Agency Regulations: Rights and Responsibilities

If an agreement continues to be performed after the agreed term ends, it will become a contract for an indefinite period and either party may terminate it with the following notice periods:

• One month for the first year.
• Two months for the second year.
• Three months for the third and subsequent years.

The parties may agree longer periods, however, the period observed by the principal must not be shorter than that observed by the agent.

The parties cannot agree to contract out of these provisions.

What rights does the agent have to be compensated on termination?

In an agency agreement, the parties can choose whether compensation is payable on termination or an indemnity given. In the absence of agreement, the entitlement is to compensation.

The entitlement applies to agreements that are terminated by the principal, have come to the end of their fixed term or if the agent dies or retires.

Indemnity

The amount of the indemnity is calculated with regard to:

• The extent to which the agent has brought in new customers or has significantly increased the volume of business with existing customers, and that the principal continues to derive substantial benefits from such business.

• The commission lost by the agent as a result of the termination.

The amount of the indemnity shall not exceed one year’s average commission, which is calculated from the agent’s average remuneration over five years. If the contract is for less than five years, then it is the average for the period in question.

Compensation

The Regulations are unclear as to the method of calculating the amount of compensation. There have been several cases, which sought to clarify the situation. The House of Lords has now largely settled the issue in the case of Lonsdale v Howard & Hallam Ltd 2007.

The principal has to pay the agent the value of the agent’s business that is lost as a result of the termination, including the value of any goodwill and the agent’s potential future earnings.

In determining the value, the future performance of the principal’s business should be taken into account. If the market is good and the agent could have expected an increase in sales, then the value may be increased. Any underperformance should also be reflected in the value.

In practice, an accountant is usually employed to value the agent’s business using the standard methods.

The parties cannot contract out of the provisions for indemnity or compensation to the detriment of the agent.

It is worth noting that no other EU country allows for the choice of indemnity or compensation.

Losing the entitlement to indemnity or compensation

The agent’s entitlement to indemnity or compensation will be lost if:

• The claim is not notified to the principal within 1 year of termination.
• The principal terminates the agreement because of a repudiatory breach by the agent.
• The agent terminates the agreement, unless justified by the principal’s default or the agent’s age, infirmity or illness.
• If the agent assigns the agency to a third party.

Whether to choose indemnity or compensation?

Generally principals prefer the indemnity option as it limits compensation to one year’s commission and offers a degree of certainty. However, before entering into the agency agreement, the principal should also try to determine what would be the likely level of damages if compensation were paid. This can be difficult to predict, as it is dependent on a number of factors.

The main factors that both parties should consider are how long they expect the agreement to run and the value of the contracts involved.

For further detailed advice on your particular agency arrangement, please contact Christopher Sherliker (cjs@silvermansherliker.co.uk), Shane Morris (scm@silvermansherliker.co.uk) or Izabela Mountford (ibm@silvermansherliker.co.uk) or call us on +44 (0)20 7749 2700.