General

It depends. Your agency contract may for a fixed term (ie, ending on a definite date), in which case the contract can normally be expected to run for that entire period. The parties may, of course, agree to vary the term of the contract if the correct legal procedures are followed. A premature termination by one party of the contract is likely to have serious consequences and will, in most cases, allow the other party to sue for breach of contract, claiming damages for any losses suffered.

If the agency contract is for an indefinite period (or is a fixed-term agreement which has been converted to an ongoing contract), then either party may terminate it by notice in accordance with Regulation 15 of the Commercial Agents (Council Directive) Regulations 1993 (as amended). The minimum periods of notice are 1 month each year (or part year) of the contract up to a maximum of 3 months’ notice. Unless otherwise agreed, the contract must terminate at the end of a calendar month. The parties can agree that longer periods of notice will apply, but the period to be given by the principal must not be shorter than the notice to be given by the agent.

If the principal does not give the correct amount of notice under Regulation 15, then it will be liable to the agent for the commissions which would have been earned during that period, and must make a payment to the agent in lieu of giving notice.

The Regulations apply to all commercial agents undertaking activities within Great Britain unless the parties have agreed that the law of another member state of the European Union is to apply. Accordingly, most agents operating in the UK are protected by the Regulations, irrespective of whether or not the agency agreement is in writing.

Even though there is not a formal written agency agreement between you and your principal, there is still in place an agency agreement. It could be that there is a letter of appointment and other correspondence recording the terms of the agency. If there is no such documentation, there will be in place an oral agency, the terms of which will have been established by a course of dealing.

The Regulations operate so as to imply into the agency agreement certain terms. These include terms about:

  • the duties owed by you to your principal and by your principal to you;
  • when commission becomes due to you and when it should be paid to you; and
  • what your rights are on termination of the agency.

It is possible to exclude some of these terms by providing for this in the agency agreement. In an oral agency agreement, these terms are unlikely to have been excluded.

This will depend on how much time has elapsed since termination. If you are a ‘commercial agent’ as defined in the Regulations then the Regulations will apply to your agency relationship whether or not you were aware of them prior to termination. However, Regulation 17(9) contains an important limitation: it states that an agent “shall lose his entitlement to the indemnity or compensation….if within one year following termination of his agency contract he has not notified his principal that he intends pursuing his entitlement”.

This provision is strictly applied. Therefore, if one year has not elapsed since termination, you should notify your former principal in writing as soon as possible and request a written acknowledgement. You are not required to provide any details of the claim at this stage. Once notification has been given, you could have up to six years from the date of termination to bring your claim. However, I would strongly suggest that you pursue all claims without delay, otherwise you run the risk of, for example, your principal becoming insolvent or vital evidence being lost or destroyed.

Note that this one year limitation does not apply to other claims you may have against your former principal, whether under the Regulations (for example for pre-termination or post- termination commission) or at common law.

 

The issue of the principal’s liability to pay his agent in circumstances where the principal has not been paid is one of the most complex under the Regulations.

A distinction is drawn by the Regulations between commission accruing and becoming due. Ultimately the principal is not liable to pay commission to the commercial agent when the principal has not been paid by the customer and this is due to the customer’s default.

In contrast, if the principal has not been paid because of making a short or late delivery or as a result of delivering defective goods, the principal is still liable to pay commission to the agent.

When involved with the termination of an agency agreement we will explore with our client whether payment has been made of all commission that should have been paid. Often this is not the position. The consequences for both principal and agent can be considerable. We have been involved in a number of cases where “back” commission of this nature has amounted to many £0000’s.

Regulation 17 of the Commercial Agents (Council Directive) Regulations 1993 (as amended) provides that, when the agency relationship comes to an end, agents are entitled to be indemnified or compensated. Indemnity is only available where the agency contract provided for it. Compensation will be available to an agent for damage suffered as a result of the agency relationship being terminated. Damage is deemed to occur in certain cases, and each situation requires careful analysis to determine whether and to what extent the agent will be entitled to claim compensation.

Unfortunately, the Regulations do not contain any rules for how the compensation is to be calculated, and this has been the subject of conflicting court decisions. Depending on whether the agent can prove various matters relating to the performance of the agency agreement, it is likely that the agent may be entitled to substantial sums by way of compensation, in some cases worth two or three times the average annual commission.

Agents will not be entitled to compensation if the principal has terminated the agency contract because of default attributable to the commercial agent which would have justified immediate termination of the agency contract under the Regulations. An agent who has terminated the agreement itself will also generally not be entitled to compensation.

The agent’s claim for compensation, in most cases, is likely to be the largest claim which is made against a principal. It is therefore important that both the agent, and the principal, are aware of their legal positions on the termination of the agreement. This is one of the most difficult areas of commercial agency law to navigate, and there are pitfalls for both the agent and the principal to watch out for.

Given that the Commercial Agents Regulations are drafted heavily in favour of agents, it is better for principals to put in place a written contract governing the terms of the agency. This is in order that the contract can, so far as the Regulations permit it, limit the rights and protections given to agents by the Regulations.

In addition, the principal can use the contract to enhance the obligations owed by the agent under the Regulations and as a matter of English common law. (In this context, it is worth noting that the Regulations place only five duties on an agent.) Setting out in the contract the obligations on an agent is a way of ensuring that the principal is better able to monitor the agent’s performance.

Until very recently, it has been the case that two years’ earnings was thought to be the correct benchmark for the assessment of the compensation to be awarded to a commercial agent whose agency had been terminated.  Although the Commercial Agents (Council Directive) Regulations 1993 (as amended) do not give any specific guidelines as to the amount of compensation which an agent is entitled to receive, the ‘two year rule’ has been applied in several cases, and is derived from the French courts’ approach to the assessment of compensation.

However, in February 2006, the Court of Appeal handed down its judgment in Lonsdale v Howard & Hallam Ltd.  This case has clarified the law on the compensation to be awarded to a commercial agent on the termination of his agency, and has rejected the ‘two year rule’.

According to Lord Justice Moore-Bick, the ‘two year rule’ “does not involve any reasoned attempt to ascertain the true extent of the agent’s loss”.  The court found that the correct measure of damages for compensation is the value of the agency business (including goodwill) at the date of  termination of the agency.

The value of the agency business will obviously depend on many factors, one of which being the state of the principal’s business at the date of the termination of the agency.

 

At the present time, we don’t know. Neither the Regulations nor the Directive address the issue of sub-agents. Equally there have been no reported cases that have considered the issue. However, the DTI’s guidance notes on the Regulations which were published in September 1994 thought it likely that sub-agents were covered.

The difficulty is caused by the fact that the Regulations pre-suppose that the commercial agent will obtain orders for goods which are owned by the principal. But as between agent and sub-agent, the agent does not own the goods.

Despite this we feel that if the issue was to come before a court, it would try and find a way of bringing a sub-agent within the ambit of the Regulations. It is for this reason that agents need to take care when engaging sub-agents. For example, the termination of the principal-agent relationship may have ramifications for the agent-sub agent relationship. This can result in the agent fighting a war on two fronts as a number of our clients have found

Care should also be taken by principals. Invariably principals have deeper pockets than agents. It is more than possible that a sub-agent may decide to pursue the wealthier principal as opposed to the agent.

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