemnities or compensation claims: which are better for the agent?

The same comparison from the agent’s side, and when each option tends to work out better.

Whilst agents are familiar with the concept of potentially being entitled to receive some form of compensatory payment on termination of an agency, they are not necessarily clear as to whether (firstly) that potential entitlement should be actually to ‘compensation’, or (instead:-) to an ‘indemnity’, (secondly) whether they (as the agent) can unilaterally and at any point in time make an election as between claiming either form of entitlement, and (thirdly) what anyway are the differences in practice (i.e.:- are the two different types of compensatory payments calculated in the same way?).

The first point to make is that ‘compensation’ and ‘indemnities’ are the alternative forms of compensatory payment, as set out in Regulation 17 of the Commercial Agents (Council Directive) Regulations 1993, meaning to say that, unless otherwise agreed between the parties, an agent’s prospective entitlement to any form of compensatory payment on termination will always be to literal ‘compensation’ as opposed to an ‘indemnity’. In other words, being entitled to compensation on termination of an agency is the default position unless the principal and the agent had otherwise agreed that the prospective compensatory payment would instead be an indemnity (and so that if there was never any written agreement between the parties, the default position of an entitlement to compensation would therefore apply).

The second point to make is that whereas the amount which a principal might have to pay by way of compensation is not capped by the Regulations, the maximum amount of an indemnity is however capped, and that cap is (but need not necessarily be as much as) the equivalent of one year’s earnings from the agency in question, with that capped one year amount calculated as an average of the previous 5 years’ earnings (or instead calculated as an average of a lesser number of years, where the agency had been ongoing for less than 5 years).

The third point is that the ways in which ‘compensation’ on the one hand and ‘indemnities’ on the other hand are calculated are very different, with compensation being calculated on the basis of [very broadly speaking:- ] an assessment as to what was the hypothetical sales value of the agency as at the point of termination, and an indemnity calculation [again, very generally summarised as:-] reflecting the extent to which the agent, from either new customers whom he introduced and/or otherwise as a result of business he has significantly increased, has left the principal with a substantial benefit going forward.

From the above, and because there is no statutory cap as to the amount payable, it might be assumed that, from the agent’s point of view, compensation is automatically more favourable, as opposed to an indemnity. This, however, is not necessarily going to be the case, as there are many variable factors to consider, and so that, at the end of the day, an agent would unlikely know when entering into a new agency as to what would be the better option for him or her in terms of the relevant compensatory payment option when the agency terminates in the future (whenever and in whatever circumstances that may be). However, and whilst reiterating that an agent cannot unilaterally elect to receive an indemnity on termination, as to whether an indemnity or compensation could be predicted in advance or adjudged in retrospect to perhaps work out (or have worked out) better, you could it view it this way:-

If after taking account of all relevant expenses (including an appropriate amount by way of a salary) the agency is operating at a low profit level as at the point of termination, then the amount of compensation to which the agent may be entitled would potentially likely be less than would be the level of an indemnity where, notwithstanding the poor profitability of the agency itself, the agent has nevertheless successfully brought the principal new customers and/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.

By contrast, if the agent’s commission income and profitability is good as at the point of termination, then the fact that compensation has no statutory cap may then stand him or her in better financial stead than being (or having been) entitled (just) to an indemnity, as any calculation as to the hypothetical sales value of the agency may arrive at a number which exceeds (and potentially significantly exceeds) the sum which reflects one year’s average annual income.

When might compensation be better for a principal than indemnity?

The mirror image from the principal’s side, and why an indemnity is often the safer election.

Under the Commercial Agents Regulations, an agent will generally be entitled to compensation or an indemnity payment on the termination of their agency contract. Unless the agency contract specifies an indemnity payment, the default position is that compensation will be payable.

The decision about whether to elect for compensation or indemnity has to be taken at the time the agency contract is entered into. At this point in time, before the agency relationship has started, it can be difficult to predict how successful the agent is going to be in generating business for the principal. In most cases, an indemnity payment will be the cheaper option for the principal because it is calculated on the basis of the average annual commission received by the agent in the last five years of the agency (or a lesser period if the agency has not been in existence for five years). This operates to cap the principal’s liability on termination and gives the principal certainty of the maximum exposure they will have to their agent on termination.

