We try to answer some of the common questions that arise during Sales Agency contracts.
I am entering a sales agency agreement – what terms should I look out for?
Whether you are an agent or a principal which is considering taking on an agent to sell your goods, there are certain key terms to look out for and seek to negotiate at the start of a commercial agency contract within the written agency agreement:
Termination Provisions – all commercial agents who negotiate the sale of goods within the EU have the right to either compensation or indemnity when their agency is terminated, under Regulation 17 of the Commercial Agents (Council Directive) Regulations 1993 (“the Regulations”). In the UK, if the written agency agreement does not specify that the agent is entitled to an indemnity, then the agent will be entitled to compensation under Regulation 17.
Generally speaking (and always seek advice on your individual circumstances because other factors may apply) indemnity clauses generally result in lower payments to agents at the conclusion of an agency than compensation provisions. Very broadly speaking, therefore, agents tend to prefer to have a right to compensation while principals prefer to opt for an indemnity. The key reason for the difference is that an indemnity under Regulation 17 is capped at one year’s earnings (Regulation 17(4)), which is averaged over the last five years or less if the agency was shorter. Conversely, a compensation payment is based on assessing the market value of the agency – i.e. what would a third party purchaser pay for the benefit of taking on that agency. In many cases therefore, if a written agency agreement incorporates an indemnity provision then it tends to reduce the prospects of a costly dispute at the conclusion of an agency, though indemnity cases can be contested also. (However, a point that is sometimes overlooked is that where an agency contract includes an indemnity provision that does not prevent the agent from also pursuing a damages claim. But in practice such parallel damages claims are rare.)
Pipeline Provisions – under Regulation 8, when an agency is terminated the agent is entitled to receive commission on transactions concluded after the agency contract terminated provided the transaction is mainly attributable to the agent’s efforts during the agency and provided the transaction was entered into within a reasonable period after the agency terminated. Disputes over Regulation 8 pipeline payments happen fairly frequently. If the written agency agreement has not made it specific, a Court will have to assess what “the reasonable period” is for which the agent should receive commission on orders after the agency has terminated. Though the agent and the principal have opposite interests on this question there is a lot to be said for trying to agree what the reasonable period for Regulation 8 purposes is at the outset if possible.
Notice Provisions – Regulation 15 sets out the minimum periods of notice which must apply and it is illegal to derogate from these. These are one month during the first year of an agency, two months for the second year and three months for the third year and subsequent years, and unless agreed otherwise the period of notice must coincide with the end of a calendar month. The agency contract must therefore, at a minimum reflect these minima in Regulation 15. However, in some cases, a longer period of notice, during which time an effective handover can be achieved, often suits both parties.
Other Agencies and Competition – principals sometimes assume that an agent taking on another agency, particularly if it is for competing goods, will automatically be a fundamental breach of contract. However, the case of Rossetti Marketing Limited v Diamond Sofa Company Limited  had to go all the way to the Court of Appeal for the principal to prove that such behaviour was a breach. Every case turns on its own facts and it is often unwise for the principal to rely merely on the agent’s obligation to act dutifully and in good faith under Regulation 3. Ideally, at the outset of the agency, the agent and principal should discuss what other agencies the agent has, and record these in the agreement. From the agent’s point of view they may well have to take on a number of complimentary agencies to earn a reasonable income. Conversely, from the principal’s point of view, they will want some control over the amount of time the agent dedicates to their business. In practice, a middle way is often reached by providing that the agent is permitted to take on other agencies, but must obtain the principal’s consent in advance (such consent not to be unreasonably withheld) and for the agreement to provide that the agent will not take on any agency for goods directly competing with those of the principal. This may need further detail and discussion depending on the nature of the trade.
Performance Targets and Breach of Contract – again, the interests of the agent and principal diverge on this issue, but some discussion at the outset is advisable. From a principal’s point of view, they will probably want to set out the circumstances in which an agent’s performance will be unsatisfactory and their conduct will be considered to be a breach of contract, particularly with regards to sales performance. Conversely, agents are often hesitant about signing up to such commitments, particularly in cases where they are taking on a new brand or a new territory and therefore the likely success is difficult to gauge. Whatever the solution, it is advisable to avoid a situation where the principal has to try to impose sales/performance targets later on, once an agreement has already been in place for several years, as in such circumstances, an agent is likely to argue that this is an unacceptable attempt to unilaterally vary the contract.
Customers and Territory – clarity on both of these issues at the outset of an agency agreement is highly advisable. In addition, principals will frequently want to set out the circumstances in which an account can be made a house account. Conversely, if an agreement does provide for that, an agent will want to ensure that they have some monetary recognition of the fact that they are losing an account that they have been building up.
Commission Levels and Alterations – frequently a principal will want to downwardly adjust the levels of commission payable to an agent once a product “takes off” and sales rise substantially. Conversely, agents are very resistant to this because they will see the growth of a product sales as directly attributable to their own efforts. Frequently this matter is overlooked at the outset of an agency agreement, particularly for agencies which deal with new products or brands, but, again, discussing how the parties envisage the relationship developing, and trying to reach agreement at the outset, may well help to avoid costly disputes later.
To whom do the Commercial Agents (Council Directive) Regulations 1993 (“the Regulations”) apply?
Classically a Commercial Agent will satisfy the following criteria:
- They will be self-employed – the agent may work through a limited company but the key issue is that the agent does not have an employment contract with the principal whose goods he or she is selling.
- Generally an agent will work on a commission-only basis – if the agent is given a salary then usually they will be deemed to be an employee. However, this does not prevent the principal paying a retainer to the agent, particularly to cover expenses. Retainer arrangements frequently arise where the likely expenses of running an agency are considerable or where the market for particular goods is not yet established and therefore the likely earnings during the initial period of the agency will be modest.
- The agent is selling or purchasing goods (not services) – this is one of the areas that has frequently led to litigation. Generally speaking Courts often start from the basis that ‘goods’ has the same definition that applies under the Sale of Goods Act. But it is also probably fair to say that, in recent years, where there has been doubt, the Courts have erred on the side of finding that the agent is covered by the Regulations rather than not.
- The agent has continuing authority to “negotiate” the sale or purchase of goods on behalf of the principal – again “negotiate” is construed widely.
Some agents are specifically excluded from the application of the Regulations under Regulation 2, and these are the following:
- Company officers
- Partners of a business
- Insolvency Practitioners
- Unpaid agents
- Commercial Agents operating on commodity exchanges
- Crown Agents for overseas Governments and Administrations
Sometimes, a person or company will be carrying out a rôle for another company, which seems partly akin to the rôle of a commercial agent in some respects, but not in others. If in doubt, the Schedule to the Regulations plays an important rôle in helping to decide whether an agent’s actions are deemed to be primary (in which case the Regulations will apply) or secondary (in which case they will not).
For example, the Schedule explains that mail order catalogue agents for consumer goods and consumer credit agents do not fall within the scope of the Regulations.
In some cases it is a complicated issue to decide whether an agent is caught by the Regulations or not and it has needed determination by the Courts – cases over the last few years have included agents selling Sky TV packages and set top boxes, electricity, petrol and software. If you have any doubts it is better to seek early legal advice.
In the early years of the application of the Regulations, some principals tried to get round the application of the Regulations by seeking to limit the agent’s authority to negotiate on their behalf, and tried to provide that the principal would be responsible for entering any final contractual relationship with customers. The case of PJ Pipe & Valve Co Ltd v Audco India Ltd EWHC 1904 (QB) decided this issue and it is now clear that the word “negotiate” in the Regulations will be construed widely. If the self-employed agent’s role is in Europe, and is to effect introductions and persuade end customers to be interested in and to place orders for the principal’s goods, then the agent will be covered by the Regulations. In the PJ Pipe case the Claimant was held to be a commercial agent despite the fact that it had no authority to negotiate the sale of the goods in the sense that it was not empowered to agree terms or pricing. The Claimant did effect the crucial introductions and played a significant role in persuading potential customers to be interested in the manufacturer’s product, so was covered by the Regulations.
What are the alternatives to a sales agency agreement?
At first blush the benefits of a commercial agency agreement might appear obvious for both principal and agent. The principal gets the benefit of the agent’s work without the upfront costs/risk (i.e. salary, NI, benefits, pensions etc) of taking on an employee, frequently obtaining the experience of someone in a specialised sector who might be difficult or expensive to employ full-time. Meanwhile, the agent is incentivised to sell the goods because, although a retainer may apply to cover the agent’s expenses in some cases, their earnings are completely contingent upon the sales they make. Rising sales therefore produce a “win-win” situation for agent and principal alike, though frequently disputes arise over whether commission should be modified once the market for certain goods is established, particularly where this has not been dealt with in the original agency agreement.
