FAQ 1 – Why are the Regulations important and when do they apply?
The Regulations set out various rights and obligations for both principals and agents, which are incorporated into (i.e. form part of) the agency contract. Many of those rights and obligations cannot be overridden or excluded by a written agency contract (unless they operate in the agent’s favour).
The Regulations apply where:
- The agent fulfils the definition of ‘commercial agent’ (see question 2); and
- Generally, where the agent conducts their activities in Great Britain (or where the parties have agreed that the Regulations will apply to the agency contract); and
- None of the exclusions set out in the Schedule to the Regulations apply (i.e. where the commercial agency activities are considered to be a secondary element of the agent’s role); and
None of the exceptions specified in Regulation 2 apply.
FAQ 2 – Who is a commercial agent under the Regulations?
The definition of ‘commercial agent’ in the Regulations is ‘a self-employed intermediary who has continuing authority to negotiate the sale or purchase of goods on behalf of another person (the principal), or to negotiate and conclude such transactions on behalf of and in the name of that principal’.
The definition is not as complicated or as difficult for an agent to fulfil as you might think. For example:
- ‘Self-employed intermediary’ includes an individual who is self-employed (i.e. not an employee), or a partnership or a limited company.
- ‘Continuing authority’ basically means that the agent’s authority is not limited to a single transaction;
- ‘Negotiate’ is not defined in the Regulations but has been given a wide meaning by the Courts. This point has often been challenged (unsuccessfully) by principals, who argue that the agent did not have authority to negotiate the sale or purchase of their goods because the agent did not deal with customers in relation to prices or the terms of sale. However, the Courts have found that ‘negotiate’ includes agents whose role is to get third parties interested in the principal’s products, suggest possible prices subject to confirmation by the principal and to encourage the third party to place an order at those prices;
- ‘Goods’ are not defined by the Regulations either. In many situations the difference between goods (which do fall within the Regulations) and services (which do not) is obvious. However, there are some areas of uncertainty, particularly in relation to computer software. This issue is currently before the Supreme Court, which decided to refer the question to the Court of Justice of the European Union. We will update this page when that decision has been made.
A distributor could not fall within the definition of ‘commercial agent’. An agent would either negotiate the sale on behalf the principal or would negotiate and conclude the sale on behalf of and in the name of the principal. In both situations, the customer would enter into a sales contract with the principal. In contrast, a distributor would take legal title to the goods from the principal and would then sell them on its own account to the customer.
FAQ 3 – Can an agency contract exclude or contract out of the Regulations?
It is not possible to exclude or contract out of the Regulations as a whole, but it is possible to exclude or contract out of some individual Regulations. However, there are some Regulations which specifically state that they cannot be excluded by the agency contract or cannot be varied in the agency contract to the detriment of the agent. Any attempts to do so render the clause void (i.e. it has no effect).
FAQ 4 – Do the Regulations apply where the agent is purchasing goods, rather than selling them?
In principle, yes, although we may need to analyse the particular circumstances of the agent and check that none of the exclusions in the Regulations apply.
FAQ 5 – Do the Regulations apply to sub-agents
The position on this is not clear, as it has not been properly addressed by the Courts. The sub-agent’s contractual relationship will usually be with the main agent, rather than the principal. It is highly unusual for the sub-agent to have a direct contract with the principal.
The Regulations may apply to the main agent’s contract with the principal but are unlikely to apply to the contract between the main agent and the sub-agent (for example the sub-agent would not be selling the main agent’s goods and the main agent would not be a party to the contract with the customer).
The Courts have suggested that a sub-agent could claim a contribution from the main agent bringing a claim against the principal but did not explain how this might work in practice. Much would depend on what the contract between the main agent and sub-agent says, but it is difficult to see how that would operate.
FAQ 6 – What are the important terms in a sales agency contract?
We would recommend that both principals and agents pay careful attention to the following issues in a sales agency contract:
- What products is the agent authorised to promote and/or sell? Is it the principal’s full portfolio or a limited subset of products?
- What territory has been assigned to the agent?