Mr Warren was successful. In his claim for “pipeline commission” on the £230,000 orders placed after his retirement, he was awarded £5,771 under regulation 8. In addition, Mr Warren was awarded £18,800 under regulation 17 of the Regulations as compensation for the damage suffered by the termination of his agency. In deciding on the sum of £18,800 as compensation for termination the Judge considered what a reasonable hypothetical purchaser would have paid for the agency.

In contrast, the compensation payment is calculated by reference to the value of the agency business if it was sold to a theoretical third party at or immediately before the date of termination of the agency. This valuation process can be quite complex, particularly with large and/or highly successful agencies, but generally the calculation will involve assessing the annual (or monthly) income of the agency, deducting the annual (or monthly) costs of running the agency and then multiplying that annual (or monthly) “net earnings” figure by an appropriate multiplier to reach the compensation figure. There is no cap on the compensation figure so where, for example, an agent builds up a very successful and sustainable agency from a zero or very low base (think Pandora or Crocs), the compensation payment due on termination could be very large. However, it might be possible for the principal, at the start of the agency relationship, to have a clear idea of how the agency is going to progress and, therefore, whether compensation might be preferable to indemnity. One example might be where a sales agent has previously been employed by the principal but the parties have agreed to change the relationship so that the former employee is appointed as an agent. In that situation, the principal would probably have quite a clear view of the likely level of sales that the agent would generate, at least at the outset. If the market is a fairly stable one, the principal might be comfortable enough to compare the likely compensation v indemnity payments to determine which option is preferable. However, there is an element of risk here because if the principal misjudges the market and the agency is more successful than anticipated, opting for compensation over indemnity could be an expensive mistake.

Another example where indemnity could be preferable to compensation is where the agent is likely to saturate the market quite quickly, with sales then reducing quite significantly. This could occur where the product offered by the principal is likely to be a one-off purchase for the customer rather than a repeat purchase. It is worth noting that if sales levels do reduce significantly over time, then the sum payable to the agent as compensation or indemnity would also reduce. The principal would need to be quite certain about the level of sales that would be generated by the agent, the amount of commission that would be earned and how long it is likely to take to reach that saturation point for them to assess whether compensation would be a better option than indemnity. If there is any doubt about how the agency might perform, it is probably safest to elect for an indemnity payment in the agency contract. That will give the principal certainty of their maximum exposure if the contract has to be terminated and will allow them to plan accordingly

Kevin Manship is a Senior Associate with Blake Morgan Solicitors.
New Kings Court, Tollgate, Chandler’s Ford, Eastleigh, SO53 3LG
Tel: 023 8085 7026 www.blakemorgan.co.uk

Disclaimer: This column does not contain legal advice and is for general guidance only. Agentbase, Blake Morgan Solicitors and the writer accept no liability in connection with the general guidance given in this column. Please ensure that you obtain legal advice before acting in reliance upon anything in this article. For example, please be clear that the answers given in this column may not cover all possible angles, aspects, relevant considerations and/or points of law and so that all or any information which is given above needs in every instance to be referred for legal advice for clarification and amplification, before being relied upon.

Post-termination payments for agents, indemnity, compensation and the worst of all worlds

A drafting cautionary tale, on clauses that try to pick whichever payment is lower.

Commercial Agents can benefit from substantial payments when their agency contracts come to an end.

In England and Wales, principals and agents can choose when they enter into the agency contract whether an indemnity or compensation will be payable on termination. If there is no election, then compensation is payable by default. Compensation is usually more than an indemnity.

From a principal’s perspective the key advantage of an indemnity is that the amount payable to an agent has an easily calculated top limit. In contrast, compensation has no cap, which can be favourable to the agent, though principals can adopt strategies to manage their potential liability if they act promptly and strategically before termination. The sharp contrast between an indemnity and compensation was again considered recently in the case of Brand Studio Ltd v St John Knits Inc [2015] EWHC 3143 (QB), in which the Court found that the agent was entitled to an indemnity and not compensation.