Depending on the sector and the circumstances, the agent often has the flexibility to work for a number of complementary principals at once.
However, particularly since the Commercial Agents (Council Directive) Regulations 1993 (“the Regulations”) came into force, principals have tended to look again at the logic of contracting with sales agents, particularly because of the liabilities they face when terminating a commercial agency contract (chiefly in terms of compensation or, if the contract provides for it, indemnity under Regulation 17, pipeline commissions under Regulation 8 and notice under Regulation 15).
In addition, often principals have become concerned over the rising costs of using agents where the market for goods has become established and the cost of paying agents on commissions exceeds the cost of employed sales people.
The chief alternatives to a sales agency agreement are:
- Having employed sales representatives; and
- Entering into a distributorship agreement.
However, in some cases a more complex structure needs to be worked out.
Employees – the downside of having employed sales representatives instead of agents is the fixed liabilities in terms of salary, NI, benefits and pensions that become payable. The upside may be that where the market for goods is established an employed sales force may cost less than paying commissions each month. The key issues for the principal to consider are:
- Have you sought legal advice regarding your likely liabilities (particularly in terms of compensation/indemnity and pipeline commissions) before terminating any Agency Agreement? It is essential to understand the likely quantum of any agents’ claims before taking steps to replace them.
- Are you replacing like with like? This is often difficult to assess. Many professional sales agents have years of experience in their sectors, whereas in some cases those salespeople willing to work on lower salaries with a top-up commission to incentivise sales won’t have that level of expertise. Careful assessment of the customer base and the brand profile is necessary before taking this step.
Appointing a distributor instead of an agent – the central difference between an agent and a distributor is that an agent negotiates the sale of goods on behalf of a principal so the contract for the sale of goods is concluded between the principal and the customer. Conversely, the distributor takes legal title to the goods and sells them on its own account to customer, commonly for an uplift on the price it paid to the principal. The distributor therefore takes the ‘risk’ in the goods.
On the positive side, a distributor is neither an employee (entitled to a salary etc) nor an agent (entitled to commissions and to rights under the Regulations if the principal terminates the agency). On the negative side, a distributor will demand a different scale of uplift in exchange for the profile and input it contributes to selling the goods. Frequently, distributors will be more interested in goods once the market for them is clearly established.
Negotiating Agency Agreements, Distributorship Agreements and Employment Contracts for your business has a number of pitfalls – our team is skilled at advising on and negotiating a wide range of these contracts, both nationally and internationally – seeking early legal advice is essential.
Some final points to note
When appointing an agent to sell goods for your business remember:
- The agent’s rights under the Regulations apply from day one. It is still fairly common for parties to verbally agree that an agent will be taken on for a short “trial period”, with the idea of seeing how they get on with selling the goods then negotiating a written contract after the parties have seen how the first six to twelve months have gone. This is hugely risky, particularly if the agent makes a success of selling the goods. By the end of a successful trial period, expectations of an agent and principal often diverge widely, and yet the principal will be legally liable to pay compensation and pipeline commissions under Regulation 17 if they choose to terminate the agency at this point. Ideally, seek legal advice early and get all key terms agreed in writing up front, including considering the key issues set out at the faq below – I am entering a sales agency agreement, what terms should I look out for?
- Even if an agent is appointed for a fixed term, they will still be entitled to compensation (or indemnity) once that term expires under Regulation 17. This was established in the cases of Light and others v Ty Europe Limited  EWCA Civ 1238 and Cooper v Pure Fishing  EWCA Civ 375. That said, the fact the agency was for a fixed term may affect the valuation of the compensation claim under the principles of the leading case of Lonsdale v Howard & Hallam Limited  UKHL 32.
Do the Commercial Agents (Council Directive) Regulations 1993 apply where the agent is purchasing goods, instead of selling them?
The answer to this question is almost certainly “yes”. However, it will need some analysis of the individual circumstances, and applying these against the factors in Regulation 2 and the Schedule to the Regulations to confirm the exact legal position.
Over the years we have come across instances where agents are not selling but instead buying goods for principals and where the agents are remunerated on a commission-only basis, and not on a salary. Occasionally such commissions are based on savings negotiated with end suppliers. Such commissions will usually be related to the volume of goods purchased.
The wording of the Regulations makes it clear that purchasing agents will be covered by the protections of the Regulations. Hence, Regulation 2 states that “Commercial Agent” means a self employed intermediary who has continuing authority to negotiate a sale or purchase of goods on behalf of another person…”.
Thus, whether you are a principal using a self employed agent to purchase goods or working as such an agent it pays to seek legal advice on the effect of the Regulations, and there are clear advantages to a written contract setting out the terms (in compliance with the Regulations) wherever possible.
I am being asked to sign a new agency agreement but have worked for this company already for a while, what should I do?
Crucially, don’t sign anything until you have obtained independent legal advice on your circumstances. Similarly, principals are advised to seek legal advice before sending out proposed new contracts to agents.
This is a situation that arises often in practice.
There may be good reasons why a principal wishes to formalise a new written contract with its agents.
However, under Regulation 13 of the Commercial Agents (Council Directive) Regulations 1993 the principal and the agent are entitled to receive from each other “a signed written document setting out the terms of the agency contract”. This means that both parties are entitled to a record of the terms which have been operating already, reflecting what has actually happened by agreement to date.
But Regulation 13 does not entitle the principal to seek to change the terms already in force, or to insist that the agent signs a new contract. Just because a contract may only have been agreed informally, perhaps through a chain of emails or faxes, that does not affect the fact that the agency contract is legally binding and the agent’s rights under the Regulations will apply already.
It is not unknown for principals to use the excuse of formalising new contracts to try to negotiate new terms. In many cases the changes may not be justifiable in legal terms, though in practice much of the balance of power in the relationship often lies with the principal, and it is best for both parties to be legally advised.
My principal is withholding information on sales – what should I do?
The Commercial Agents (Council Directive) Regulations 1993 (“the Regulations”) include important rights for agents to be supplied with information from their principals. Regulation 12 states as follows:
12. Periodic supply of information as to commission due and right of inspection of principal’s books.
- The principal shall supply his commercial agent with a statement of the commission due, not later than the last day of the month following the quarter in which the commission has become due, and such statement shall set out the main components used in calculating the amount of the commission.
- A commercial agent shall be entitled to demand that he be provided with all the information (and in particular an extract from the books) which is available to his principal and which he needs in order to check the amount of the commission due to him…
Hence the agent has the right to a statement of the commissions due and can demand to inspect the books, or see a copy. In practice, disputes in this area are usually accompanied by a suspicion that the principal is not giving full credit to the agent for certain sales, which is occasionally accompanied by a dispute over whether the agent is entitled to commissions on sales placed with the principal direct instead of through the agent.
If an agent is in dispute in this area it is advisable to write to the principal quoting Regulation 12, and possibly referring to any additional rights under the written contract if any, and asking for that information to be provided within a reasonable period, perhaps fourteen days.
Hopefully, if the principal seeks legal advice, then the principal will be advised to comply given that this is a mandatory duty under UK and European Law.
However, if the principal still does not supply the information, and if the principal is unwilling to meet and negotiate this issue, then the Regulations do not provide a specific remedy or consequence. In these circumstances, it is important to take legal advice before making any major decisions. Some possible options which may apply are:
- The agent could commence proceedings seeking to enforce their statutory rights under Regulation 12, which might be accompanied by a claim for unpaid commissions if there is sufficient suspicion to justify that. The fact that this is a statutory right should considerably assist the agent when claiming the costs of such an action later. In practice, this statutory right dovetails with and supports an application for disclosure under the Civil Procedure Rules in England and Wales or even, in appropriate cases, an application for “Pre-Action Disclosure”, which is a Court Order for disclosure of documents before an actual Court claim has been commenced. Nevertheless, given the legal costs involved and the likely effect on the agent’s relationship with the principal this is not a course to take lightly and it probably will not be considered unless the agent has good grounds to believe that significant sums are likely to be at stake, or
- Given that the duty to supply information to the agent and to provide extracts from the principal’s books is a statutory duty, and assuming that the principal continues to fail to comply with reasonable requests, then (depending on the agent’s practical and financial situation, and the seriousness of the principal’s conduct) the agent may wish to consider terminating the agency agreement themselves. Such a termination would be made under Regulation 16 on the grounds that the principal has not fulfilled their duties under the contract. It would be important, in these circumstances, to cite Regulation 18(b)(i) at the time of termination to explain that the agent is still claiming compensation (or indemnity if the written contract so provides) as they have terminated the contract because of circumstances attributable to the principal. In such circumstances, the agent can, however, expect a battle over whether compensation (or indemnity) is still actually payable – seek independent legal advice before taking such actions.