- Is the agent appointed as an exclusive, sole or non-exclusive agent (see question 10) and is the principal able to appoint other intermediaries or sell directly in the agent’s assigned territory?
- The obligations on the agent – how onerous are they? Certain obligations are incorporated into the agency contract by the Regulations, including duties to:
- look after the interests of the principal;
- act dutifully and in good faith;
- make proper efforts to negotiate and conclude transactions;
- communicate to the principal all necessary information that is available to the agent;
- comply with reasonable instructions given by the principal.
- The obligations on the principal – how onerous are they? Again, certain obligations are incorporated into the agency contract by the Regulations, including duties to:
- act dutifully and in good faith in the principal’s relations with the agent;
- provide the agent with the necessary documentation relating to the goods covered by the agency contract;
- obtain for the agent the information necessary for the agent to perform the agency contract;
- notify the agent within a reasonable period once the principal anticipates that sales volumes will be significantly lower than the agent could normally have expected;
- inform the agent within a reasonable period of the principal accepting, refusing or not executing a commercial transaction procured by the agent.
- How is the agent to be remunerated – is this via commission and/or retainer? What sales result in commission payments to the agent and when do those commission payments become due?
- Is the agent required to meet minimum sales targets? What happens if the agent fails to meet those targets? (see question 9)
- In what circumstances can the agency contract be terminated?
- What are the consequences of termination (e.g. do compensation or indemnity apply under the Regulations)?
- What law applies to the agency contract and which country’s Courts can decide any dispute about the contract? This clause can be particularly important if the agent and principal are based in different countries (see question 33).
FAQ 7 – Can an agency contract be for a fixed term?
It can. However, this does not prevent the agent from claiming compensation or indemnity once the fixed term expires, although a fixed term may reduce the valuation of any compensation claim.
It should also be noted that if the agency contract continues to be performed by both parties beyond expiry of the fixed term, the contract is deemed by the Regulations to be converted into an agency contract for an indefinite period.
FAQ 8 – Can the terms of the agency contract be changed?
They can, provided the changes are agreed by all the parties to the agency contract. The mechanics of this depend to some extent on whether the agency contract is written or verbal.
A written agency contract should contain a clause which sets out the process for varying (changing) the terms of the contract. This would usually require the changes to be set out clearly in a document which is signed by the principal and the agent confirming that they agree to the changes.
If the written agency contract does not specify a process for agreeing changes or the agency contract is not set out in writing, a Court would look for other evidence that the parties have agreed to change the contractual terms. That evidence could be produced in a number of different ways, including by email or other correspondence, verbally or even by the conduct of the parties (e.g. the principal seeks to impose a change, the agent does not object to that change and continues to perform their duties in accordance with that change).
FAQ 9 – Issues to consider in relation to sales targets
The first issue for an agent to consider is whether to agree to sales targets at all. The second is likely to be how those sales targets are to be set – are they imposed by the principal, are they agreed by the parties each year, is there any consideration of previous years’ performance, is there any obligation on the principal or the parties to act reasonably in setting the sales target?
Consideration also needs to be given to the effect of failing to meet those sales targets. Such failure could put the agent in breach of contract and could potentially lead to the agency contract being terminated. However, failing to achieve a sales target does not automatically give the principal the right to terminate the agency contract – everything will depend on the circumstances. The COVID-19 pandemic is a prime example – this has resulted in a significant economic downturn and in those circumstances simply maintaining sales may involve a massive effort. Achieving sales targets that were set before the pandemic hit is likely to be impossible, despite the agent’s best efforts. The principal would need to give very careful consideration to terminating the agency contract in such circumstances and should take early legal advice on their options.
FAQ 10 – What is the difference between exclusive, sole and non-exclusive agents?
This relates to the extent of the rights granted to the agent within the territory they have been assigned:
- An exclusive agency gives the agent the exclusive right to represent the principal within the assigned territory and prevents the principal from actively seeking sales within that territory itself and from appointing other agents or distributors within that territory. However, the right to exclusivity may be limited (with the principal reserving the right to continue to supply certain customers or categories of customer in the territory without involving the agent).
