by Larry Coltman, Partner, Hill Hofstetter LLP, Birmingham
This is a question which is often asked by Principals and Agents. Some countries insist on written contracts whereas others, like the UK, do not require Agents to have written contracts to rely on the benefit of the Commercial Agents (Council Directive) Regulations 1993
There are a number of remedies available to the parties under those Regulations in the event of disagreements or disputes. One of the major issues is what an agent should be entitled to if he is unlawfully terminated by a Principal.
In the absence of a written contract or a contract specifying an indemnity provision, the Agent would be entitled to claim compensation which is currently based upon a valuation of the agency carried out by an independent expert valuer. The indemnity provision which is preferred by Principals has to be included in a written contract for Principals to rely on it.
The net result is that a Principal would be obliged to pay, in the event of wrongful termination of the agency, an indemnity payment which is no more than the annual average commissions over the last 5 years of the agency. It is also subject to a number of deductibles including 8% for accelerated receipt, the Agent’s expenses and any customers and turnover the Agent inherited from the Principal at commencement.
This means it is unusual for an Agent to get anything like 100% of the annual average commissions over the last five years provided there is an indemnity clause in your written contract.
Conversely, under the compensation valuation system, the valuations can vary dramatically between one year and seven years in my experience depending upon the length of the agency, the success of the agent and a number of other factors. It is also based on net commissions but nevertheless the calculation of compensation is usually far more than an Agent would be entitled to with an indemnity provision in his contract.
For these reasons, Agents prefer to have no indemnity provision in their contract or no written contract. Principals usually insist on a written agency contract with an indemnity clause if they have taken legal advice before engaging an Agent.
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Disclaimer: This column does not contain legal advice and is for general guidance only. Agentbase, Hill Hofstetter and the writer accept no liability in connection with the general guidance given in this column.
Q. I am an Agent who, with the authority of my Principal, has appointed sub Agents. My Principal now wants to terminate my Agreement; can I include as part of my compensation claim the compensation that I have to pay to my sub agents?
A. Yes, this is certainly possible, unless of course the contract precludes the delegation of the Agency duties or the appointment of a sub-Agent, in which case no such claims could be made. In some cases the Agent who appoints sub-Agents may in fact place the sub-Agents in a direct contractual relationship with the Principal.
Q. I am a distributor for a large manufacturer. At the same time, I do, on occasions, act as agent for the manufacturer and sell its goods for commission. If the manufacturer should want to terminate this agreement, can I get compensation under the Regulations?
A. No, in general if the Agent is mainly a distributor and simply does a small amount of Agency work, then the Regulations do not apply because the Agency activities are ‘secondary’. This means that when an Agent is taken on then he must be asked what other activities he undertakes so the Principal knows what else he does and whether the Regulations apply.
Q. I am, at present, a sole trader with a number of agencies for various principals. I now wish to form a Limited company and transfer all my agencies to the new company. All my principals have agreed to this. Will the limited company still be protected under the Regulations?
A. This is a difficult question given the fact that the Regulations require that the Agent be a ‘self employed intermediary’. However, it would appear that the DTI Guidance and Case Law suggest that the Regulations do apply to Agents who are companies.
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