In Brand Studio Ltd v St John Knits Inc, the parties’ contract provided that upon termination, the agent would be paid by way of indemnity, unless compensation would be less than the indemnity, in which case the agent would be entitled to compensation. In a previous case, (Shearman v Hunter Boot [2014] EWHC 47) such a clause was held to be invalid and the Court held that the agent was entitled to compensation. The agent in the Brand Studio case argued that the clause was invalid as a whole and so it was entitled to compensation. The principal argued that the selection of an indemnity was valid and should be upheld regardless of the further provision selecting compensation if it was lower, on the basis that if that further compensation provision was invalid, it could be deleted from the contract without altering the nature of the parties’ bargain. The court agreed with the principal and severed the clause, leaving the selection of the indemnity in place. This did not happen in Shearman, as the principal had not argued that the offending part of the clause could be severed, which meant that the entire clause was deleted and the agent was entitled to compensation. On the face of it, this latest decision flies in the face of the rationale underpinning the Commercial Agents Regulations (which is to protect agents from their principals), as the decision is to the principal’s benefit and the principal is likely to have had the bargaining power when the contract was entered into. However, the parties clearly agreed an indemnity in the contract and the principal was debarred from being able to rely on the part of the clause by which the agent would get the worst possible outcome.

DWF has extensive expertise in advising principals and agents on compensation and indemnity claims as well as other issues arising from the agency relationship. Specific examples of our recent cases involving indemnities include acting for a very well-known European food manufacturer, advising a major sportswear manufacturer on its relationship with a European agency business and dealing with a potential multi-million pound claim against a major food producer. We take a solution focussed, client centric commercial approach. For both principals and agents, careful consideration is required of the best way to protect your position. Steps can be taken at the outset of, during and after the end of the relationship to ensure that your legal, evidential and tactical position is protected and aligns to your commercial objectives. We have extensive experience in acting for principals and agents in relation to issues arising before, during and upon the termination of the agency contract, including dealing with contested claims, liability and valuation issues.

DWF LLP
One Snowhill, Snowhill Queensway, Birmingham B4 6GA
Tel: 0121 212 2620 www.dwf.co.uk

Disclaimer: This column does not contain legal advice and is for general guidance only. Agentbase, DWF LLP and the writer accept no liability in connection with the general guidance given in this column. Please ensure that you obtain legal advice before acting in reliance upon anything in this article. For example, please be clear that the answers given in this column may not cover all possible angles, aspects, relevant considerations and/or points of law and so that all or any information which is given above needs in every instance to be referred for legal advice for clarification and amplification, before being relied upon.

Who qualifies as a “new customer” when calculating an indemnity payment?

The first step of the calculation: which customers actually count towards an indemnity, and when an existing customer can be treated as new. Written in 2016, and drawing on a European Court decision; UK courts are no longer bound by such decisions since the end of 2023, though they may still follow them.

UK and European Courts have made clear on a number of occasions that one of the key aims behind the indemnity and compensation mechanisms in the Commercial Agents (Council Directive) Regulations 1993 (“the Regulations”), and the European Directive from which the Regulations flow, is to ensure that, following termination of their agency contract, a commercial agent receives a payment which reflects the value of the goodwill that the agent has generated for their principal’s business.

The goodwill of a business is not a physical asset like the products that a business manufactures, but it can have considerable value. What amounts to goodwill will vary from business to business but essentially, it is the reputation or good name which a business builds up with its customers which persuades those customers to continue to buy products from that business.

A commercial agent can play an important role in building and maintaining that goodwill. Where the business continues to receive the benefit of the goodwill generated by the commercial agent after the agency contract has ended, it is only fair that the commercial agent receives a payment for the goodwill that they have generated for the business.

Regulation 17 states that a commercial agent is entitled to an indemnity payment after the termination of his agency contract if and to the extent that “…he 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”.

When calculating what indemnity payment a commercial agent will be entitled to following the termination of their contract, the first step would be to assess the commission paid to the commercial agent on business from new customers and increased business with existing customers, we would not simply use the full annual commission paid to the commercial agent across all customers. The customer would have to fall within one of these two categories (i.e. a new customer or a significant increase in the volume of business of an existing customer.)