- Sole rights prevent the principal from appointing another agent (and potentially distributors or other resellers) for the assigned territory. However, the principal itself is not prevented from actively seeking or negotiating direct sales to customers within the territory without involving the agent.
- A non-exclusive agency enables the principal to appoint other agents, distributors or other resellers within the agent’s assigned territory and to seek or negotiate direct sales itself to customers within the territory.
FAQ 11 – What if I don’t have a written agency contract?
Having a written agency contract in place is often the best way to set out clearly and comprehensively the rights, duties and obligations of the principal and agent.
However, the lack of a written agency contract does not mean that there is no contract in place. In those circumstances, the terms that are automatically incorporated into the agency contract by the Regulations become of great importance.
For the remaining key terms (such as the territory, products and commission payable to the agent), a Court would look to construct these from the evidence provided by the parties. That evidence could be provided from verbal discussions between the parties, emails or other correspondence or even the conduct of the parties during the course of the agency.
The Regulations also give the principal and the agent the right (at any time) to request from the other a signed written document setting out the terms of the current agency contract between them. The right to request the current contract is important because some terms may be agreed or amended during the course of the agency and after the initial agency contract is put in place.
FAQ 12 – What can an agent do if the principal wants to take customers away from them?
Where an agent deals with large customers and/or customers who place repeat orders, it is not unusual for the principal to want to remove the agent’s involvement and make those customers ‘house’ accounts. The thinking behind this is often that the principal would no longer have to pay the agent commission for sales to those customers.
However, this would require a change to the existing contractual terms, which needs the agent’s agreement in order to be effective. In theory, it is open to the agent to say that they don’t agree to the customer being removed in this way. In practice, however, it could be difficult for the agent to resist the principal’s request. It might be possible for the agent and principal to negotiate a financial payment of some sort to compensate the agent for the loss of future commission from sales to such customers.
FAQ 13 – What can an agent do if the principal wants to reduce the agent’s territory?
This would also require a change to the existing contractual terms, which would need the agent’s agreement in order to be effective. It is logical to assume that a reduction in the agent’s territory would result in a fall in the agent’s commission earnings, which is unlikely to be an attractive proposition for the agent. In theory, it is open to the agent to say that they don’t agree to their territory being reduced. In practice, however, it could be difficult for the agent to resist the principal’s request. It might be possible for the agent and principal to negotiate a financial payment of some sort to compensate the agent for the loss of future commission resulting from the territory reduction.
FAQ 14 – What can an agent do if the actions of the principal prevent the agent from doing their job?
There are a number of ways in which the agent might rely on the principal to enable the agent to do their job. The agent might need the principal to provide them with product samples and/or marketing materials or to provide specific information requested by a customer (for a bespoke product) or to confirm what products are in stock or to confirm whether a specific order has been accepted and when it will be delivered.
Most of the time, these obligations will be set out in the agency contract and the agent can (politely) point out that the principal’s failure to comply with its obligations is preventing the agent from doing their job. If the relevant obligations are not specified in the agency contract, the agent might be able to rely on the general obligations imposed on the principal by the Regulations (see question 6).
Recording the reasons for the problems is important, particularly if the principal complains about the agent’s performance and/or tries to terminate the agency contract for poor performance. This can be a very sensitive situation and both agent and principal need to take care that they do not do something which breaches their contractual obligations.
FAQ 15 – Must an agent follow all instructions from the principal?
The Regulations require the agent to comply with reasonable instructions given by the principal. The agency contract may also specify further requirements on the agent (e.g. to provide information about customer visits or to attend sales meetings with the principal).
This does not necessarily mean that the agent must follow all instructions from the principal, but the instruction would clearly need to be unreasonable to enable the agent to refuse to follow it. The agent would need to think about their position very carefully because refusing to follow specific instructions from the principal could put the agent in breach of contract and could enable the principal to terminate the agency contract.
FAQ 16 – When should commission be paid to the agent?
This will usually be set out in the written agency contract. The agency contract may distinguish between when commission becomes due (i.e. the point in time at which the agent becomes entitled to commission) and when commission must actually be paid to the agent.
