Indemnity or Compensation – what is an agent entitled to on termination of their agency?

An agent’s rights on termination of a commercial agency are extensive. The position is governed by the Commercial Agents (Council Directive) Regulations 1993 which impose strict obligations upon both a principal and agent. Unless certain regulations are disapplied under the terms of a formal agency agreement, then the repercussions of termination can be very expensive for a principal!

What is the definition of an agent?

Agent on phone discussing IndemnityIn order for an agent to benefit from protection under the Regulations, they must overcome the first hurdle of satisfying the definition of a commercial agent. An agent is a self-employed intermediary who has continuing authority to negotiate the sale or purchase of goods on behalf of another person, that being the principal, or to negotiate and conclude the sale and purchase of goods on behalf of and in the name of the principal. If an agent is able to satisfy this definition, then they are by virtue of their agency entitled to receive either compensation or an indemnity payment in the event of termination.

Indemnity or Compensation?

Compensation is the default payment, this will apply unless the parties have opted for indemnity within the agency agreement itself. From an agent’s perspective it would be more beneficial if the contract was silent on payment in the event of termination. However, from a principal’s perspective and in order to mitigate their losses, it would be best to ensure that a formal agency agreement has been put in place to provide for an indemnity payment in the event of termination.

So how is payment calculated?

compensationIn the event that compensation is payable, the agent is entitled to be compensated for the damage they suffer as a result of the termination of their agency. This will take account of the future income stream which is lost and by reference to the value of their agency at the time of termination. Principals take note, there is no limit to the amount of compensation that a court can award to an agent! In contrast, an indemnity payment is capped under the Regulations to the value of one year’s average annual remuneration over the last five years prior to termination, or a lesser period where appropriate. Opting for an indemnity provides a principal with certainty as to their maximum potential exposure, which is why putting a formal agency agreement in place is vital to limit a principal’s liability.

So, when might a principal be entitled not to pay an agent on termination of their agency?

Regulation 18 provides for certain circumstances in which this may be excluded. This could include where the principal has terminated by virtue of a default on the agent’s behalf which justifies immediate termination, if the agent has themself terminated the agency contract (unless such termination is justified by circumstances attributable to the principal), on grounds of age, illness etc., or in the event that the commercial agent has assigned their rights under the contract.

If you are a commercial agent and require advice with regards to having your commercial agency terminated, then please do not hesitate to contact Christopher Buck in our Commercial Services Department.

Similarly, if you are a principal and require legal assistance with drafting an agency agreement so to ensure you mitigate your exposure in the best way possible, then please do not hesitate to get in touch. 01908 660966 or Christopher.buck@franklins-sols.co.uk.

Disclaimer: The information provided on this blog is for general informational purposes only and is accurate as of the date of publication. It should not be construed as legal advice. Laws and regulations may change, and the content may not reflect the most current legal developments. We recommend consulting with a qualified solicitor for specific legal guidance tailored to your situation.