In a recent referral to the European Court of Justice (ECJ), a German court dealing with an indemnity claim (Marchon Germany GmbH v Ms Karaszkiewicz) asked the ECJ to confirm whether “new customers” could include existing customers, that is to say customers who had previously had a business relationship with the principal but in relation to different products.

In this case the principal was a producer and wholesaler of various brands of frames for spectacles and assigned to its commercial agents collections of spectacle frames of particular brands, rather than its full range of products. This meant that several agents operated in the same geographical area, with each agent having responsibility for two or three specific brands. The agents were effectively competing against each other to persuade customers to buy their brands.

During her agency, the commercial agent had persuaded customers to purchase for the first time the brands that she was responsible for. Those customers had previously bought other brands from the principal. In bringing her claim for an indemnity payment, the agent claimed that these customers should be treated as “new customers” even though they had previously been customers of the principal, but for different brands. The ECJ agreed with that view, but noted that the sales strategy adopted by the Principal (i.e. allocating specific brands to specific agents) was a key consideration in reaching its decision.

The clarification from the ECJ is useful, but might be limited to the situation where the commercial agent is the sole representative of the principal for specific products (i.e. none of the other agents have access to those products).

This situation can be contrasted with the following:

A customer has previously purchased products from the principal, but has not done so for some time. The agent visits the customer and persuades them to place an order and resume business with the principal (e.g. by offering more favourable prices than previously); or
The principal launches new product lines and permits all of its existing commercial agents to promote the new products to existing customers.

In the above situations, it would be difficult for the commercial agent to argue that these customers should be treated as “new customers” when calculating any indemnity payment. Rather, they would be treated as “existing customers”.

As noted above, the distinction is important because the commercial agent would need to establish that they “significantly increased the volume of business” with existing customers when assessing whether the agent is entitled to an indemnity payment. The additional hurdle could make all the difference to the amount of the indemnity payment.

Kevin Manship is a Senior Associate with Blake Morgan Solicitors.
One Central Square, Cardiff CF10 1FS
Tel: 029 2068 6126
www.blakemorgan.co.uk

Potential Impact of Brand Names on Indemnity Payments to Commercial Agents

A possible reduction: where a brand is strong enough that products partly sell themselves. Written in 2009, and drawing on German practice, so read the references to English case law in that light.

by Alain Cohen, Director, Ashby Cohen Solicitors, London

On the termination of a commercial agency agreement, one of the principal entitlements of the agent is indemnity. The value of this indemnity should be commensurate with the value of the agreement itself: however, what impact should the brand name of the products supplied have on this calculation?

While in English law this has not yet been fully determined, there are a number of precedents being set in other EU countries which could have important ramifications in the UK for future rulings.

The concept of indemnity in the termination of a commercial agency agreement derives from German law, where the case law dealing with indemnity calculation has subsequently become very well defined. In English courts, however, there has only been one decision relating to how an agent’s entitlement to indemnity should be calculated.

In this case, it was found that it is permissible to look at the practices of other EU member states when interpreting the Commercial Agents Regulations which govern the provision of indemnity

In a recent decision in the German courts, an agent had their indemnity payment reduced by 25% as a direct result of the perceived value of the brand name of their principal. In the view of the court, as the principal’s brand name was so well-known and so respected that the agent’s job of selling the product was rendered 25% easier, as the products effectively “sold themselves” to a degree.

Applying this kind of reduction to termination indemnity to take into account the perceived value of a particular brand name is common in several EU member states. The tendency of consumers to gravitate towards particular brands is known as the “suction effect”, and has been a recognised factor in indemnity calculations in German courts over the last 10 years.

Although there is no precedent in English courts, there is equally no reason why a principal should not raise the “suction effect” argument in response to an agent’s indemnity claim.

In the wake of a recent ruling in the House of Lords regarding how compensation is to be calculated following the termination of a commercial agency agreement, it is likely that the majority of such agreements drawn up in future will provide for the indemnity to apply to avoid compensation payments.

With such an increase in indemnity provision imminent and the lack of English case law on the subject, it seems inevitable that the German model will be a major influence on the way this issue is treated in the UK.

