A Prejudicial Agreement? A look at the Commercial Agents Regulations

21 January 2015

The Commercial Agents (Council Directives) Regulations 1993 from the Principal?s perspective.

The Commercial Agents (Council Directives) Regulations 1993 were introduced in order to bring the law in the UK regarding the appointment of Agents into line with other EU member states.

The Regulations apply where an Agent is employed by another (The Principal) to carry out work on their behalf, most commonly under an Agency Agreement. The introduction of the regulations has seen a significant increase in the protection afforded to commercial agents, to the extent that in some circumstances they are better protected than employees. Since 1993, there has been great debate about the fact that the regulations seem to be heavily weighted in the Agents favour, particularly with regard to the payment of compensation after the Agreement has terminated. Under the regulations, if an Agency Agreement is terminated the Principal is still liable to pay compensation or indemnify the Agents in respect of any lost profit which would otherwise be due to the Agent had the relationship continued. This remains a contentious issue and the Courts have heard many cases in which the liability to make a payment and the level of compensation due was disputed by the Principal.

A Principal cannot contract out of the regulations. However, it has become commonplace for a clause to be inserted into the Agency Agreement which entitles the Agent to an Indemnity payment only. An Indemnity payment is capped at one year’s average annual remuneration over the last five years (or over the duration of the contract, if shorter). The clause does not remove the Principal’s obligation to financially compensate the Agent, instead it gives some indication to the Principal as to the amount the Agent is entitled to.

Whilst there has been no amendment to the regulations or any legislative reform on this issue; it seems in recent years the Courts have developed a tendency to favour the Principal rather than the Agent when calculating the payment due.

In the landmark case of Lonsdale (t/a Lonsdale Agencies) v Howard & Hallam Ltd[2007] UKHL 32 it was decided that the calculation of compensation should be based on the notional value of that agency on the open market, albeit that the particular circumstances preceding would be taken into account and an expert evaluation would also be required. More recently, in the case ofMichael McQuillan, Lorna McQuillan v Darren McCormick, Wizzeweb Limited, Pandora Jewelry Limited[2010]the Judge departed significantly from the expert’s valuation of the agency and the figure awarded was based on what a potential purchaser would pay given that the agreement was terminable on one year’s notice. The figure awarded was less than half what the experts’ agreed figure.

Whilst the decision in McQuillan is not a binding authority, it will no doubt be a persuasive influence on judges when it comes to calculating compensation. It paves the way for other factors to be considered outside what is set down by the regulations and Lonsdale.

The most recent developments suggest a less onerous position for Principals and show that whilst the obligations remain, payments to Agents may be limited and numerous arguments can be deployed when seeking to avoid the regulatory protections or to negate or minimise pay-outs. A Principal may also rely on the fact that many issues are still riddled with uncertainty; something which can be used to its advantage in settlement negotiations. You should always seek legal advice before seeking to terminate a commercial agents contract.


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