Written by Steve Sidkin
1 July 98
The most controversial provisions of the Commercial Agents Regulations are those concerning the payment of compensation or the giving of an indemnity to a terminated agent. This is understandable. The Regulations represent a fundamental change in English agency law. Their poorly drafted provisions have left the courts groping in trying to formulate an accurate statement of the law.
The problem stems from the corresponding provisions in the European Self-employed Agents Directive. It is arguable that the problem was recognized when the Directive was drafted as it included a requirement for the European Commission to submit a report by 17 December 1994 on the implementation of these provisions into the national laws of Member States. In addition the Commission was required to put forward its proposals, if necessary, for amending these provisions.
Invariably the Commission is late in whatever it does. The submission of this report was no exception. It was not until July 1996 that it was published, more than 18 months overdue. Furthermore it failed to put forward possible amendments. Instead the report consistently calls for German case law and practice in this area to be followed.
Under the indemnity system, a terminated agent is entitled to payment of an indemnity to the extent that he has brought new customers to the principal or has significantly increased the volume of business with existing customers. This is subject to the requirement that the principal continues to derive substantial benefits from such customers after termination. The payment of the indemnity must be equitable having regard all the circumstances and, in particular, the commission lost by the agent on the business transacted with such customers.
The Directive provides a one year ceiling on the amount of the indemnity. This is calculated from the agent's average annual remuneration over the preceding five years (or, if less, the average for the period in question.)
In this respect the Regulations follow the Directive. However, as regards the volume of business with existing customers, the report points out that the German courts are concerned with whether the increase in volume is such that it can be considered to be economically equivalent to the acquisition of a new customer. In relation to new customers, the addition of a single new customer is sufficient.
The indemnity reflects the continuing benefits to the principal resulting from the agent's efforts. The agent, however, will only have received commission during the duration of the agreement, which does not reflect the value of the goodwill generated for the principal. It is for this reason that payment of a goodwill indemnity is commercially justified.
As the report points out, the indemnity system was derived from the German Commercial Code.
The report provides a worked example of an indemnity under the Directive. In doing so, it allows for assumptions to be included and an estimate made. The report refers to special circumstances justifying a departure from an established procedure. It also lists a range of factors which may or may not be taken into account.
The conclusion of the report is that this method of calculation of the indemnity is "extremely precise and should lead to a predictable outcome". This is, at best, a misconception!
It is the case that an indemnity may have a role to play in agency agreements. If, for example, the principal's business is mature and it is unlikely that an agent will introduce new customers or significantly increase business with existing customers, the principal may prefer the agent to have an indemnity rather than a right to compensation. Another situation may be where the principal provides the agent with leads. An indemnity may also be useful in the case of an indefinite term agency agreement. But the position is far from being as cut and dried as the Commission suggests.
The report then analyses the compensation system. This is derived from French law.
In the report the Commission dwells on the vagaries of the French courts in determining compensation. But, at the same time, the Commission confusedly interchanges in the report the terms "indemnity" and "compensation"!
What cannot be denied is that the large majority of Member States have adopted the indemnity route. There are only three exceptions:
• France, which understandably has continued with existing French law.
• Ireland, which failed to provide any direct choice at all in its legislation and has now been brought by the Commission before the European Court of Justice.
• The UK, where the parties must positively elect for the inclusion of the indemnity in their agency agreements.
But to the evident disappointment of the Commission, there has been no universal adoption of German principles in those countries which have adopted the indemnity provisions.
In its report the Commission considers also business practice. It remarks on the reaction in the UK to the Regulations and suggests that this is due to a fear of the unknown. At the same time the Commission points out that whilst there was some interest in the indemnity by UK principals as a result of the maximum limit, other principals have preferred the compensation route which necessitates the proving of actual loss by the agent.
Written before transcripts were available of two of the first cases concerning the Regulations to come before the English courts, the report considers it likely that the English courts will take account of common law principles. But ironically in neither of these cases did common law principles play a significant role.
Overall, however, the Commission is purely shameless. The Directive was derived from the original proposal in 1977 by the Commission to the Council of Ministers. Furthermore, the report, having pointed to the uncertainties which exist, is claimed by the Commission to provide further clarification of the indemnity and compensation provisions in the Directive.
The Commission claims that in providing such further clarification, the report should facilitate a more uniformed interpretation of these provisions. In putting forward this view the Commission has failed to discharge its duty under the Directive. Clarification is not provided simply by an abdication of responsibility in favour of German law. More particularly it is difficult to see how the Commission can put forward these views given the vagaries and uncertainties noted in its report.
Principals in the UK need to take account of the existing cases and the report. But subject to this there are ways in which they can engage agents in order to try and limit the burden which the Regulations imposes on them.
This briefing note is for general information. For advice in applying this general information to your specific circumstances, please contact Stephen Sidkin or any member of the Fox Williams’ agentlaw team.(www.agentlaw.co.uk)