I want to dismiss an underperforming agent – what should I do?
Following a process that is demonstrably fair is essential. It is also important to seek independent legal advice early on – what may seem obvious to a principal and what seems obvious to an agent are often two very different things.
Two initial key considerations are:
- Do you have a written agency agreement? and
- Is the agent in clear breach of the terms of that written agreement?
In the absence of some clear breach of the written agreement, the principal may need to rely on common law principles applicable to agents. In many circumstances a sales agency will be construed as one of the special class of fiduciary relationships where special duties are owed by the agent to the principal. Alternatively, the principal may need to rely on the duties of a commercial agent set out in Regulation 3, in particular the duty to look after the principal’s interest and to “act dutifully and in good faith”, which are often cited in such circumstances.
Sometimes, of course, the breach of contract by the agent will be very clear. It is difficult to generalise in this area because some actions look very different when viewed from the perspective of the agent compared with the perspective of a principal.
However, some clear examples of breach might be taking on an agency for directly competing products without the principal’s consent and diverting the principal’s customers to that new agency, fraud or dishonesty, or actively poaching the principal’s staff or taking steps to completely undermine its customer base.
In other cases, particularly where the alleged breach of contract is not so clear cut, it is essential to follow and to document a clear process, comparable to a disciplinary process in employment law, which needs legal input, proper investigation and ample opportunity for the agent to put across their views and to address, if possible, underperformance or other alleged failures that the principal complains of. Contrary to many principals’ beliefs, experiencing a significant dip in sales is not always evidence of a fundamental breach of contract – that will depend on all the surrounding circumstances and on what the written contract says.
If the principal can prove that agent was in fundamental breach of their agency agreement then that will extinguish the agent’s rights to compensation (or indemnity if the contract so provides) under Regulation 17 and notice under Regulation 15.
However, unless the principal has a counterclaim in damages against the agent, a fundamental breach of contract usually does not extinguish the agent’s rights to normal commissions under Regulation 7 or to pipeline commissions under Regulation 8 where the work that the agent did which led to them gaining those rights predated the breach of contract.
For this reason, the Courts in the UK are alive to the fact that “fundamental breach of contract” by the agent is more commonly alleged by principals than it turns out to be proved. Proving that the agent has breached the contract in so serious a way as to justify immediate termination of the agency under Regulations 16 and 18 is often not an easy matter and care should be taken to avoid disputes becoming costly and protracted.
As an example of this, Blake Morgan successfully acted for the claimant agents in the recent Court of Appeal case Crocs Europe BV v Craig Lee Anderson & Anor trading as Spectrum Agencies (a partnership) 2012 EWCA Civ 1400, 2012 WL 4867068, in which the principal purported to repudiate an agency contract for what they claimed was a fundamental breach entitling them to avoid liability for compensation under the Regulations. But the High Court, and the Court of Appeal, decided that the breach was not sufficiently serious to justify that step, so the agent was still entitled to be compensated.
I have just received notice terminating my agency agreement – what should I do next?
Over the years we have seen agents occasionally react in “knee jerk” inappropriate ways when they receive notice of termination, and sometimes that does their case no favours.
Obviously, receiving notice of termination of an agency is often traumatic, particularly where the agency has been in place for years or that income forms a major part of the agent’s livelihood.
However, these are a few tips if this happens to you:
- Seek independent legal advice quickly, before writing back or responding to the termination – contact us.
- If the principal alleges that you are in breach of contract, serve a detailed rebuttal of the allegations, with legal input on your circumstances, if you are justified in doing so;
- Consider whether you need to agree the terms of a written handover agreement, to cover the period between the notice and the final end of the agency. In some cases this is advisable for both principal and agent, even if the issues of quantification of compensation/indemnity/pipeline payments are “parked” for resolution (whether through negotiation or at Court) for another day;
- If justified, serve a formal notification of your intention to pursue your rights under the Commercial Agents (Council Directive) Regulations 1993. This notice will need to be formally served upon the principal in line with the notice provisions of the written agency agreement, if any. Your notice should make it clear that you intend to pursue your rights under the Regulations and under the agency contract including, without limitation, compensation (or change this to “indemnity” if the written contract provides for that), pipeline commissions under Regulation 8, commissions under Regulation 7 (if some are unpaid) and notice under Regulation 15 (or under the written agency contract if those provisions are more generous).
- Note that if the agent does not notify his or her intention to make this claim under the Regulations against the principal within one year of the termination of the agency then the right to claim is entirely lost. Disputes about whether the agent has notified his or her claim within time have arisen fairly frequently in practice so do not get caught out.
- Request and obtain from the principal the documents that you need, if any, to document your potential claim. Frequently, an agent will need to request details of sales, especially sales occurring within a reasonable time after the agency is terminated to enable them to calculate their potential pipeline claim under Regulation 8.
The agent can rely on their rights to inspect a principal’s books under Regulation 12. Similarly, documents relevant to the quantum of their claim and to the issues surrounding the termination of the agreement (if any), will be documents that are subject to standard disclosure during litigation at Court. This means that the agent has the right to inspect the original documents and to obtain copies.
In some cases a Court may order pre-action disclosure of documents against a principal, forcing them to provide copies of documents even before formal proceedings commence. Seek legal advice on this if you believe that you need such documents before proceeding with a legal claim.
What payments are due to be paid by the principal to the agent when the principal terminates the commercial agency?
Agents have a number of rights to payments from the principal under the Commercial Agents (Council Directive) Regulations 1993 (the “Regulations”), and under their agency contracts, when their contracts are terminated by the principal. (For information on what happens if an agent wishes to retire or dies during the agency please contact us). Not all of these will apply in every case – it would depend on whether the principal is up to date with payments, the terms of any written agreement and the reason(s) why the agency was terminated:
- Normal commissions due on sales transacted during the agency (under Regulation 7);
- “Pipeline commissions” under Regulation 8;
- Payments in lieu of notice, either under Regulation 15 or under the written contract if that is more generous than the terms of Regulation 15.;
- Compensation under Regulation 17 (or an indemnity if the written contract provides for that). (Usually compensation or indemnity will be the most significant claim and often discussions of the other claims will be subsumed within that, but it is clear, particularly if a dispute reaches Court, that these legal rights are distinct.)
Normal Commissions Under Regulation 7 – in theory this should be the simplest claim to make, because it arises from the agent’s claim to commissions on the sales that they transacted during the agency. In practice, it often is not as simple as that and independent legal advice should be sought early on. Disputes often arise, for example, about:
- Whether the principal is entitled to make an account a house account or not, and here the terms of any written contract will be central;
- Whether the agent has exclusive rights to a territory such that commissions are paid on any orders from customers within that territory, including orders that come in direct to the principal without any involvement by the agent, or not;
- Whether or not the principal is entitled to apply different commission rates for different products or to reduce percentage commissions for sales over a certain level;
- Whether the transaction was actually completed and, if not, was that the fault of the customer or the principal (which includes disputes concerning Regulations 10 and 11).
Pipeline Commissions Under Regulation 8 – Regulation 8 provides that the agent is entitled to commissions on commercial transactions concluded after the agency has terminated if:
- The transaction is mainly attributable to his efforts during the period covered by the Agency Contract and if the transaction was entered into within a reasonable period after that contract terminated; or
- In accordance with the conditions mentioned in Regulation 7, the order of the third party reached the principal or the commercial agent before the agency contract terminated.
Disputes over Regulation 8 payments are often significant. However, it is possible for the parties to eliminate many potential areas of dispute at the outset by agreeing what the “reasonable period” will be for the purposes of Regulation 8. This will make it completely clear for how long the agent’s rights to commissions will persist after the contract is terminated.
However, in the absence of such agreement, and if the matter cannot be agreed by the parties, a Court will have to assess what that “reasonable period” should be. There are no hard and fast rules in this area, save to say that what might be reasonable in one sector might be completely different to that suitable for another sector. (For example, a completely different approach might apply in the fashion sector where there might be two or four selling “seasons” each year compared with the markets for specialist aircraft machine parts or energy sector components or other highly specialised areas where orders tend to be infrequent but, when concluded, of high value).
Disputes also arise over issues such as:
- Was the sale attributable to the work of the former agent or the new agent (or employed sales person) who took over from them?
- Does a breach of contract by the agent affect their Regulation 8 pipeline claim? (and did the alleged breach of contract proceed they agent’s work which entitled them to pipeline claims?)
- Does the principal have a valid counterclaim against the agent, relating to the agent’s behaviour or breach of contract, which offsets the pipeline claim?
