Agency agreements are subject to the Commercial Agents Regulations 1993 (“the regulations”), which implement the EU Commercial Agents Directive (86/653/EC), which govern the commercial relationship between principal and agent. These consider that the agent will typically have the weaker bargaining power, and so create numerous protections for an agent.
The regulations will apply if the following four criteria are satisfied:
- The agent is a “commercial agent”
- The agent is buying or selling goods
- The sale takes place within the territorial scope of the regulations
- None of the exclusions apply.
“Commercial agent” is defined in the regulations as a self-employed intermediary with authority to negotiate the sale or purchase of goods on the principal’s behalf. They will therefore apply to agents who negotiate, or enter into, contracts with customers. They do not apply to the supply of services.
The regulations apply to the purchase or sale of goods in Great Britain, although the EU directive will need to be considered for sales within the EEA, and similar regulations are also in place in Northern Ireland.
Among other exclusions, the regulations do not apply where the agent’s activities are “secondary”. There isn’t a simple definition as to what constitutes a “secondary” activity, but some examples include sales of goods which are not individually negotiated, or transactions which are unlikely to lead to repeat customers.
Remuneration and commission
Usually, an agent will be paid commission on the sales it makes. The regulations set out details including how commission should be calculated and when it should be paid. Some provisions cannot be contracted out by the parties. Any remuneration which varies depending on the level of sales is considered commission and will be caught by the regulations.
The regulations also set out when an agent should be entitled to commission, which covers sales where the agent has previously acquired the customer or if the agent has an exclusive right in a specific territory.
The wording in the agency agreement must be carefully considered to avoid scenarios where the principal is liable to pay commission twice if it engages more than one agent, or where a transaction is concluded after the term of the agency agreement has ended.
Compensation and indemnity
The agent’s right to compensation or indemnity arises if the agreement is terminated by the principal. The only circumstances that give an agent a right to compensation or indemnity are when the agent itself terminates the agreement due to age, illness or due to instances that are attributable to the principal.
An agent is entitled to be “compensated for the damage it suffers as a result of the termination of his relations with his principal”. The amount of compensation paid will depend on the amount that a hypothetical buyer would pay for the agency at the date it is terminated.
The rationale behind this is that the agent should be compensated for the loss of value of the agency, or the loss of income the agent would otherwise have received. There is no cap on the amount of compensation an agent can receive. However, there is a risk of receiving limited compensation if the value of the agency at the time of termination is low.
As compensation is the default, an agent must actively choose indemnity if it wishes to receive this protection post-termination. If the agency agreement does not expressly state which rule will apply upon termination, the agent will automatically be entitled to compensation rather than an indemnity.
There are three conditions for indemnity to be applicable:
- The agent brought in new customers or substantially increased the business from the principal’s existing customers
- The principal has received and will continue to receive considerable benefits as a result of the increased business procured by the agent
- An indemnity would be fair in the circumstances, particularly considering the commission lost by the agent upon termination.
Under an indemnity, an agent is entitled to a maximum of one year’s commission, which is calculated using the agent’s average annual remuneration during the preceding five years, or the contractual period if shorter.
For principals, this cap means that an indemnity can be the more desirable path following termination and so this should be considered when drafting an agency agreement. Establishing the amount payable to an agency upon termination can be a point of tension and, in a worst-case scenario, dispute.
The regulations go into considerable detail regarding the terms of an agency relationship and must be considered when entering into an agency agreement. Many of the terms cannot be overridden by a commercial contract – and the wording needs to carefully reflect the parties’ intentions while remaining within the scope of what is permitted.