News > Commercial agents: ending the relationship

Print Page

News

12 June 2009

Commercial agents: ending the relationship

Terminating contracts with commercial agents can prove an unexpectedly expensive exercise, even if done under contract. This is because commercial agents are protected above and beyond their contract terms by the Commercial Agents Directive, explains partner Anne Scheland.

In these times of economic uncertainty, many companies are finding that they are being pressed for cash.  When this happens they undoubtedly look for ways to reduce cash flow and one of the options which they may consider is terminating their contracts with commercial agents.

Why terminate an agency?

There are a number of reasons why you may wish to end the relationship with a commercial agent, including:

• Deciding to undertake the agent’s role in-house, using surplus staff (and therefore avoiding redundancies) and saving on commission payments. Your agents are likely to have compiled a substantial customer base which you can tap into.
• When supplying a number of different countries, you may decide to stop supplying those countries suffering most from the downturn and terminate the relevant agency contracts.
• If you have acquired a struggling business, you may wish to increase margins by ceasing to use the new company’s agents in countries where you already have a presence.
• Reducing the number of countries in which your agents operate, which may induce the agents to terminate their contracts.

How agents are protected by the legislation

A commercial agent is a self-employed intermediary with continuing authority to negotiate the sale or purchase of goods on your behalf or to negotiate and conclude such transactions on your behalf and in your name.

The legislation provides that if you terminate a contract for any reason an agent is entitled to a compensation or indemnity payment, other than where you terminate due to the default of that agent. What is important to note is that this entitlement to compensation applies even if the contract provides that you may terminate by notice.

Furthermore, an agent is entitled to a compensation payment if they terminate due to your actions or inaction.

The UK regulations state that an agent will receive compensation unless the contract specifies entitlement to an indemnity.  The differences between the calculation of compensation and an indemnity are as follows:

Compensation:  This is designed to compensate for damage suffered as a result of a termination in terms of lost commission which he or she would have earned had the agency not been terminated and in terms of being able to recoup the expenses (or set up costs) which he or she had incurred.

How compensation is quantified varies from one member state to another. The French courts tend to award around two years' commission. The English courts have dismissed any such "rule of thumb" and, until recently, based awards on various factors. Their approach has now changed following a recent court case when the House of Lords ruled that the compensation should instead be quantified by asking what a willing buyer able to perform the contract would reasonably have paid, at the date of termination, for the rights the agent had been enjoying.

Indemnity: This is designed to reflect the extent to which the agent brought you new customers, or significantly increased your existing business, from which you will continue to derive substantial benefits and also includes lost commissions.

In contrast to compensation, an indemnity focuses on the degree to which you have gained and continue to benefit post-termination from the agent's work, rather than on what the agent has lost. In all cases, unlike compensation, an indemnity is capped at one year's average annual remuneration over the last five years or over the duration of the contract, if shorter.  Grant of indemnity payments does not prevent the agent from seeking damages. There is no equivalent provision for compensation.

What are your options?

According to Anne Scheland, “It is not all bleak news for companies attempting to terminate agency relationships in the EU. Numerous arguments can be deployed when seeking to avoid the regulatory protections or to negate or minimise payouts. Also, many issues are still riddled with uncertainty; something which you can use to your advantage in settlement negotiations.”

For example, you may be able to show that:

• The "agent" was in fact an employee.
• The authorised role of the agent was not as the regulations require i.e. authority either to negotiate and sell on your behalf or to actively promote or market.
• The contract concerned the supply of your services, not goods, and so is not covered by the GB Regulations. 
• The contract is one of distributorship, not agency.

Furthermore, you may even be able to draw on the “doom and gloom” of the economic downturn to minimise the quantum of any payments. So, if the reason for termination was that there was no longer a demand for the goods in the agent’s territories, then you could argue that:

• Any indemnity payment should be nil or insignificant, since you will not continue to benefit substantially from the agent’s activities or a contrary order would not be equitable.
• Any compensation payment ordered by an English court should be minimal, since the rights enjoyed under the agency contract would have minimal worth.

However, such arguments will not be available if the commercial agent’s sales remained considerable,and the termination was instead designed to allow you to reduce costs.

If you have to make an indemnity payment, you can take some comfort from the fact that the payment will be capped, thereby setting the parameters for any claim or negotiation. This is often seen as an advantage of having expressly stated, in a contract subject to the GB Regulations, that an indemnity, rather than compensation, will be payable on termination as the default position is that compensation is payable.

If you are considering terminating contracts with any of your commercial agents, please speak to the Beswicks commercial team first.  Call us on 01782 205 000 and ask to speak to Simon Woodings, Anne Scheland or Margaret West.

The contents of this article are for the purposes of general awareness only. They do not purport to constitute legal or professional advice. The law may have changed since this article was published. Readers should not act on the basis of the information included and should take appropriate professional advice upon their own particular circumstances.

Back to news list