Commission will generally become due at the point in time at which the principal receives payment for the goods from the customer. However, it is not unusual for commission to become due when the goods are delivered to the customer or when the principal invoices the customer for the goods. There is some potential risk for the principal in agreeing to commission becoming payable at these earlier stages of the transaction – if the principal doesn’t subsequently receive payment from the customer, the principal would need to claw back commission payments from the agent and this could lead to arguments about whether the agent’s right to commission has been extinguished (see question 17).
Commission will generally become payable at some point in time after it falls due. The main reason for this is to allow the principal and agent some time to go through their processes to establish the commission payable to the agent (e.g. for the principal to provide confirmation of completed sales and/or a statement of commission due to the agent and for the agent to invoice the principal). The agency contract may specify that commission becomes payable at a fixed point after it falls due (e.g. one month after payment is received from the customer) or it may simply refer to the backstop date in the Regulations (see below).
If the agency contract does not specify when commission becomes due or payable, or there is no written agency contract in place, the Regulations specify backstop dates (i.e. maximum allowable periods) for when commission becomes due and payable. The parties are not allowed to specify longer dates than these in the agency contract. If they do, those provisions would be void and would have no effect.
Under the Regulations, commission becomes due as soon as and to the extent that:
- The principal has ‘executed’ (i.e. performed) their part of the transaction; or
- The principal should, according to the agreement with the customer, have executed the transaction; or
- The customer executes the transaction.
The Regulations state that commission becomes due at the latest when the customer has executed their part of the transaction or should have done so if the principal had executed their part of the transaction as they should have. This language is hard to understand in the context of dealings between the principal and customers, so some examples might be helpful:
- In the normal course of events a customer would take delivery of the goods, accept those goods and pay the principal for the goods within the payment period specified in the principal’s terms and conditions. Commission would become due to the agent on the latest of those events, which would usually be payment.
- If the customer does not take all of those steps, then:
- if the principal is in breach of the contract with the customer (e.g. by not delivering the goods on the date specified in the contract with the customer or by delivering goods which are defective), commission would become payable on the latest of the dates on which the goods would have been delivered to the customer, accepted by the customer or paid for by the customer under the contract between the principal and the customer;
- if the principal has performed their part of the transaction (i.e. delivered goods which meet the requirements of the contract with the customer) but the customer is refusing to take delivery, accept the goods or pay for the goods, then the agent would have to wait until all of those steps have been taken before commission becomes due.
The Regulations also specify a backstop date by which commission must be paid to the agent. This is the last day of the month following the quarter in which the commission became due. In this context ‘quarters’ are calculated by reference to the start date of the agency. Again, this wording is quite difficult to understand, so some examples may be helpful:
- The agency commenced on 1 January 2017, so ‘quarters’ run from January – March, April – June, July – September and October – December.
- A customer pays for goods on 26 February 2020. The relevant quarter is January – March, so commission for that sale would have to be paid to the agent by 30 April 2020 at the latest.
- A customer pays for goods on 1 April 2020. The relevant quarter is April – June, so commission for that sale would have to be paid to the agent by 31 July 2020 at the latest.
FAQ 17 – When is the agent’s right to commission extinguished?
The only situation in which the agent’s right to commission is extinguished is where (and to the extent that) the contract between the principal and the customer will not be executed due to a reason for which the principal is not to blame. In those circumstances the agent is required to refund to the principal any commission that has already been paid for that transaction.
There can be some difficulty with the terminology used in the Regulations but, essentially, where a sale between the customer and the principal is not completed the agent would still be entitled to be paid commission on that sale unless the principal can show that it was not ‘to blame’ for the sale not completing.
Some reasons for which the principal is likely to be to blame:
- The principal fails to deliver goods at all (e.g. because they cannot keep up with demand) or delivers the goods later than the contractual delivery date agreed with the customer;
- The customer rejects the goods because they are defective;
In contrast, the principal would not be to blame in the situation where goods are delivered on time and comply with the contractual specification, but the customer simply refuses to pay for them or is unable to pay for them (e.g. because the customer is insolvent).
FAQ 18 – What can an agent do if the principal refuses to provide sales information?
