Written by Steve Sidkin
1 November 01

In a perfect world the relationship between principal and agent should be a win-win relationship. The better the principal does, the better the agent does and vice versa. But the world is not perfect. As a result it is important to consider the legal basis on which an overseas agent is appointed.

Within the European Economic Area the agency agreement will be governed by the law of the country in which the agent undertakes business unless the agreement provides otherwise. Similarly the courts of that country will hear disputes unless the courts of another country have been chosen by the parties. Accordingly it is desirable that the agreement provides for the applicable law and courts to be that of the principal’s country. Essentially if there is a dispute the principal will be “playing at home”, whilst the agent will face the burden of “playing away”.

Within the EEA there is uniformity of agency law to some extent as a result of the European Self-employed Agents Directive. The Directive gives agents many rights which they did not have previously. The Directive has been implemented into English law by the Commercial Agents (Council Directive) Regulations 1993 (as amended).

The Regulations require minimum periods of notice of termination to be given to the agent depending on the length of the agency agreement. The maximum is three months. In contrast in some parts of the EEA the agent is entitled to up to six months’ notice.
In most cases of termination (including as a result of death, age and illness) the agent will receive either an indemnity or compensation. But indemnity only applies if expressly chosen by the parties.

Indemnity and compensation have their origin in German and French law respectively. But there are clear differences between the two concepts. These differences have found their way into the interpretation given to the Regulations, although some of the interpretations have been questionable when compared to those given in other parts of the EEA. Meanwhile the law remains in a state of flux because of the different interpretations given by the English courts to the calculation of compensation under the Regulations.

One particular way in which indemnity and compensation differ is that indemnity is thought to look back to what the agent has achieved for the principal in terms of new customers introduced or a significant increase in business with existing customers. In contrast, compensation looks forward to the loss suffered by the agent as a result of the termination of his contract with the principal.

In view of this indemnity may be better for a principal during the start up phase. Where a business becomes mature, compensation may be better for the principal. However, whilst this is an important issue for both principal and agent, ultimately the tail should not wag the commercial dog.

The benchmark for compensation awarded to a terminated agent is currently twice the amount of commission paid to the agent during the previous three years. In contrast the indemnity amount is capped at the annual average commission paid during the previous five years of the agency or if it has lasted for a shorter period of time, that period of time.

Contracting out is not possible in respect of the giving of notice and the payment of compensation or indemnity. But, contracting out is permitted in respect of another important right given to agents by the Regulations, namely post-termination commission. Unless contracted out, the agent will be able to claim such commission if he shows that particular orders came in within a reasonable time after termination as a result of his activities before termination.

Further rights and benefits are given to agents by the Directive, including a right to commission even where in certain circumstances the principal has not been paid. But by taking account of the opportunities offered by the Regulations, principals have the best chance of ensuring a win-win relationship when dealing with agents.

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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