Commercial Agents Regulations
A commercial agent is a valuable asset to any business. He will negotiate, advise and conclude transactions on behalf of his principals.
The agent’s crucial role in generating profit and building up customer bases for businesses was recognised in the Commercial Agents (Council Directive) Regulations 1993. The Regulations give an agent the right to seek compensation from his principal for lost business, following the early termination of his contract.
Despite the Regulations being in force for nearly a decade, it is only now that we are beginning to see their frequent application. The rise in litigation seems to be due to lawyers having a better understanding of the scope of the provisions and recognising circumstances where the right to compensation may arise.
Are you a commercial agent entitled to compensation?
If you are a commercial agent within the definition in the Regulations you may be entitled to compensation upon termination of the agency contract. In order to be a commercial agent, you must be a self employed agent and you must have continuing authority to act and negotiate on behalf of your principal.
A commercial agent within the Regulations must also have an exclusive territory to sell within. If you are a commercial agent within the meaning of the Regulations and your contract has been terminated by the principal, you may be entitled to compensation.
The House of Lords provided guidance on the key issues of such compensation claims in the case of Lonsdale v Howard & Hallam Ltd. Mr Lonsdale had been appointed as an agent by Howard & Hallam Ltd, a shoe manufacturer. Over the years the company experienced a decline in sales and eventually Howard & Hallam ceased trading. Mr Lonsdale was given 6 months notice of the termination of his contract. Mr Lonsdale, in his claim against the company, argued that he had received inadequate compensation.
The House of Lords took the opportunity to clarify that an agent will be compensated ‘for the damage he suffers as a result of the termination of his relations with the principal.’ In other words, the agent should be compensated for loss of future commissions.
How to claim for lost agency?
Agents are entitled to either an indemnity or compensation. In some cases, the contract may explicitly state which method of relief the agent will receive.
The commercial agent is entitled to be compensated for damage and losses suffered as a result of the early termination of the agency. The agent may also be entitled to an indemnity where he has significantly improved the customer base of a business to the point where the business continues to benefit from his work; or in cases where the court deems it fair, given all the circumstances, that the principal should provide an indemnity. Whereas compensation would be for losses arising from the early termination, an indemnity involves assessing the benefit the agent has conferred on the business by his labours. Note, however, that the written contractual terms may lawfully exclude the provision of an indemnity.
Until the case of Lonsdale, there was considerable debate as to the method of calculating the amount of compensation. However, the House of Lords concluded that the amount of compensation should be based on what the business is worth to the agent and is quantified by what a ‘hypothetical purchaser’ would pay for the agency. As such, compensation can potentially be substantial.
One year time limit for commercial agency claims
Agents should note that their right to claim may be lost if they fail to notify their principal within a year of the termination of their contact that they intend to make claim.
The regulations significantly affect the relationship between agent and principal. If you’ve thought about entering into a contract either as an agent or principal, or termination of your contract is a possibility, don’t get stuck in the middle. It is important to take legal advice at an early stage to consider your rights and responsibilities under an agreement. Redress Law provide advice on a range of commercial disputes, including commercial agency disputes, and are able to represent you in court proceedings pursuant to the Regulations.
By Victoria Moore.