The Regulations require the principal to provide statements of commission to the agent on a regular basis. Those statements must set out the main components used in calculating the commission amount. Logically, that must include key information in relation to each sale on which commission is payable, such as date of sale, amount of sale, applicable commission rate and commission payable on that sale.
The commission statement must be provided to the agent no later than the last day of the month following the quarter in which the commission has become due (see question 16).
If the principal does not provide commission statements or if the agent does not agree with the information provided by the principal, under the Regulations the agent is entitled to demand from the principal all of the information available to the principal and which the agent needs in order to check the amount of commission due to the agent. If the principal refuses to provide this information, the agent would need to ask a Court to make an order requiring the principal to disclose the information. Such conduct by the principal would invariably be seen by the Court as unreasonable and could result in a significant order for legal costs against the principal.
FAQ 19 – When is the principal entitled to terminate an agency contract?
The principal can terminate the agency contract in a variety of circumstances:
- By giving the minimum period of notice specified by the Regulations (see question 22). This is sometimes referred to as ‘no-fault’ termination or termination for convenience;
- Because the agent has been in serious breach of their obligations under the agency contract (sometimes referred to as termination for fault).
The reason for terminating the agency contract is important because it determines whether the agent is entitled to bring a claim for compensation or indemnity against the principal. This is discussed further at question 32 but, in summary, compensation or indemnity would be payable where there has been a no-fault termination but would not be payable where there has been termination for fault.
If terminating for fault, it is important for the principal to be very certain of their position because, if they get it wrong, the principal will be liable to pay compensation or indemnity to the agent. Many of the cases dealt with by the Courts have included arguments about whether the principal was entitled to terminate for fault.
FAQ 20 – What can the principal do if an agent is under performing?
To a large degree, this will depend on the nature of the underperformance. Is the principal concerned that the agent is not visiting their customers often enough or is not dedicating enough time to the agency? Is the agent not providing regular reports on their activity or failing to make efforts to acquire new customers for the principal?
If the principal can identify that the agent is failing to comply with one or more of the specific obligations set out in the agency contract, in the first instance the principal should point out the failures to the agent and require them to comply with their contractual obligations. Managing the underperformance (where possible) and recording that management in writing, would be seen by a Court as sensible and prudent.
If there are not specific obligations in the agency contract that the agent is not complying with, the principal could request the agent to take specific actions (relying on the general obligation in the Regulations for the agent to comply with reasonable instructions given by the principal). Again, it would be prudent to record this in writing and perhaps to explain why the agent is being instructed to take the specific actions.
If the nature of the underperformance is a serious breach of the agent’s contractual obligations then, ultimately, the principal would be entitled to terminate the agency contract as a result of that serious breach. However, the principal would need to be very sure of their position before taking this action and we would recommend taking early legal advice. If the principal terminates the agency contract for serious breach, but gets it wrong, the principal would itself be in breach of contract and could face a significant claim for compensation or indemnity (as well as a claim for damages for breach of contract).
FAQ 21 – What can a principal do if an agent spends their time selling goods which compete with those of the principal?
Many agents represent a number of different principals and carry different products or product ranges that they show to their clients. Most of the time the products do not compete and there is no issue, especially if the agent and principal have had a discussion at the outset and the principal has consented to the agent’s other agencies. That would generally be the safest way to deal with this issue.
However, situations have arisen where a principal believes that the agent is acting for another principal whose products compete with those of the principal. On the face of it, the agent could be in breach of their obligation under the Regulations to act dutifully and in good faith and/or in breach of a specific provision in a written agency contract not to sell goods which compete with the principal’s products without the principal’s consent. This could potentially be a serious breach by the agent which leads to termination of the agency contract.
However, the principal needs to take care to ensure that they get their position right before taking any action against the agent. This may require a careful assessment of the nature of the products – even if they are of the same type, they may be sold to different types of customer due to price or quality. It might be prudent to first express their concerns about the competing products to the agent in writing and give them an opportunity to respond, rather than rushing to terminate the agency contract.
FAQ 22 – What period of notice should be given to terminate an agency contract?