If an indemnity arrangement is in place, the payment is dependent on and should reflect:

Whatever new customers or increased volume of business the agent has brought to the principal and the principal continues to enjoy.
The fairness of the payment with regard to the totality of the circumstances of the case.

The Commercial Agents Regulations do not go into detail as to how the actual value of the indemnity should be calculated. The EU has set out a formula, based on the German system, for how the calculation should be tackled.

As a result of this, principals with high “suction effect” products should seek to include indemnity provisions in future commercial agency contracts, as this means the popularity of their brand will be taken into account on termination of the agreement.

Conversely, agents dealing with such products should be aware that, if their agreement is terminated, they are likely to receive more through a compensation award than they would through an indemnity payment.

Ashby Cohen Solicitors Ltd
18 Hanover Street, London W1S 1YN
Tel: 0207 408 1338 Fax: 0207 491 0414
Email: info@ashbycohen.co.uk
www.ashbycohen.co.uk

Disclaimer: This column does not contain legal advice and is for general guidance only. Agentbase, Ashby Cohen and the writer accept no liability in connection with the general guidance given in this column.

Compensation and indemnity claims: did you know…

Practical points that can decide a claim: deadlines, the default-for-breach rule, and trial periods.

Please see below a few points that could be very important in deciding whether an agent’s claim for compensation or indemnity under the Commercial Agents (Council Directive) Regulations 1993 (“the Regulations”) is successful.

Are there specific deadlines that have to be met when bringing a compensation or indemnity claim?

There are actually two key deadlines that agents need to be aware of when bringing a claim for compensation under Regulation 17 of the Regulations:

Within 1 year of the date of termination of the agency contract, the agent must notify their principal that they intend to bring a claim for compensation.
Within 6 years of the date of termination of the agency contract, the agent must start Court proceedings against the principal, bringing a claim for compensation.

The result of failure to comply with either of these deadlines is that the agent loses their entitlement to bring a claim for compensation against their principal.

NB These deadlines also apply to claims for indemnity under Regulation 17.

Does a principal have to terminate for breach to avoid a compensation claim?

Regulation 18(a) of the Regulations states that compensation (or indemnity) under Regulation 17 is not payable by the principal where “…the principal has terminated the agency contract because of default attributable to the commercial agent which would justify immediate termination of the agency contract pursuant to regulation 16“.

Regulation 16 says that the Regulations do not affect any laws of the UK which provide for the agency contract to be terminated with immediate effect because one party had failed to carry out all or part of their obligations under the agency contract or where exceptional circumstances arise. UK contract law permits parties to terminate contracts where the other party to the contract has failed in some very serious or major way to do what they were supposed to do under the agency contract.

Logically you might think that, when terminating the agency contract as a result of this type of breach, the principal would be required to explain the breach or breaches by the agent which the principal relies on as the basis to terminate the agency contract. While that would be the safest course of action to take, it is not always necessary. There are Court decisions where the principal has been able to avoid compensation or indemnity liability where the agent has been in breach of their contractual obligations but the principal has not mentioned those reasons when terminating the agency contract. In those cases the principal has satisfied the Court that the “real reason” for terminating was the breach by the agent and has therefore been able to rely on Regulation 18(a). This is a more difficult route for a principal to take, but it can be done.

What happens if the agency is terminated within an initial trial period?

The European Court of Justice has confirmed that an agent remains entitled to claim compensation (or indemnity) under Regulation 17 even if their agency contract is terminated during what is described in the contract as a trial period.

However, it is worth noting that if an agency contract is terminated at such an early stage the value of any claim for compensation or indemnity is likely to be very low.

Kevin Manship, Legal Director
Blake Morgan Solicitors LLP, One Central Square, Cardiff, CF10 1FS
Email: kevin.manship@blakemorgan.co.uk
Direct Tel: 029 2068 6126
www.blakemorgan.co.uk

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Short answers to common questions

What is the difference between compensation and an indemnity?

Which one applies by default?

Is there a cap on the payment?

Who counts as a “new customer” for an indemnity?

Can a strong brand reduce the indemnity?

When is an agent not entitled to any payment?

What are the deadlines for a claim?

Which is better for the agent?