The law provides for an agent to be entitled to claim compensation or an indemnity on the termination of an agency agreement (subject to a number of exceptions).
If an agent has a right to claim compensation (as opposed to an indemnity payment), at some point in the litigation process it will be necessary for the amount of the compensation payable must be valued. The leading case on valuation of an agent’s compensation entitlement – Lonsdale – provides for the value of the agency to be the amount that a notional third party purchaser would pay for the agency immediately before its termination.
An indemnity payment is calculated very differently to compensation. For a start, the agent will only be entitled to an indemnity payment if and to the extent that the agent has brought the principal new customers or significantly increased the volume of business with existing customers, and the principal continues to derive substantial benefits from such customers. There is also a requirement for the payment of the indemnity to be equitable in the circumstances. Unlike compensation, the maximum amount payable by way of an indemnity is capped. Many years ago the European Commission issued a report on the way in which an indemnity payment should be calculated.
There are a number of steps that a principal can take in order to seek to minimise the amount payable to an agent by way of compensation or indemnity. However, the clear purpose of the European Directive which underpins the Regulations is to compensate the agent for loss suffered when an agency relationship comes to an end. Therefore, unless the principal can establish that the agent is in serious breach of the agency agreement, the agent will have an entitlement to a payment.
The agent will only be entitled to an indemnity payment if the parties have agreed that the indemnity regime will apply to the agreement. The agent will only be entitled to indemnity payment if and to the extent that the agent has brought the principal new customers or significantly increased the volume of business with existing customers. As a result it follows that, the principal should keep a careful record of the customers given to an agent at the start of the agency relationship, and those introduced by an agent during the course of the agency relationship, and the level of business done with each customer over the course of the agency relationship. It should then be possible to exclude from the indemnity calculation commission paid to the agent on sales to customers which do not satisfy the above criteria. Therefore, the better a principal’s records, the stronger the principal’s chances of reducing the overall indemnity payment. A principal should keep records relating to its agents for longer than the normal 6-year retention period, as frequently agency agreements last longer than this.
If there is no agreement for the agent to be paid an indemnity, he will be entitled to compensation. There is less that can be done by a principal to reduce the value of the compensation payable, as the process of valuation of compensation claims depends on the method of valuation of the agency business and often involves accountants.
However, if the grant of the agency is dependent on particular circumstances, there may be value in making it clear to the agent in the agency agreement that this is the case and that the agency agreement will terminate if those circumstances change. For example, if the principal is a distributor of products manufactured by a supplier, it should be made clear in the agency agreement that the agency will terminate if the principal loses the distribution rights for the relevant products. If the agent then makes a claim for compensation, the principal can seek to rely on the case of McQuillan v McCormick. In this case, the principal was a distributor of Pandora jewellery in the UK, and appointed Mr and Mrs McQuillan as jewellery agents to service the territory. On termination of the McQuillans’ agency agreement, the court heavily discounted the compensation payable due to the risk of termination by Pandora of the distributorship agreement with the principal (the distributorship agreement could be terminated on two years’ notice).
However, it is questionable whether McQuillan v McCormick was correctly decided. The judge claimed to be following Lord Hoffman’s judgment in Lonsdale, in which the compensation payable was discounted heavily due to the closure of the principal’s business. However, it is arguable that the judge in McQuillan v McCormick was mistaken in discounting the compensation payable to Mr McQuillan due to the risk of the principal’s business with Pandora disappearing – such a heavy discount should only have been applied if Pandora had actually given notice to terminate the distributorship agreement with Mr McCormick, and not simply for the risk that Pandora might do so at some point in the future. After all, it can be said that any agency agreement terminable by notice is at risk of being terminated within a matter of months at any time, and it can be questioned whether Lord Hoffmann intended such a risk to result in a discount to the compensation payable.
Equally how is compensation payable to an agent on the expiry of a fixed term agency agreement to be valued. The case of Whitehead v Jenks & Cattell Engineering Limited established that an agent whose fixed term agency agreement expires is entitled to compensation. However, a notional third party purchaser is likely to pay very little, if anything at all, for an agency which is about to expire, and it is unclear how the value of the compensation payment is to be determined.
In conclusion, the principal should if possible agree at the outset of the agency relationship for the agent to be entitled to an indemnity payment on termination. Fewer questions remain regarding the calculation of an indemnity payment as opposed to the calculation of a compensation payment, and there are more ways in which the principal may be able to convincingly reduce the value of the payment to be made.
Emma Roake is an associate in the Commerce and Technology department at Fox Williams LLP and is a member of the agentlaw team. Emma can be contacted at firstname.lastname@example.org.