Payments in Lieu of Notice Under Regulation 15 – the Regulations provide for statutory minimum periods of notice which must be given to the agent, unless the agent is in fundamental breach of their obligations (Regulation 16) and if such notice is not given then the agent will be entitled to claim average commissions earned equivalent to the notice period they should have received. The parties to an agency agreement can agree notice provisions more generous than those in Regulation 15, but not less:
- One month in the first year of a sales agency agreement.
- Two months in the second year.
- Three months in the third and subsequent years.
Note that unless agreed otherwise by the parties in the written contract the notice must coincide with the end of a calendar month.
Compensation or Indemnity Under Regulation 17 – compensation is the fallback position in UK law and the agent shall be entitled to compensation unless there is a written contract which specifically provides that agent shall be entitled to an indemnity instead.
Compensation, or indemnity, is usually the most valuable right, in monetary terms that the agent is entitled to pursue if the principal terminates their agency agreement.
In broad terms, barring a few rare and specific cases, an indemnity provision will commonly result in a lower net payment by the principal to the agent after termination of the contract by the principal. This is because indemnity payments are capped at one year’s earnings, whereas quantification of compensation is the UK is now based on assessing the open market value of the agency that has been terminated.
Written agency contracts can occasionally provide further guidance to the parties concerning how the indemnity payment should be calculated.
Cases concerning indemnity payments still arise, and Blake Morgan has advised on many such disputes, but they have tended to settle earlier, so indemnity claims reach Court less often than compensation claims, presumably because of the smaller scope for dispute. This greater certainty, and the potential for saving legal costs, is a major factor in favour of indemnity clauses, particularly for principals, but also for agents who would rather the “bird in the hand” of an indemnity rather than the “two in the bush” of compensation.
Fundamental Breach – in some circumstances, where the agent has acted in a way which fundamentally breaches the agency agreement, the contract may be terminated by the principal and liability under Regulation 17 for compensation or indemnity can be avoided.
How are compensation payments calculated?
In the UK, if a sales agency agreement (whether written or oral) does not have an indemnity provision then the agent will have the right to be compensated under Regulation 17 when the principal terminates the agency, except in cases where the principal can prove that the agent is in fundamental breach of contract.
In the UK, the House of Lords decided that compensation should be assessed by determining what was the open market value of the agency at the time of termination. This means that if the parties cannot agree a valuation then the Court will usually need the assistance of expert evidence to assess what amount a third party purchaser might pay for the privilege of stepping into the agent’s shoes and taking over its agency business. Most of the experts who practice in this field are accountants skilled in valuation of businesses.
This was the outcome of the leading case on assessment of compensation rights under Regulation 17 – in Lonsdale t/a Lonsdale Agency v Howard & Hallam Limited  UKHL 32,in which Blake Morgan acted for the Claimant.
The House of Lord’s approach, which confirmed and developed those taken by the Court of Appeal and the Oxford County Court, overturned the previous approach of the UK Courts since the Regulations came into effect in 1994. Previously, the Courts in the UK had attempted to follow the practice in France, and had tended to award compensation against a “benchmark” of two years net earnings.
By contrast, the House of Lords decided that that approach was unfounded, and preferred an approach based on the agent proving the value of the income stream that they had lost.
Valuation and negotiation of compensation is a specialist area, and Blake Morgan has brought many cases to successful conclusions over the years. The following practical points are worth noting:
- Both principals and agents should seek early legal advice on their circumstances.
- For both parties, it may be advantageous to get an initial expert’s view for the purposes of a negotiation or mediation, reserving the right to instruct the same expert to do a full written report later for use in litigation, if the matter cannot be settled at an early stage. Blake Morgan deals with a number of experts specialising in this field, with experience of valuing agency businesses.
- Any agency case that might go to a full trial is likely to be very expensive to litigate, particularly because of the costs of disclosure of documents, preparation of witness statements and instructing experts. Blake Morgan’s team is experienced at negotiating various types of agency claims, and many of our cases settle at mediation (which is a confidential, without prejudice, process chaired by an independent third party) which frequently produces results which are far preferable to the costs and uncertainty of contested litigation.
- If you are an agent making such a claim, then it is important to consider the options for funding of your case going forward, and whether you need to take out ATE (after the event) insurance – call us to discuss the options available.
An example of a compensation assessment
The case of Invicta UK v International Brands 2013 EWHC 1564 QB is a useful and interesting example of a Court dealing with a ‘post-Lonsdale’ assessment of compensation. In this case the Judge’s decision was broadly favourable to the contentions of the claimant agent, and the contentions of the Principal were given much less weight. The Court’s key findings in assessing compensation were:
- the expert valuation accountants had rightly approached the calculation by looking at a multiplicand based on the annual profits of the agency business;
- the Judge ordered the Principal to pay compensation at 4.5 times that multiplicand – i.e. that was the amount that the Judge found that a notional third party purchaser would have to pay for the privilege of purchasing such an agency and stepping into this agent’s shoes. The Judge rejected the defendant Principal’s argument that the agent should only be entitled to a multiplicand of 2 (i.e. equivalent to 2-years profits);
- the Judge only made a minimal deduction for the costs/expenses of the agency business. The Judge found that in this case the agent carried on so many complementary agencies that it was wrong to deduct any substantial sum for agency expenses because the ‘cost saving’ benefit of losing the agency would be minimal in these circumstances.
It is important to understand, however, how the Invicta decision turned on its own facts and it may not be applied in every case. Firstly, this was what lawyers call a ‘first instance’ decision of the Queen’s Bench Division of the High Court – so it can be cited as a ‘persuasive’ authority in other cases but another Court is not bound to follow the ruling. Secondly, this was obviously a very successful agency in which the agent had gained listings with wholesalers and retailers for the principal’s brands of wine, and sales of the wines had then grown substantially. This level of success encouraged the Judge to find that there was a significant ongoing value to the agency. Thirdly, the agent had numerous agencies for other complementary products for different principals so the idea of deducting expenses to get to a notional fair ‘net’ result was not so applicable.
On this latter point, it should be noted that the question of how a Court should deal with an agent’s expenses is a thorny issue which is almost invariably central to disputes over compensation or indemnity. On the one hand, agents frequently want to argue that they have incurred little or no cost savings as a result of losing the agency, or there are often arguments about whether costs were fairly attributable to one agency or the other. Conversely Principals often want to emphasise that an agent only earned commissions after first spending on certain costs (e.g. the costs of travel/mileage, publicity, office costs, staff, stationary, costs of a showroom or attending trade shows, hotel costs etc) so those expenses should be deducted from any compensation or indemnity award to avoid giving the agent a ‘windfall’. Each case will turn on its own facts, depending on the nature of the agency, the number of agencies the agent has, and the nature of the expenses incurred, so taking expert legal advice is essential. A case where an agent has only one or two agencies is likely to be dealt with in a very different way to one where the agent is serving half a dozen or more Principals.
My contract contains an indemnity provision – how is that calculated?
In the UK the default position where the principal terminates the agency contract without seeking to rely on any breach of contract by the agent is that the agent will be entitled to compensation under Regulation 17. The written agency contract must specify the choice of indemnity under Regulation 17 for this option to apply.
Indemnity is payable by the principal to the agent where the principal terminates the agency without any legal entitlement to do so, i.e. there are no circumstances of fundamental breach, or where a fixed term agency has expired through the passing of time. (Note that there are some circumstances when indemnity will still be payable even though the agent has terminated the agency themselves).
Pre-conditions for payment of indemnity
In order for an indemnity payment to be due the following conditions under Regulation 17 must be met:
- The agent has brought the principal new customers; or the agent has significantly increased the volume of business that the principal does with existing customers; and
- The principal continues to derive substantial benefits from such business; and
- The payment of the indemnity is equitable having regard to all the circumstances, including the commission lost by the commercial agent on the business transacted with such customers.
If these criteria are not met then the agent will not be entitled to an indemnity payment. As a result, disputes over application of these pre-conditions are not uncommon. For example, in some cases, principals have argued that most of the agents’ trade was with “one-off” customers and that they have retained little benefit, in which case looking at patterns of trade over a certain period may be important. Similarly, during the economic downturn, it has become common for principals to emphasise that looking at historic trade can be unfair if orders have dropped off considerably and if some customers have gone out of business, so there is again an argument over the benefit retained by the principal. We suggest that there is a critical difference between whether a customer has gone out of business (and is not replaced by another customer placing orders in that area) and one that has reduced orders, hopefully temporarily, because of reduced demand during an economic downturn.
