But these sorts of agencies can be subject to laws which regulate the relationship between principals and agents, and provide protections to commercial agents. Importantly, these laws, which apply in various forms across all EU countries, as well as the UK, usually entitle agents to payments on termination that can be substantial.
In England and Wales, the Commercial Agents (Council Directive) Regulations 1993 (the “Regulations”) apply to relationships between principals and agents, where the agent meets the definition of ‘commercial agent’ in the Regulations. The Regulations apply in both cross-border and domestic relationships.
Definition of ‘commercial agent’
Key to the definition is that the agent must have continuing authority to negotiate the sale or purchase of goods on their principal’s behalf. This is not a high threshold, and the courts have found, including in a case involving the sale of valves in the energy sector, that agents do not need to haggle on price to be ‘negotiating’ within the meaning of the Regulations – dealing with, managing or conducting the relevant transaction will suffice.Additionally, it is not only traditional tangible goods – such as aeroplane parts – that fall within the scope of the Regulations. Agents promoting a principal’s software for sale, and a company employing agents to go from door to door to persuade households to switch electricity and gas suppliers, have been found by the Courts to fall within the Regulations.
Compensation or indemnity to be paid on termination
Once the definition of commercial agent is satisfied, the principal-agent relationship is subject to the Regulations. The most fundamental result of this is that, subject to a limited number of exceptions, on termination of the agency relationship, the agent is entitled to, and the principal has to pay, compensation or an indemnity.
These compensation and indemnity payments can be substantial. An indemnity is due if there is a written contract between agent and principal, and that contract says an indemnity is payable on termination. If the contract is silent on the point, or there is no written contract, then compensation is payable.
Indemnities are calculated in accordance with the principles laid down in the Regulations. They are capped at one year’s remuneration calculated from the commercial agent's average annual remuneration over the preceding five years (or the average annual remuneration over the actual life of the agency if it has not run for 5 years).
Compensation is calculated in accordance with the case of Lonsdale v Howard & Hallam [2007] UKHL 32, which requires a hypothetical valuation of the agency business as at the date of termination. Whilst it is a matter of expert evidence, commonly it is calculated as a multiple of the agent’s net annual income from the agency. Unlike an indemnity, it is unlimited.