The agency contract can be terminated by either the principal or the agent giving notice of termination to the other. Ideally, such notice should be given in writing.
If there is a termination for fault (see question 19), then termination can take immediate effect upon service of the notice.
Otherwise, the party giving notice would have to comply with the minimum periods of notice specified in the Regulations:
- 1 month’s notice during the first year of the agency contract;
- 2 month’s notice during the second year of the agency contract; or
- 3 month’s notice where the agency contract has entered its third year or for any longer period.
The Regulations make clear that the parties cannot agree any shorter periods of notice, but they can agree on longer periods (provided the notice period to be observed by the principal is not shorter than that to be observed by the agent).
The end of a notice period must coincide with the end of a calendar month. For example, if the principal sends a notice of termination to an agent on 14 July 2020 and the principal is required to give 3 months’ notice, the minimum notice period required by the Regulations would expire on 31 October 2020.
FAQ 23 – What should an agent do after receiving notice of termination of the agency contract from the principal?
Seek legal advice before responding to the principal. This minimises the risk of the agent doing or saying something that might prejudice their position and any post-termination claims the agent might have.
FAQ 24 – What happens when an agent wants to retire?
There is nothing to prevent an agent from terminating the agency contract at any time, provided they comply with the notice requirements specified by the Regulations (see question 22). The importance of terminating the agency contract so that the agent can retire lies in whether the agent would still be entitled to bring a claim for compensation or indemnity following termination.
Generally, where the agent terminates the agency contract, they would not be entitled to bring a claim for compensation or indemnity against the principal. However, there are two exceptions to this general rule. The first is where the termination is justified by fault on the part of the principal (i.e. the principal has seriously breached their contractual obligations).
The second is where the agent cannot reasonably be required to continue their activities due to age, infirmity or illness. It should be noted at the outset that this provision would not apply to a limited company – it could only apply to an individual.
The Regulations do not specifically reference the word ‘retirement’ or a specific age from which an agent could not reasonably be required to continue their activities. There was a case where the Court decided that an agent was entitled to retire at the then statutory retirement age of 65. However, the statutory retirement age has now been scrapped, which allows workers to continue working beyond 65. It may be that 65 is still a suitable age, or perhaps the age at which the state pension becomes payable would be taken as a suitable age. We need some clarity on this from the Courts. In our view it seems unlikely that termination of an agency contract on the grounds of age alone would be justified and a Court is now likely to look at all the relevant circumstances, of which age would be one. It may be, for example, that the agent is less able to cope with the physical demands of the agency (such as driving or carrying heavy samples) as they get older.
Ideally, the principal and the agent would be able to negotiate the agent’s exit from the agency contract in these circumstances. If that is not possible, the decision would have to be taken by a Court.
FAQ 25 – What happens if an agent becomes ill or dies during their agency?
Again, this could not apply where the agent is a limited company.
If an agent becomes ill during the course of their agency, consideration may need to be given to whether the agent is able to continue with their agency activities. If they are not, then the agent would be justified in terminating the agency contract and would still be entitled to claim compensation or indemnity. Much would depend on the nature and severity of the illness / health issues and the agent might need to obtain medical evidence to support their position. Currently, there are no Court cases which have specifically considered this issue.
If the agent dies during their agency, then the Regulations make clear that the agent’s estate would be entitled to claim against the principal for compensation or indemnity.
FAQ 26 – What payments could an agent claim from their principal when their agency contract has been terminated?
Under the Regulations and the agency contract, there are a number of payments that can potentially be claimed by an agent from the principal following termination of the agency contract:
- Outstanding commission for sales completed before the date of termination of the agency contract (under Regulation 7). In many cases this will be relatively straightforward to calculate, but in some cases the situation can be more complex due to the existence of house accounts, variable commission rates, rights of exclusivity for the agent or whether sales have been completed;
- ‘Pipeline’ commission under Regulation 8. This enables the agent to claim commission on sales that are completed after the date of termination of the agency contract, provided certain criteria are met (see question 32);
- Payment in lieu of notice under Regulation 15 or under the agency contract if that specifies a longer notice period. This claim could be brought where the principal has failed to provide the required period of notice of termination to the agent;
- Compensation or indemnity under Regulation 17. Compensation would be payable to the agent in these circumstances unless there is a written agency contract which specifies that an indemnity would be payable on termination.
