Background to the Commercial Agents Regulations
The Commercial Agents (Council Directive) Regulations 1993 (the “Regulations”) are derived from French and German law in the area of commercial agents, which have been imposed across the EU. The Regulations cover the rights and obligations of both a commercial agent (a self-employed intermediary who negotiates sales or purchases of goods) and a principal (someone who engages a commercial agent to market their goods). The Regulations are particularly relevant to tech businesses who appoint sales agents and representatives in Europe.
The most controversial term of the Regulations is that the principal must make a payment to the agent after termination of any agency agreement. This can sometimes come as a surprise to some principals but there are measures that can be put in place to mitigate the impact.
The Regulations specify minimum notice periods depending on how long the agency agreement has lasted for:
- 1 month for the first year
- 2 months for the second year
- 3 months’ notice for the third year of any agency relationship.
Under Article 17 there is a provision for the mandatory termination payment which is either calculated as compensation or an indemnity. The agent cannot receive both compensation and an indemnity. The payment of compensation will apply by default unless the parties have expressly agreed that an indemnity should be applied.
The difference between compensation and indemnity
Compensation requires the principal to pay a sum of money to the agent as compensation for the agent’s loss in relation to the value of the agency to a purchaser.
The courts calculate compensation using the approach in Lonsdale v Howard & Hallam. This involves a hypothetical transaction as at the termination date between a willing buyer and a willing seller, who value the agency business in terms of the income stream from future commission payments from the principal. It is necessary to assume that the agency would have continued for a time; and that the buyer would have been able to take over the agency and step into the shoes of the agent. Other than these assumptions, the calculation considers the real world position, so the trend of the market would be relevant.
Indemnity requires the principal to indemnify the agent for commissions which the agency would have received had the agency not been terminated. The amount of the indemnity is capped by the Regulations at the average annual remuneration (calculated over the preceding five years). This approach is typically lower than a compensation approach.
Who do the Regulations apply to?
The Regulations apply to commercial agents, who are involved in marketing goods (as opposed to services). Goods include gas and electricity but may not include software that is downloaded (this is being decided in the Software Incubator case) as opposed to software integrated into a tangible product. The Regulations apply to both exclusive and non-exclusive agencies.
Commercial agent has a broad interpretation, which includes, amongst other things, a self-employed intermediary with continuing authority to negotiate the sale or purchase of goods on behalf of the principal. Self-employed does include limited companies in this context. It’s not limited to just sole traders.
The Regulations do not apply to a relationship that is a distributorship, but simply labelling an agency relationship as a distributorship won’t prevent the Regulations from applying.
Some key distinctions are that a distributor will acquire title in the goods from the principal and will contract directly with the end-customers. An agent will only arrange the contract between the end-customers and the principal.
As a Principal what should I be doing?
There are ways to mitigate the termination payment through contractual drafting and there are some pitfalls to avoid.
There is no minimum term before an agent becomes entitled to a termination payment. This means that frequently changing agent can be expensive. The courts have confirmed that the Regulations will even apply to a trial or probationary period. If the trial period is unsuccessful, it is possible that the agent will demand a termination payment. Doing thorough due diligence on a commercial agent before entering an agreement is important.
It’s not possible to contract out of the termination payment (Regulation 19) or the minimum notice period. Principles should consider including a clause providing that the indemnity option applies and a cap on this, and also clearly state that default compensation does not apply. An agent will normally prefer the agreement to be silent or to provide expressly for compensation. It’s not possible to hedge your bets by providing that the agent will receive an indemnity unless compensation would yield a lower amount, i.e. the lower of the two options (Shearman v Hunter Boot and Brand Studio v St John Knits).
It makes sense to ensure the agreement can be terminated with the minimum period of notice or a payment in lieu of this notice period.
It can be helpful to include an express reference to the cap that applies to an indemnity in the agreement. The agreement can address the liability for any legal costs involved in negotiating or resolving a dispute over the termination payment.
Principles should consider if they need a sales agent, or if a distributorship would be more appropriate.
During the term of the agency, an agent should keep detailed records that allow its costs and net profits to be accurately calculated, should compensation be relevant.
There is a time limit under Regulation 17(9) requiring the agent to notify the principal within one year after termination. This cannot be overridden in any agreement but a contractual mechanism for agreeing how an indemnity works or compensation is paid can be useful to reduce costs and time.
How will Brexit impact the Regulations?
Following Brexit, the Regulations will remain part of English statute law. In time, they may be amended but there is nothing to suggest that this will happen soon.
What else should I be aware of?
We also await confirmation from the Court of Justice of the EU as to whether software counts as goods for the purposes of the Regulations. It’s a good idea to review any new or current agreements you have in place to mitigate your risk in anticipation of the outcome.
The courts continue to refine the approach used to calculate compensation.
How can Steer & Co help with Commercial Agent Relationships?
If you are a tech, creative digital or media client, we can advise on different aspects of commercial agency relationships including obligations as a principle, drafting suitable sales rep agreements and advising on termination rights and disputes following termination.
We are highly experienced at drafting agency agreements on behalf of our clients across the tech, digital and creative sectors. For more information or advice, please contact Rebecca Steer Rebecca.email@example.com