Who qualifies as a “new customer ” when calculating an indemnity payment?

Uk and uropean Courts have made clear on a number of occasions that one of the key aims behind the indemnity and compensation mechanisms in the  Commercial Agents (Council Directive) Regulations 1993 (“the Regulations”). and the European Directive from which the REgualtions flow. is to ensure that, following termination of their agency contract. a commercial agent receives a payment which reflects the value of the goodwill that the agent has generated for their principal’s business.

 

The goodwill of a business is not a physical asset like the products that a business manufactures. but it can have considerable value. What amounts to goodwill will vary from business to business but essentially, it is the reputation or good name which a business builds up with its customers which persuades those customers to continue to buy products from that business.

A commercial agent can play an important role in building and maintaining that goodwill. where the business continues to receive the benefit of the goodwill generated by the commercial agent after the agency contract has ended, it is only fair that the commercial agent receives a payment for the goodwill that they have generated for the business.

Regulation 17 states that a commercial agent is entitled to an indemnity payment after the termination of his agency contract if and to the extent that “…he has brought the principal new customers or has significantly increased the volume of business with existing customers and the principal continues to deliver substantial benefits from the business with such customers”.

When calculating what indemnity payment a commercial agent will be entitled to following the termination of their contract, the first step would be to assess the commission paid to the commercial agent on business from new customers and increased business with existing customers, we would not simply use the full annual commission paid to the commercial agent across all customers – the customer would have to fall within one of these two categories (i.e. a new customer or a significant increase in the volume of business of an existing customer.)

In a recent referral to the European Court of Justice (ECJ), a German court dealing with an indemnity claim (Marchon Germany GmbH vs Ms Karaszkiewicz) asked the ECI to confirm whether “new customers” could include existing customers. that is to say customers who had previously had a business relationship with the principal but in relation to different products.

In this case the principal was a producer and wholesaler of various brands of frames for spectacles and assigned to its commercial agents collections of spectacle grames of particular brands, rather than its full range of products. This meant that several agents operated in the same geographical area, with each agent having responsibility for two or three specific brands. The agents were effectively competing against eachother to persuade customers to buy their brands.

During her agency, the commercial agent had persuaded customers to purchase for the first time the brands that she was responsible for. Those customers had previously bought other brands from the principal. In bringing her claim for an indemnity payment, the agent claimed that these customers should be treated as “new customers” even though they had previously been customers of the principal, but for different brands. the ECJ agreed with that view, but noted that the sales strategy adopted by the Principal (i.e. allocating specific brands to specific agents) was a key consideration in reaching its decision.

The clarification from the ECJ is useful, but might be limited to the situation where the commercial agent is the sole representative of the principal for specific products (i.e. none of the other agents have access to those products).

This situation can be contrasted with the following:

  • A customer has previously purchased products from the principal, but has not done so for some itme. The agent visits the customer and persuades them to place an order and resume business with the principal (e.g. by offering more favourable prices than previously); or
  • The principal launches new product lines and permits all of its existing commercial agents to promote the new products to existing customers.

In the above situations, it would be difficult for the commercial agent to argue that these customers should be treated as “new customers” when calculating any indemnity payment. Rather, they would be treated as “existing customers”.

As noted above, the distinction is important because the commercial agent would need to establish that they “significantly increased the volume of business” with existing customers when assessing whether the agent is entitled to an indemnity payment. The additional hurdle could make all the difference to the amount of the indemnity payment.

 

Kevin Manship is a Senior Associate with Blake Morgan Solicitors.

One Central Square,

Cardiff CF10 1FS

Tel: 029 2068 6126

www.blakemorgan.co.uk

 

 

 

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