It should be noted that there is a requirement under the Regulations for the agent to notify the principal within 12 months of the date of termination of the agency contract of the agent’s intention to bring a claim under Regulation 17.
It should also be noted that the claims under Regulations 15 and 17 would not be available to an agent if the principal has terminated the agency contract due to serious breach by the agent and was justified in doing so.
FAQ 27 – How are compensation claims calculated?
Initially, it was argued by agents that compensation should be calculated as twice the average annual net commission earned by the agent. However, it has been clear since the House of Lords decision in Lonsdale v Howard & Hallam Limited in 2007 that this is not the correct calculation to use.
In Lonsdale, the House of Lords decided that compensation should be assessed by determining the open market value of the agency at the date on which it was terminated. This involves looking at the income stream likely to be generated by the agency and assessing what a hypothetical purchaser would be willing to pay for that income stream. This exercise can be complex and often requires expert evidence from a forensic accountant, especially if the claim goes to Court.
The usual approach that is taken to valuing the compensation claim is first to identify a figure for the annual future net earnings of the agency and then to apply a suitable multiplier to that figure (the applicable multiplier being determined by following established accountancy practices). There are several different methodologies which could be applied, depending on the circumstances of the specific case. In general, however, the theoretical valuation exercise will usually include the following:
- Identify the likely gross annual income that the agency would have earned in the year following termination, if the agency hadn’t been terminated. This is usually done by reference to the pre-termination earnings of the agency (unless that would be an unrealistic basis to use).
- Determine the future annual costs of running the agency. Again, this will generally be calculated by reference to the pre-termination costs of the agency, but it can lead to disagreement between experts.
- note that if the agent has more than one agency (which is often the case), the agent’s overall costs would need to be apportioned to this agency;
- there are a number of ways in which those costs could be apportioned and the most appropriate method will depend on the particular facts of the case.
- Deduct the annual costs figure for the agency from the gross annual income figure, to give the net annual earnings figure.
- The next step would then be to identify the appropriate multiplier to be applied to the net annual earnings figure. Again, this is often an area of disagreement between experts. In recent cases the following have tended to be viewed as the most important factors, but they should not be taken as an exhaustive list:
- how the agency was anticipated to perform (i.e. as at the date of termination were sales levels expected to rise, decline or stay at a consistent level?);
- whether the agency included exclusive rights to the territory;
- the profitability and stability of the principal’s business;
- the size of the agency and whether it was likely to be purchased by a cautious investor of modest means;
- how secure the supply of the products was (particularly if the principal was not the manufacturer of the relevant goods).
Generally, the value of the multiplier varies between 0 (if it is anticipated that the future earnings of the agency would be 0) and 5 (if it is anticipated that the future earnings of the agency are on a steep upward trajectory).
FAQ 28 – How are indemnity claims calculated?
A brief reminder that an indemnity claim could only be brought if a written agency contract specifies that indemnity applies when the agency contract is terminated.
Calculating the value of an indemnity payment is a three-stage process:
- Firstly, assess the value to the principal’s business of (i) new customers brought by the agent and (ii) existing customers whose business has been significantly increased by the efforts of the agent. An important point to consider here is that the principal must continue to derive substantial benefits from doing business with those customers following termination of the agency contract;
- Secondly, assess what payment would be equitable having regard to all the circumstances and in particular the commission ‘lost’ by the agent (i.e. the commission that would have been earned by the agent if the agency had not been terminated);
- Thirdly, the amount of indemnity payable is subject to a cap which is equal to the agent’s gross average annual remuneration calculated over the 5 year period prior to termination of the agency contract (or a shorter period if the agency was in existence for less than 5 years prior to termination).
