What does your agency agreement say about compensation?

by Emma Butcher
of Clarkslegal LLP

Under the Commercial Agents
(Council Directive) Regulations
1993 (the “Regulations”), an agent
is usually entitled to a payment
when his agency agreement is
terminated by the principal (unless
the agreement is being terminated
as a result of the agent’s own
breach). The Regulations provide
for two different payment
regimes: compensation and
indemnity. It is not possible for
the parties to contract out of
these provisions of the
Regulations.

If the agency agreement is silent as to
wh e t h e r t h e a g e n t wi l l r e c e i ve
compensation or an indemnity, Regulation
17(2) provides that he will receive
compensation, which is calculated by
reference to the open market value of the
agency as if it were being sold as a business
to a third party purchaser. Alternatively, the
parties can agree that the agent will receive
an indemnity instead of compensation.
Regulation 17(4) provides that the amount
of the indemnity will be capped at one year’s
commission (averaged over the last five
years of the agency).
As a general rule, principals will favour the
indemnity regime, as a year’s commission
usually works out to be less than the open
market value of the agency. However, there
will occasionally be cases where the
opposite is true.

The recent case of Shearman v Hunter Boot
Ltd considered an unusual clause in which
the principal tried to limit its liability by
providing that on termination the agent
would receive an indemnity, unless
compensation would result in a lower
payment, in which case he would receive
compensation instead.

Mr Shearman was an agent for the famous
wellington boot company and his agency
agreement was terminated. Calculating his
entitlement on the compensation basis, Mr
S h e a rma n wo u l d h a v e r e c e i v e d
approximately £1.45million. On the
indemnity basis, he would have received
only £204,000. He therefore argued that
the termination clause in his agency
agreement was unenforceable and that he
should receive compensation.
There were a number of issues between the
parties, including whether Mr Shearman was
entitled to any payment at all, but the High
Court decided to consider the validity of the
termination clause as a preliminary issue
prior to trial. It found that the termination
clause was not enforceable.
The court considered that it might be
permissible for an agency agreement to
provide for compensation and indemnity to
be payable in different situations e.g.
compensation if the agreement was
terminated on notice, or indemnity if it was
terminated by the death of the agent.
What the court objected to about the clause
in Mr Shearman’s agreement was that it
operated to ensure that Mr Shearman would
receive the least favourable outcome –
whichever amount was cheaper for Hunter.

This, it found, was inconsistent with the
purpose of the Regulations, which is to
protect agents who are generally the weaker
party in the commercial agency relationship.

The clause would therefore be struck out of
the agreement, with the result that if at trial
it was found that Mr Hunter was entitled to a
payment from Hunter, this would be
calculated on the default compensation
basis.
After judgment was handed down, the case
was settled, so it is not known how much Mr
Shearman ultimately ended up recovering
from Hunter. However, the case
nonetheless raises an interesting point
about the parties’ ability to choose between
compensation and indemnity. Principals
should consider reviewing their standard
agreements and amending any which
contain a similar clause to the one in Mr
Shearman’s agreement in light of the
decision.

One Forbury Square, The Forbury,

Reading RG1 3EB
Tel: 0118 958 5321
www.clarkslegal.com Emma Butcher

Disclaimer: This columndoes not contain legal advice and is for general
guidance only. Agentbase, Clarkslegal LLP and the writer accept no liability
in connection with the general guidance given in this column.
Please ensure that you obtain legal advice before acting in reliance upon
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