How indemnity is calculated
For guidance in this area, lawyers look to the practice in Germany, from where the indemnity model derives, and at the 1996 EU Commission Report on the application of Article 17 of Council Directive E6/653 (“the Commission Report”). There has only been one reported case on calculation of indemnity in the UK – Moore v Piretta PTA Limited  1 All England Reports 174. Though the Moore case is a useful reference point, it is open to question how closely it will be followed in future cases. This is particularly because, although the Judge decided that the practice of German law should be followed, there were some areas where the Court did not apply German law in that case.
The Commission Report sets out the three-stage process for calculating indemnity:
- Stage 1 – firstly, calculate the number of new customers and the increased volume of business with old customers. From this calculate the gross commissions for the last twelve months of the agency (and a fixed retainer can be included if it is considered a remuneration for new customers, though ideally the written contract will specify how the retainer should be dealt with).
Consider the market situation at the time of termination and estimate how long the principal will benefit from these new customers or the increased business. The Commission Report says, “the usual period is two – three years but it can be as much as five years”.
Next, consider a rate for migration of customers, which should be calculated as a percentage of the commissions on an annual basis.
Reduce the value to take into account accelerated receipt by the agent – we suggest that at present, given the circumstances of historically very low interest rates, any reduction for accelerated receipt should probably be minimal.
- Stage 2 – at this stage a number of factors are taken into account to make an adjustment for equity. These factors are wide-ranging and include the following:
– Is the agent retained by other principals?
– Are there any faults/breaches by the agent that need to be taken into account?
– The level of remuneration of the agent, including the question of whether the agent has themselves incurred costs regarding losing sub-agents (including any payments arguably due to those sub-agents)
– Any decrease in the turnover of the principal
– The extent of the advantage received by the principal
– Any pension contributions made by the principal
– If there is a restraint of trade clause restricting what agencies the agent can take on after that agency has terminated then the principal will probably pay a higher indemnity
- Stage 3 – finally, the amount resulting from stages 1 & 2 is compared with the cap under Regulation 17, which is a figure equivalent to the remuneration for one year calculated from the agent’s average annual remuneration over the preceding five years, or shorter if the agency was shorter. This one year cap is therefore a final checking exercise.
Obviously, the first two stages above involve a number of fertile areas of dispute between principal and agent, which underlines the importance of both parties obtaining legal advice from firms with specialist expertise in this area before negotiating any settlements.
Are expenses deducted when calculating an indemnity payment?
At present, under English law, if the Moore v Piretta case is followed, then expenses are deducted. It is also fair to say that lawyers in the UK negotiating such settlements have generally been affected by UK judicial reluctance towards giving an agent “a windfall”, which stems from the fact that the Regulations introduced new rights previously unknown in English law. That cautious common law approach tends to favour a “net” approach to an indemnity calculation.
However, this approach to expenses is one of the ways in which the Moore v Piretta case failed to follow German law, which, while it applies a staged process as explained above, it does not deduct expenses, though there is arguably still room to get some allowance for them within the “equity” test at stage 2.
At present therefore, principals should be aware that it is not guaranteed that the Court will always take a “net” approach and deduct the agent’s expenses. Similarly, in some cases if the amounts are significant enough, the agent may find it worth their while to challenge that point, given the present uncertainty over the position.
Parallel damages claims
Another point, apparently often overlooked in practice, is that Regulation 17 claims for indemnity do not prevent the agent from seeking damages as well from the principal. In some cases this could be a significant claim. Imagine, for example, if the original contract between the principal and the agent had provided for say a five-year term and the principal had terminated that contract after say two years, perhaps after the agent had incurred considerable start-up costs. In such circumstances, even before the Regulations became law in 1994, the common law of England and Wales would have contemplated an action for damages by the agent against the principal for breach of contract, and, in the example given above, it is possible to see that the indemnity claim would not address the scale of the agent’s actual losses.
However, in practice, such cases are rare in the UK, presumably because it needs a breach of contract by the principal, which is something outside the activities contemplated by the agency contract. If the agency has been terminated by giving the correct period of notice and in compliance with the contract, or has expired through the passing of time, then the agent will be entitled to indemnity, but there probably will not be scope for an additional damages claim.
Comparing indemnity with compensation – which is best?
Having said all of the above, some readers who are principals may wonder whether compensation is not simpler and possibly cheaper. However, generally speaking, (and note that sometimes individual circumstances will point the other way), the following advantages of an indemnity provision over compensation (particularly, but not exclusively, assisting principals) are clear:
- In practice, although technically the one year cap is the last stage of the calculation of an indemnity payment, it serves as an early guide for both parties of the band of value within which the indemnity payment will fall. Although occasionally expert evidence will still be needed even on indemnity cases, it isn’t an almost automatic assumption that experts will be needed if cases cannot be settled early, as it is in compensation cases.
- In practice therefore, indemnity cases usually settle quicker and with less outlay on legal costs for both parties than compensation cases
- The one-year cap also operates as a limit on awards. Therefore, even if the agent is hugely successful in growing the principal’s business the indemnity is limited, whereas such a cap does not apply in compensation cases.
- Furthermore, the hurdles that the agent has to overcome in order to claim indemnity (i.e. proving the ongoing benefit to the principal etc) are clearly set out in the Regulations themselves and therefore these types of argument, which may reduce or eliminate the indemnity payment, are easier for the principal to make.
Can I ‘hedge my bets’ between compensation and indemnity in a sales agency contract?
No, this isn’t a good idea.
Given the financial implications of getting the decision wrong over whether an agency contract should contain provisions for either compensation or indemnity, it is perhaps tempting to a Principal to consider this option as a way of trying to minimise their financial liabilities to the agent if the contract has to be terminated.
This is exactly what the Principal attempted in the case of Charles Shearman v Hunter Boot Ltd  EWHC 47 (QB). The agency contract, drafted by the Principal, provided that if the Principal terminated the agency then the agent would be paid whichever was the lowest in value of an indemnity or compensation payment. (The point was an important one financially, worth approximately £1.2m, since the compensation claimed by the agent was alleged to be around £1,454,400 whereas an indemnity claim would only be worth around £204,000.)
This case rested on interpretation of Regulation 19 which deals with prohibitions on derogation from regulations 17 and 18 and which states that: “The parties may not derogate from Regulations 17 and 18 to the detriment of the commercial agent before the agency contract expires.”
The Judge ruled that the entire compensation/indemnity clause in this contract fell away because the wording was not consistent with the Regulations – providing that the agent would have ‘the worst of both worlds’ was contrary to Regulation 19. This effectively put the claimant agent in a much better position, since, once the compensation/indemnity clause was ruled out, the default position in law is that compensation will apply. The case settled shortly after the Court gave its judgement on this key issue.
This underlines how it is critical to take specialist legal advice, and to consider with your lawyer whether the option of compensation or indemnity is likely to be better for you financially if the contract has to be terminated, before incorporating suitable express provisions in the contract.
Terminating for fundamental breach – avoiding compensation and indemnity
In what circumstances can compensation or indemnity payments be avoided entirely?
Where the agent has fundamentally broken the obligations of the agency contract, or has failed to carry out their duties, the principal will be entitled to terminate the agency contract immediately (Regulation 16) and to thereby avoid payment of compensation or indemnity under Regulation 17 (by relying on Regulation 18).
This is an area fraught with difficulties for principals and agents alike, and the following key tips apply:
- Take early expert legal advice, whether you are a principal considering terminating an agent’s contract or an agent on the end of a termination notice.
- Following and documenting a fair process is essential for the principal, and it is equally essential for the agent to rebut (if they can and with legal advice) any conclusions or assertions by the principal that are unjustified. In some rare cases the behaviour of the agent will be so serious that immediate termination is justified, but in others the principal may need to follow a process akin to a disciplinary procedure under employment law and then terminate for continued failure to comply with reasonable instructions, if the agent continues to fail.
The key issue is whether the act or omission by the agent is so serious that the principal cannot reasonably be expected to continue to contract with them.
Regulation 18 provides that the compensation or indemnity payment shall not be paid to the agent where the principal has terminated the agency contract “because of default attributable to the commercial agent which would justify immediate termination of the agency contract pursuant to Regulation 16”.
Regulation 16 deals with immediate termination of the agency contract because of the failure of one party to carry out all or part of his obligations under that contract or where “exceptional circumstances” arise.
No guidance is given in the Regulations about what behaviour is needed to justify the principal in concluding that the agent has failed to carry out its obligations or what constitutes “exceptional circumstances”. However, in the UK, the idea of justification for termination under Regulations 16 and 18 has generally been equated to the concept of “fundamental breach of contract”, which is a concept with which the UK Courts are very familiar in general contract law.