While that process seems quite straightforward, in practice the calculation of indemnity could become quite complicated. Surprisingly, however, there have not been many cases in the UK dealing with the calculation of indemnity claims. The claims that do arise tend to settle before they go to Court. In our view, a large part of the reason for this is likely to be the overall cap which limits the maximum value of the indemnity claim to one year’s gross earnings. Given the complexities and uncertainties of calculating indemnity claims, principals and agents seem to have found a way to resolve such claims before they get to trial.
FAQ 29 – Is VAT payable on compensation or indemnity claims?
Following a change of policy from HMRC (as set out in Revenue and Customs Brief 12 (2020) published on 2 September 2020), it seems likely that compensation or indemnity payments due under the Regulations should account for VAT (i.e. the agent would be liable to pay VAT on such payments, so VAT should be added to the payments to be made by principals).
HMRC has stated that this change of policy has retrospective effect but has not stated how far back this effect will have. It is hoped that HMRC will provide further clarity on this in due course.
FAQ 30 – Can an agency contract limit the agent to claiming whichever is cheaper out of compensation or indemnity?
No. Such clauses are likely to be void and to have no effect. In such a case, the absence of an effective clause specifying that an indemnity would be payable means that compensation would be payable by default.
FAQ 31 – In what circumstances would a principal not have to pay compensation or indemnity?
Compensation or indemnity would not be payable to the agent in any of the following circumstances:
- Where the principal has terminated the agency contract due to serious breach of contract by the agent;
- The agent has terminated the agency contract for a reason other than serious breach of contract by the principal and not due to illness, infirmity or age (see questions 24 and 25).
- The agent has chosen to assign the agency contract to another agent and the principal has consented to the assignment.
FAQ 32 – How are ‘pipeline’ commissions under Regulation 8 calculated?
Regulation 8 deals with the agent’s entitlement to commission on sales transactions that are concluded after the agency has terminated. This covers two situations:
- Where the transaction is ‘mainly attributable’ to the agent’s efforts in the period before the agency contract was terminated and was entered into ‘within a reasonable period’ after termination of the agency contract:
- ‘mainly attributable’ requires the agent to establish a causal link between their activities during the agency period and the customer placing the order. The shorter the period of time between the activities of the agent (e.g. showing samples to the customer) and the customer placing the order, the easier it should be to establish that causal link. However, if there is a significant time gap between the agent’s activity and the order being placed it could be more difficult for the agent to establish the causal link unless the customer can be persuaded to confirm that they placed the order as a result of something the agent did;
- entering into a transaction means the customer placing an order;
- what is ‘a reasonable period’ will vary from agency to agency, depending on the nature of the goods in question, the selling / ordering cycle for those goods and how quickly any replacement agent becomes involved with the principal’s customers. It is open to the parties to agree what a ‘reasonable period’ is in the agency contract and this could save a lot of argument post-termination.
- The customer’s order reached the agent or principal before the agency contract terminated and the agent would have been entitled to commission on the transaction under Regulation 7 if the agency contract had not been terminated.
It should be noted that commission claims under Regulation 8 could be excluded by the agency contract.
FAQ 33 – Check jurisdiction and choice of law clauses in the agency contract
A jurisdiction clause sets out which country’s courts are to have jurisdiction to hear disputes arising from the agency contract. This will be linked to the governing law clause, which determines the substantive law that will apply to the agency contract and any disputes that may arise from it.
The governing law clause will be a significant factor in determining whether the Regulations apply to the agency contract, along with whether the agent performs their activities in Great Britain.
It is always worth checking these provisions in the agency contract, particularly if the principal is based outside Great Britain.
Basically, if the agent performs their activities in Great Britain, the governing law is English and Welsh law and the English Courts have jurisdiction to deal with any disputes, the Regulations will apply and any claims under the agency contract could be pursued in the English or Welsh Courts.
The situation can get quite complicated if any of the above factors is different to what is set out above and we would recommend getting legal advice before taking any action.
FAQ 34 – Will the Regulations still apply after 31 December 2020?
Yes, they will.
In the longer term it is possible that that the Regulations could be modified or withdrawn, but only Parliament could do that. However, it seems likely that the Regulations would be low on Parliament’s list of priorities after 31 December 2020. We can therefore safely assume that the Regulations will be in place for the foreseeable future.