Compensation or indemnity in agency contracts, the issue continues

The Commercial Agents Regulations provide principal and agent with a choice when it comes to termination of the agency agreement - is the agent to have an entitlement to uncapped compensation or a capped indemnity?

The Regulations require the parties to choose if they want indemnity to apply. A failure to choose will result in a right to compensation by default. 

But what of the situation where the agency agreement provides for indemnity unless compensation would result in a smaller amount being paid to the terminated agent? 

This issue had been considered previously in Shearman v Hunter Boot. In that case the court decided that such a provision did not comply with the Regulations insofar as it gave the principal two bites at the cherry. However, whilst raising the possibility of what would happen if a severability provision was included into the mix, the judge in that case did not provide an answer.  
But in Brand Studio v St John Knits the judge decided that this issue could be resolved by severing what would otherwise be an invalid provision from the agency contract. As a result:

  1. the prohibition in the Regulations designed to prevent the agent being forced into accepting less than that to which he would otherwise be entitled would not apply and
  2. the agent would be entitled to an indemnity, rather than compensation on termination of its agency.

Whilst it can be said that the judge applied the right test in Brand Studio in determining the effectiveness of a severance provision, it can easily be argued that he should have gone on to find that severance was not possible in this case given the way in which the clause had been drafted. If he had done so, the agent would have had an entitlement to the larger amount of compensation.
The agent is understood to be seeking permission to appeal to the Court of Appeal.

Take home points
It is possible to provide in an agency agreement that the terminated agent be entitled to indemnity unless compensation would result in a smaller amount being paid to the commercial agent. 
However, the better course of action remains to have in the contract an express election for indemnity given:

  • the risk that a different judge will interpret the severance provision in a different way and
  • that the capped nature of an indemnity provision means that the principal has certainty and
  • that it is usually the case that the payment of indemnity will result in a smaller amount being paid to a terminated agent than compensation.

Emma Roake

The contents of this article are intended for general information purposes only and shall not be deemed to be, or constitute legal advice. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article.
Emma Roake
Email:
Add to Contact ListAdd Emma Roake to your contact manager (e.g. Outlook)
020 7614 2663
10 Finsbury Square
London
EC2A 1AF