It is impossible to cover every situation, but the following points should be noted:
- Agents have wide-ranging duties to their principals at common law, as well as the duties to look after the principal’s interests “dutifully and in good faith” under Regulation 3. Regulation 3(2) states that –
(2) In particular, a commercial agent must –
1. make proper efforts to negotiate and, where appropriate, conclude the transactions he is instructed to take care of;
2. communicate to his principal all the necessary information available to him;
3. comply with reasonable instructions given by his principal
- Breaches that go to the heart of the agent’s fulfilment of their core functions, or to the goals that the principal intended from the contract, or the agent’s ethics and honesty are more likely to fall into the category of being “fundamental breaches”.
- The terms of the written agency contract (if any) will often be critical. It is easier for the principal to take an agent to task for a series of minor breaches, and to take action over major ones, if the key responsibilities of the agent are detailed within the written contract.
- Failing to hit sales targets is not necessarily a fundamental breach, (despite what many principals believe) and everything will depend on the circumstances. For example, were sales targets agreed in the written contract at the outset of the agreement or have they been imposed by the principal later? What external market forces apply? Simply maintaining sales during a economic downturn may involve a massive effort, and hitting targets that were set before an economic downturn hit may be practically impossible. How does the agent compare with other agents with comparable products and territories? If in doubt, the principal may well be advised to follow a disciplinary/improvement process designed to either improve the agent’s performance or as a prelude to termination for continued failure, if the agent fails to remedy their performance.
- Another question that arises often is whether an agent taking on another agency constitutes a fundamental breach or not. Context is everything, and the terms of the written contract will be crucial – e.g. does the agency contract provide that the agent must seek permission from the principal for taking on new agencies or not? If the principal has given consent to the agent taking on another agency, were all of the circumstances disclosed at that time?The case of Rossetti v Diamond Sofa Company Limited  EWCA Civ 1021 had to go all the way to the Court of Appeal for the Court to decide that it was a fundamental breach for the agent to take on an agency with a direct competitor of the principal (and that therefore the agent was not entitled to compensation because of Regulation 18). When the case first went to the High Court that Court held this was not a fundamental breach as the principal had known about the competing agency but taken no action. But when the case reached the Court of Appeal that Court noted that the principal had not understood that the agent would be selling directly competing goods. It is important to proceed cautiously after taking legal advice in this difficult area, and be mindful how far the perspectives of a principal and that of an agent often vary widely.
- Breaches of contract which are outside the core duties envisaged by the contract or which don’t go to the ethics or honesty of the agent may not be sufficient to justify immediate termination, as they are not serious enough to constitute ‘fundamental breach’. The recent case of Crocs Europe BV v Anderson (t/a Spectrum Agencies (a partnership)  EWCA Civ 1400, in which Blake Morgan successfully acted for the agent claimants, is a key case in point. In that case the Court of Appeal ruled that Regulation 3 did not create a situation whereby any breach of the agency contract, and in particular the duties of good faith to the principal, could automatically be relied on as ‘repudiatory breach’ (i.e. sufficient to justify immediate termination thus avoiding all liability for compensation under Regulation 17). An employee of the agents had created a spoof Star Wars “crawl” (i.e. the credits at the beginning of each Star Wars film that scroll up the screen) making fun of the unreliability of the Principal in satisfying product orders. The Court of Appeal, and the High Court, held that this conduct did not denigrate the Principal’s products, was obviously intended to be humorous, had a very limited circulation to people who would see the joke and that the “crawl” merely repeated issues which were well known in the industry. Hence the agent’s conduct was not sufficiently serious to justify immediate termination. As a result, the Principal was liable to pay compensation to the agent under Regulation 17.
The Crocs case underlines some key practical issues:
- The decision about whether an agent’s conduct is or is not ‘fundamental’ enough to justify immediate termination will be made by an independent Court which may well see things in an objective way quite different to how it appears to the Principal in the heat of a commercial relationship.
- The consequences of terminating a commercial agency agreement without sufficient cause could be massive – in terms of triggering liability under Regulation 17 and liability for the other side’s legal costs.
How are “pipeline” payments under Regulation 8 calculated?
Regulation 8 payments are often referred to as ‘pipeline’ commissions, and this refers to those orders that were in contemplation at the time that the agency ended, or which were part of the reasonable pattern of regular orders resulting from the agent’s work.
If possible, it pays to achieve as much clarity about how Regulation 8 pipeline payments will be calculated between the parties at the outset when the written contract is negotiated. In practice, this issue is often overlooked.
In practice, when negotiating the sums due by the principal to the agent at the conclusion of an agency contract, negotiations often reach a state where the gross sum payable by the principal to the agent is the issue, and the parties do not necessarily distinguish between which part equates to the Regulation 17 claim for indemnity or compensation and which part relates to the Regulation 8 pipeline claim. However, it is important to remember that these are distinct claims (as established in the case of Tigana v Decoro  EWHL 23).
There are a number of potential areas of dispute over calculating Regulation 8 pipeline payments.
Regulation 8 states:
“Entitlement to commission on transactions concluded after Agency Contract has terminated’
8. ‘Subject to Regulation 9 below, a commercial agent shall be entitled to commission on commercial transactions concluded after the agency contract has terminated if –
- The transaction is mainly attributable to his efforts during the period covered by the agency contract and if the transaction was entered into within a reasonable period after that contract terminated; or
- In accordance with the conditions mentioned in Regulation 7 above, the order of third party reached the principal or the commercial agent before the agency contract terminated.”
Condition [b] is straightforward. If the agent landed that order then they are entitled to the commissions on it, even though the transaction has not been executed (i.e. the goods have not yet been delivered and the customer has not yet paid for them) until after the agency ended.
Condition [a] is more problematic and there are two areas of dispute:
- Whether the transaction is mainly attributable to the agent’s efforts during the period covered by the agency; and
- What the ‘reasonable period’ should be.
Was the transaction attributable to the agent’s efforts during the agency?
Disputes over this element of Regulation 8(a) arise relatively frequently. On the one hand, some principals seem to believe that even where the agent has won a valued customer and fostered and grown that business from nothing over a number of years that as soon as they terminate the agency contract, and perhaps send their employed sales people to visit that customer in the weeks after the agency has ended, that any orders that employee takes must be ‘attributable’ to the sales person and not the previous agent. Similarly, there are many agents who disparage employed sales people and believe that all sales for a long period should be attributable to their efforts. Again, if the parties had reached agreement over what the ‘reasonable period’ should be in the written agreement at the outset of the agency agreement then this type of dispute might well have been avoided.
What should the ‘reasonable period’ be?
‘Reasonable period’ is not, and in practice could never be, defined in the Regulations.
Again, if the parties can reach agreement over what the ‘reasonable period’ should be then this may avoid costly disputes. However, if the parties cannot agree this, and if no contractual provision can be prayed in aid, then it will be left to a Court to decide what the reasonable period should be in each case.
Cases which have come to Court to date suggest that the ‘reasonable period’ will vary widely depending on the goods in question and the nature of the sales in that particular market. So, for example, in the FMCG sector ordering of goods may be frequent. In the fashion sector ordering tends to follow a pattern of two (or occasionally four) ‘seasons’ each year, (e.g. spring/summer and autumn/winter for clothing or shoe lines). Conversely, in some specialist fields, perhaps including machine parts for aircraft and defence products for example, the pattern of orders may be much less frequent, and orders may take many months or even years to land through complex procurement processes, but, when placed, such transactions are of high value. The Courts therefore need to assess the reasonable period with reference to the pattern of orders prevailing in the industry in question.
There is a legal question over whether and to what extent the parties to an agency contract can derogate from Regulations 7 – 9 which deal with the commission due during an agency contract and after an agency contract has terminated. (To derogate means that the parties agree that the Regulations do not apply or that they should be varied).
We may have to await litigation in this area, but at the moment we suggest the following practical tips:
- For principals, one idea is not to try to exclude Regulation 8 entirely but instead to try to agree what the ‘reasonable period’ should be within the written agreement at the outset. Certainty on this issue works very much in the principal’s favour. Arguably, in many cases, it is preferable for the agent compared with the costs and uncertainties of litigation.
- A challenge to a Regulation 8 clause in an agency contract that defined the ‘reasonable period’ is conceivable, but in practice a UK Court may take some persuading and some quite special circumstances to go against the provisions that the parties voluntarily agreed at the outset.
I am buying or selling a company where existing commercial agents are an issue – what should I look out for?
Buying or selling a business is a complex area and it is advisable to seek legal advice early, whether you are a principal wishing to sell the business, the purchaser or perhaps an agent caught in the middle.
