Written by Steve Sidkin
11 December 03

Should there be a statutory right to compensation when a fixed term contract comes to an end?

Most companies would probably answer with a resounding “no”. But in respect of commercial agents, it is likely that they will be in for a shock following a recent Scottish decision. The case in question concerned an agency contract which provided that the agency would end when the agent was sixty-five or on 31 May 1997, whichever was the earlier.

The Scottish court was concerned with the meaning of “termination” insofar as the Commercial Agents (Council Directive) Regulations 1993 (as amended) provide for an agent to be entitled to compensation on the termination of his relations with his principal. By giving a purposive interpretation to the Regulations, the court equated the expiry of the fixed term agreement to its termination.

The fact that an agent knew that his fixed term contract would expire at a date in the future and could plan accordingly would make no difference. It is no wonder that the rights granted by the Regulations to agents are generally considered to be extensive. They exceed the protection given to employees who have been unfairly dismissed.

The rights operate whilst the agency agreement is continuing and following its termination. Prior to termination where the agreement is for an indefinite term the agent will be entitled to statutory notice. The minimum will be one month. The maximum a period of three months and 30 days. Failure to give the requisite notice will result in a claim for commission which should have accrued during the notice period.

The main claim a terminated agent will have under the Regulations is for either compensation or indemnity. The provisions are complex. The Regulations do not give clear guidance. Nor, for that matter, have the English courts. However, the starting point will be that a terminated agent should be entitled to compensation equal to twice the average annual commission paid over the previous three years or the global amount of commission paid in the last two years before termination. This is a benchmark. It will operate unless special factors require that the agent receive more or less compensation.

The Regulations do not stop with compensation. If the agent can show that orders reaching the principal within a reasonable period of time after termination were as a result of the agent’s efforts before termination, he will be entitled to commission on those orders. It is one of the few rights of an agent under the Regulations which can be contracted out. Ironically, many principals fail to do so.

Unsurprisingly, the fact that it is payable to a terminated agent comes as a shock to the principal who has failed to provide for it.
Many principals do not pay commission if they have not received payment from customers. If this is because of fault on the part of the principal (for example, the delivery of defective products), the agent is still entitled to claim commission. Such a claim is rare whilst the agency agreement is continuing. The agent does not want to rock the boat. But following termination, the agent has nothing to fear in making such claim.

So far so bad for the principal, especially when its remembered that these rights are cumulative. But it has the potential to get worse. Unlike employment law, an agent covered by the Regulations can retire on the grounds of age, infirmity, or ill health and may claim for compensation or indemnity under the Regulations. Indeed a claim can be made by the estate of a dead agent.

In view of recent media speculation about pension underfunding and the need to push back to 70 the statutory retirement age for employees, a considerable opportunity is given by the Regulations to agents considering retirement.

Last year one UK textile agent retired and claimed from his three Continental principals more than £200,000 in aggregate. He eventually received an amount in excess of £100,000. A few years ago one AIM traded company which was terminating its agents failed to provide for the sum of £0.5m.

The protection afforded by the Regulations to agents on termination or expiry of the agency contract is considerable. Failure to provide may lead many companies using agents to nurse considerable holes in their balance sheets.

This briefing note is for general information. For advice in applying this general information to your specific circumstances, please contact Stephen Sidkin or any members of the Fox Williams’ agentlaw team. (www.agentlaw.co.uk).

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