Potential Impact of Brand Names on Indemnity Payments to Commercial Agents

by Alain Cohen Director, Ashby Cohen Solicitors, London

On the termination of a commercial agency agreement, one of the principal entitlements of the agent is indemnity. The value of this indemnity should be commensurate with the value of the agreement itself: however, what impact should the brand name of the products supplied have on this calculation?

While in English law this has not yet been fully determined, there are a number of precedents being set in other EU countries which could have important ramifications in the UK for future rulings.

The concept of indemnity in the termination of a commercial agency agreement derives from German law, where the case law dealing with indemnity calculation has subsequently become very well defined. In English courts, however, there has only been one decision relating to how an agent’s entitlement to indemnity should be calculated.

In this case, it was found that it is permissible to look at the practices of other EU member states when interpreting the Commercial Agents Regulations which govern the provision of indemnity

In a recent decision in the German courts, an agent had their indemnity payment reduced by 25% as a direct result of the perceived value of the brand name of their principal. In the view of the court, as the principal’s brand name was so well-known and so respected that the agent’s job of selling the product was rendered 25% easier, as the products effectively “sold themselves” to a degree.

Applying this kind of reduction to termination indemnity to take into account the perceived value of a particular brand name is common in several EU member states. The tendency of consumers to gravitate towards particular brands is known as the “suction effect”, and has been a recognised factor in indemnity calculations in German courts over the last 10 years.

Although there is no precedent in English courts, there is equally no reason why a principal should not raise the “suction effect” argument in response to an agent’s indemnity claim.

In the wake of a recent ruling in the House of Lords regarding how compensation is to be calculated following the termination of a commercial agency agreement, it is likely that the majority of such agreements drawn up in future will provide for the indemnity to apply to avoid compensation payments.

With such an increase in indemnity provision imminent and the lack of English case law on the subject, it seems inevitable that the German model will be a major influence on the way this issue is treated in the UK.

If an indemnity arrangement is in place, the payment is dependent on and should reflect:

Whatever new customers or increased volume of business the agent has brought to the principal and the principal continues to enjoy.

The fairness of the payment with regard to the totality of the circumstances of the case.

The Commercial Agents Regulations do not go into detail as to how the actual value of the indemnity should be calculated. The EU has set out a formula, based on the German system, for how the calculation should be tackled.

As a result of this, principals with high “suction effect” products should seek to include indemnity provisions in future commercial agency contracts, as this means the popularity of their brand will be taken into account on termination of the agreement.

Conversely, agents dealing with such products should be aware that, if their agreement is terminated, they are likely to receive more through a compensation award than they would through an indemnity payment.

Ashby Cohen Solicitors Ltd 18 Hanover Street London W1S 1YN Tel: 0207 408 1338 Fax: 0207 491 0414 Email: info@ashbycohen.co.uk www.ashbycohen.co.uk

Disclaimer: This column does not contain legal advice and is for general guidance only. Agentbase, Ashby Cohen and the writer accept no liability in connection with the general guidance given in this column.

Q&A’s

Q. I am an agent. My principal has just terminated my agency contract and I want to know what I am entitled to by way of compensation.

A. There has been a recent decision in the House of Lords that will affect how your compensation is calculated. The method which should be adopted is to analyse what a hypothetical purchaser would have paid for the goodwill of the agency as at the date of termination. This will entail a valuation in each case and the amount of compensation you receive will be directly proportionate to how the principal’s business is doing. If it is in decline, this will reduce the amount of compensation available. However, if sales are on the increase, you may be entitled to a significant sum in respect of compensation. The matter will ultimately be decided by experts valuing the business.

Q. I am a principal and believe that my agent has breached the terms of the agreement by failing to make the minimum sales specified in the agreement. Can I dismiss the agent and would I have to pay him/her any compensation?

A. In theory, provided that your agreement makes it very clear that failing to meet minimum sales figures will result in a breach of the agreement and that the consequence will be dismissal, no compensation is payable. In practice, it is very hard to prove that there has been a substantial breach which justifies immediate termination. Agents will often argue that the breach was due to circumstances outside of their control (e.g. the quality of products was poor, failures by the principal, recession or collapse of a particular market) and principals therefore have to be careful to set sales targets which are reasonable and achievable.

Q. I am considering taking on agents in order to sell my goods. What do I have to think about?

A. If you are appointing an agent to sell goods they will be covered by the Commercial Agents Regulations and certain obligations will be implied, such as the agent’s right to claim compensation or an indemnity if the contract is terminated. Most issues with agents can be avoided by picking the correct agent and first employing them on a trial basis. Things to consider include the agent’s experience, checking references, credit checks and whether the agent has any other agencies with other principals. Above all, do not allow the agent to commence work unless he/she has signed an agency agreement.

Questions are invited from members. Please email to: enquiries@agentbase.co.uk. All will be treated in confidence. We cannot guarantee all questions will be answered.

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