We are obviously acutely aware that when buying and selling a business a whole host of considerations come into play affecting how the eventual deal is structured. The position of commercial agents is just one such consideration, although occasionally it can be very significant financially.
Among the key considerations are the following, and let us assume that the business being bought or sold has commercial agents who work on a self-employed commission only basis:
- Analyse carefully how central are these agents to the sales of the company’s products and, ideally, is the plan to retain them or to terminate their contracts? This is an exercise which needs careful analysis and due diligence. Some businesses will feel that the agents’ expertise and customer relationships are central to growing sales. Others will take the view that the agents have done their job in the past by establishing the market for the goods and that now, in terms of costs, the business would like to move to using employed salespeople (i.e. presumably on a base salary plus commission top-up basis, who are employees and hence not covered by the Regulations). Such a solution would save the costs of ongoing commissions on established products to existing customers.
- If the plan is to retain the agents, then the due diligence process will want to look at the agents’ contracts. What are the terms and is there scope for re-negotiating any key terms, which will depend on whether the contract is ‘novated’ to the purchaser and whether the buyer is purchasing the shares in the company or only the assets? Even if everyone is happy to retain the agents, then it may work in everybody’s favour to review contracts and put provisions in place which reflect the new management’s objectives and working methods for the business.
- However, if the decision is that it would be better, if possible, to terminate the agents’ contracts, then both the seller of the business and the buyer will need to proceed carefully, with legal advice.
- A key consideration will be whether the purchase of the business is a share sale or an asset sale. A share sale is where the purchaser buys the entire company – i.e. buying the shares and thereby acquiring the interest in everything the business has including perhaps land (factory/office/warehouse space), equipment/machinery, contracts with existing employees, goods, intellectual property, goodwill and the benefit and burden of existing contracts, which will include those with any commercial agents who sell the company’s goods on commission.
- During a share sale transaction, unless the seller or the buyer take action to terminate the agents’ contracts, the contracts of any commercial agents will continue exactly as before, despite the sale of the business. The agents will end up dealing with new owners of the business, but otherwise everything stays as before.
- By contrast, in an asset sale the purchaser of the business only buys those assets of the business that they are interested in acquiring. The company from which they buy assets remains in existence even though in some cases it is left as a ‘shell’ with practically no assets and no business. In this scenario, though employees may well (depending on the terms of the transfer and the nature and extent of the assets) transfer across to the new company under the TUPE legislation (i.e. Transfer of Undertakings Protection of Employees Act), the contract of a commercial agent will not transfer to the purchaser unless there is an agreed novation of the contract to the new purchaser and the agent consents to that. Of course, there may well be an asset sale where the agent transfers to working for the purchaser, but enters into a new contract, often on very different terms, with the new owner who has purchased the assets of the old business.
- In this area it is difficult to generalise and it is important to seek specialist legal advice on your circumstances at an early stage. It will be important to consider if, when and how to terminate any agency contracts (either before, at the time of or after a sale of the business, which will also be affected by whether this is a share or asset purchase).
- The seller and buyer of a business will have opposite objectives, though both presumably wish to limit and avoid as far as possible any liabilities to commercial agents. On the one hand, the seller might prefer that the buyer takes on the liability for agents going forwards. On the other hand, the purchaser may insist that they are only interested in the business if the contracts of any commercial agents can be terminated and they can avoid liability for any claims under the Regulations, and that they have no obligation to take on the agents going forwards.
- In the middle, the agent will want to ensure that, while the former owner of the business negotiates their own exit, their interests are protected as far as possible, though it is fair to say that agents usually lack the leverage that the parties to the negotiations have.
My principal is going bust – what should I do?
If a Principal goes into insolvent liquidation while owing commission payments to its commercial agents, then those agents will rank alongside all other unsecured creditors. That is, the agents’ claims in the insolvency (which they will have to pursue with the insolvency practitioner or possibly the Official Receiver responsible) will rank alongside other creditors such as gas and electric companies, unpaid suppliers etc. This differs from employees of the company who have priority status.
In some cases, options may be limited, but the following practical tips are worth noting if you fear that your own Principal is in financial difficulties:
- Is the Principal paying you within agreed payment terms or lagging behind? If you have placed the order, goods have been delivered and paid for by the customer, then it is difficult to justify late payment. You may need to take legal advice and to consider legal action, possibly including a statutory demand, and possibly a subsequent application for a winding-up order, to compel payment. Obviously you may well need to balance this with the wish to maintain your relationship with the Principal, but equally you may need to take swift action to ensure that you are not unduly prejudiced if the company folds.
- Do new payment terms need to be agreed? In some rare cases, the agent receives and processes payments from customers and passes on a net sum to the Principal, and in such cases the agent may have greater leverage to exercise retentions (depending on the circumstances and on the terms of their contract). But it is best to seek legal advice before purporting to exercise a retention. Failing that, if the company is in financial difficulties, can you agree a regular payment schedule to ensure that you are not left disproportionately out of pocket at the end?
- What expenses are you incurring and will they be covered? For example, are you spending out on mileage, visiting trade shows, etc. at a time when there is doubt over the future of your Principal? If so, as far as possible we would usually suggest negotiating with the Principal to try to see if a retainer to cover expenses can be agreed, or at least to seek the Principal’s personal reassurances regarding reimbursement, before you commit to such expenditure.
- In some cases the agent will have sub-agents working for them and the difficulties with the Principal will impact down the line – seek legal advice at an early stage.
- Is there a pending asset sale or even a ‘pre pack’ administration situation (where the former company goes into administration and a new company is started using the assets of the old firm, often by the same owners or management). Seek independent legal advice on your position at an early stage – it is likely that your rights will be seriously affected.
What issues arise when an agent wants to retire? And what happens if an agent becomes seriously ill or dies during the agency?
Retirement raises a number of issues for the agent and the principal alike.
In some cases (rare in the UK, but common on the continent) the agent will retire and have a replacement agent in the wings whom the principal is happy to consent to, and then the agent reaches agreement with that new agent to assign the agency to them for an agreed value. In such circumstances no compensation or indemnity payments will be payable as the case falls within the exception at Regulation 18(c).
It also goes without saying that (subject to notice provisions, any contractual obligations and to the agent’s financial circumstances) the agent can give up an agency at any point (by complying with any notice provisions in the contract). Provided that notice of termination is not linked to the age or infirmity of the agent, then no compensation or indemnity will be payable under Regulation 17.
The problem usually arises when it is the agent’s wish to retire, but the principal does not accept that they are entitled to do so on the grounds of age, infirmity or illness and as a result the principal refuses to pay compensation or indemnity under Regulation 17.
Regulation 17 sets out the agent’s rights to compensation or to indemnity (if the written contract so provides) and Regulation 18 provides as follows:
Grounds for excluding payment of indemnity or compensation under Regulation 17
18. The compensation referred to in Regulation 17 above shall not be payable to the Commercial Agent where –
- the Principal has terminated the agency contract because of default attributable to the Commercial Agent which would justify immediate termination of the agency contract pursuant to Regulation 16 above; or
- the Commercial Agent has himself terminated the agency contract, unless such termination is justified –
1. by circumstances attributable to the Principal, or
2. on grounds of the age, infirmity or illness of the Commercial Agent in consequence of which he cannot reasonably be required to continue his activities; or
- the Commercial Agent with the agreement of his Principal assigns his rights and duties under the agency contract to another person.”
In such cases both principal and agent should seek skilled independent legal advice in this area.
We will consider two common situations:
1. The agent is approaching the former statutory retirement age.
2. The agent is not near a usual retirement age but is ill or materially less able bodied than before.
- This situation was considered in the case of Abbott v Condici Limited  2 Lloyds Rep 450. In this case, the Claimant agent was found by the Court to be entitled to retire at the age of 65, which was the then statutory retirement age, and the Court decided that the agent fell within the terms of Regulation 18(b)(ii).In that case, therefore, the agent was entitled to retire at 65 because that was a usual retirement age, and the agent was also entitled to receive compensation under Regulation 17.The question remains whether that decision means that an agent can safely always ask to retire at 65. In short, the answer is probably not. All the surrounding circumstances need to be taken into account. This uncertainty arises because:- This was a County Court decision so technically it is not binding on other Courts. That said, this was a decision by His Honour Judge Mackie QC, who now heads the London Mercantile Court, so it carries considerable weight.- Crucially, that decision was made in 2004 when it was still correct to refer to a “statutory retirement age”. Such a concept no longer exists as a result of recent age legislation.
We therefore suggest that in future cases a Court is likely to look at all the surrounding circumstances. It is certainly hard to see that an agent would be entitled to retire at age less than 65, unless the agent was suffering ill health or infirmity. It is even possible that in future the Court may refer to other factors, such as the age at which a person is entitled to a state pension.
- We are not aware of any reported cases in this area. It would be nice to think that this is because such cases are being negotiated on a sympathetic basis, but it is not possible to draw such conclusions and some cases we have encountered suggest otherwise.Let us assume that an agent has contracted an illness or a disability which means they are completely unable to carry on with their duties. In such situations the agent should notify the principal as soon as possible and, if necessary, the agent should be prepared to both provide copies of his own medical opinion relating his condition and/or to co-operate with any independent assessment carried out by an expert on behalf of the principal.If the agent asserts that their medical condition means that they cannot continue, but the principal asserts that their condition is not so serious, then the matter would have to be referred to the Court, but such a case would be likely to turn almost solely upon the medical evidence. Provided the agent can prove that he cannot reasonably be required to continue his activities then they will be entitled to compensation or indemnity.Of course, it may well be the case that the agent’s deteriorating health affects certain parts of their duties (e.g. the amount that they can travel) but they can still continue to carry out some tasks. This may be an area for careful negotiation between the agent and the principal, if necessary with legal advice and medical opinion if needed. If the agent makes a request to scale down their duties in some way, then the principal will need to handle such requests carefully to avoid falling foul of age/disability discrimination or other laws. If this situation arises, seek independent legal advice at an early stage.
What if the agent dies during the commercial agency?
Regulation 17(8) makes it clear that if the agent dies during the agency contract then the agent’s estate (i.e. their executors) will be entitled to make a claim against the principal for compensation (or indemnity if the contract provides for that).
My sales agent is spending time selling competing goods – what can be done?
This is a situation that arises fairly often, chiefly because a large number of agents act for a number of principals at the same time. The initial key issues to review are:
- Is there a written agency contract?
- If so, does the contract contain a non-competition clause, or a clause obliging the agent to seek permission from the principal before taking on any new agency?
- If not, how long has the principal known about the agent’s work selling competing goods, and has the principal registered objections?
- Do the other goods that the agent is selling compete directly or only marginally?
- Alternatively, is the problem more that the agent is spending too much time selling other (possibly non-competing) goods?
These questions will be important to consider with your lawyers at an early stage. Although such situations often provoke extreme reactions (by both principals and agents) it is important to act carefully, with careful consideration of the background.
As the above questions indicate, there is no “one size fits all” answer to this problem. In the more extreme cases, where the terms of the agency contract have been specifically ignored by the agent or where the goods directly compete with those of the principal then it is more likely that the principal may be entitled to (at their option) either:
- Demand that the agent gives up the new agency and devotes themselves entirely to the original principal again; or
- Terminate the agency contract citing fundamental breach (in which case this will have an important bearing on whether compensation or indemnity will be payable to the agent under Regulation 17).
On the other hand, if the agency contract does not contain a non-competition provision then the principal will be seeking to enforce the agent’s obligation to act “dutifully and good faith” under Regulation 3, and in accordance with the other general fiduciary responsibilities of an agent at Common Law.
The case of Rossetti Marketing v Diamond Sofa Co Limited 2012 WL2923014 demonstrates how the views of an agent and a principal are often widely polarised in this area. When this case first went before a Judge, at the High Court, the Court ruled that the fact the agent had an agency selling competing goods was not a fundamental breach of contract so the agent was still entitled to compensation when the principal terminated that agency. The Judge at the High Court particularly noted the fact that the principal had known for some time that the agent had this competing agency selling sofas for a competitor brand of the principal.
However, the principal then appealed this decision to the Court of Appeal which overturned the High Court’s decision. The Court of Appeal looked more closely at exactly what the principal knew about the agent’s other agency and when, and came to the opposite conclusion, ruling that the principal had not initially understood that the agent would be selling directly competing goods to its own. Therefore, the principal could not be held to have consented to this competing agency, and therefore the agent’s selling directly competing goods was, in this instance, held to be a fundamental breach of contract.
However, the fact that this case went all the way to the Court of Appeal in order for the principal to get the ruling it sought underlines the difficulties in this area, and the following practical points arise:
- Having a written contract, setting out express non-competition obligations and obliging the agent to obtain the principal’s consent to any new agencies is ideal;
- Even where the agency contract does not contain such an express non-competition provision then taking on an agency selling directly competing goods may be a fundamental breach of contract. However, it is important to obtain independent legal advice before doing anything and it may also be critical to act quickly so that the principal is not held to have waived (i.e. consented to) such a breach of contract.
What recent case law is there about what breaches of contract are serious enough to justify immediate termination of an agency?
For a principal, getting the decision right over whether they are justified in terminating an agency contract often has massive financial consequences.
Get the decision right, and they could avoid liability for compensation or indemnity under Regulation 17. But conversely if a principal terminates when they are not entitled to, then they will be in breach of contract and they will trigger the agent’s rights to make significant claims against the principal under Regulation 17.
Principals should always exercise extreme caution and seek legal advice at an early stage. Similarly, agents who are accused of breaching an agency contract should take care to act in a way that maximises their prospects of preserving their rights under the Regulations.
The difficulties in this area were highlighted in the recent Court of Appeal case, Crocs Europe BV v Craig Lee Anderson & Anor t/a Spectrum Agencies  EWCA Civ 1400. Blake Morgan acted for the Respondents (Spectrum) in successfully defending an appeal by their former principal, Crocs, against an earlier decision that Crocs had not been entitled to terminate an agency contract where disparaging remarks had been made about Crocs online.
Regulation 3 of the Commercial Agents (Council Directive) Regulations 1993 implies into the contract between commercial agent and principal an obligation on the commercial agent to “…look after the interests of his principal and act dutifully and in good faith”. There is a similar duty on agents under the common law.
Spectrum were the UK agents of the highly successful Crocs brand of footwear. Love them or hate them, Crocs shoes were a phenomenon in the UK market and the agency was highly successful. Unsurprisingly, Crocs became unhappy with the amount of commission it had to pay Spectrum and sought to re-negotiate the agency contract. Crocs gave Spectrum an ultimatum to (i) agree contract variations proposed by Crocs (which would have reduced Spectrum’s commission by 50-60%), (ii) sell the agency to Crocs for £700,000 or (iii) Crocs would terminate the agency.
Spectrum declined options (i) and (ii) but were happy to continue to perform the agency under its existing terms. Crocs was reluctant to terminate because it would have faced a significant compensation claim under the Regulations (estimated at £12m – £16m). The contract continued with an awkward stand off for a number of months, until Crocs terminated on the basis that Spectrum had breached their obligations under Regulation 3. Crocs relied on a spoof ‘Star Wars’ crawl (mirroring the text which scrolls up the screen at the beginning of each Star Wars film) created by an employee of Spectrum which poked fun at the difficulties Crocs had had over a number of years in making deliveries to customers in the UK and the emailing of the link to that crawl to several customers of Crocs.
At first instance, the Judge concluded that Spectrum had breached their obligations under Regulation 3 but that the seriousness of that breach fell a long way short of the seriousness required to entitle Crocs Europe to terminate the agency contract. He set out a number of factors which resulted in him reaching that conclusion, including that:
- the crawl was obviously intended to be humorous;
- the circulation of the crawl was very limited and to persons who would see the joke;
- it was very unlikely that a retailer would see the crawl unless they had the specific link;
- the situation at Crocs which was the subject of the crawl’s humour was well known to Crocs’ retailers.
Crocs appealed to the Court of Appeal, arguing on a number of grounds that any breach by Spectrum of its obligations under Regulation 3 should automatically entitle Crocs to terminate the agency contract or, alternatively, that the first instance Judge had made the wrong decision and that the breach of contract was serious enough to entitle Crocs to terminate.
The Court of Appeal dismissed Crocs’ appeal and agreed with the first instance Judge that Spectrum’s breach was not serious enough to entitle Crocs to terminate. The crawl did not disparage Crocs’ products, but referred to its well known inability to meet delivery obligations. The Court of Appeal noted that circulation of the crawl was limited and temporary, and it was removed soon after being posted. The Court also concluded that the crawl was “obviously jokey, though not everyone might see the joke and though [Crocs] was not amused” and that there was no evidence of harm suffered by Crocs.
The case emphasises the difficulty faced by any principal considering terminating an agency contract where the agent has made disparaging comments about the principal or, indeed, in circumstances where the principal considers the agent to be in breach of their obligations. The principal has to determine, objectively, whether such conduct is a breach of the agent’s obligations and whether such a breach goes to the root of the agency contract, in effect destroying the relationship between the parties. The repercussions of getting that decision wrong can be very serious, particularly in cases involving commercial agents where the principal may face significant claims for indemnity or compensation.