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When an agency agreement is terminated by the principal for a reason other than a breach by the agent, the agent is entitled to remuneration. There are two forms of remuneration; indemnity and compensation. Where there is no written agency agreement in place, an agent is only entitled to compensation as there needs to be a clause within a written contract stipulating both parties agree on an indemnity payment. The legislation in this area protects the agent’s rights to a higher degree than that of the principal.
Legislation in this area
The EU passed an EC Directive to harmonise the law regulating commercial agent contracts, which was implemented in the UK through the UK Commercial Agents Regulations 1993. This Regulation outlines protections for agents which includes minimum notice periods for termination and the right to receive compensation and/or an indemnity payment on termination. Each will be dealt with in turn.
Appropriate notice for termination
The Regulation outlines the appropriate notice which must be given to terminate an agency agreement without reasoning of a breach by the agent. This notice period cannot be negotiated for a less notice period regardless if a written agreement is in place. The notice periods are as follows:
- 3 months’ notice where an agency has existed for 3 years or more;
- 2 months’ notice where an agency existed for 2 years; or
- 1 months’ notice where an agency existed for 1 year or less.
Should the appropriate notice period not be given, the agent will have a claim for payment in lieu of notice on top of the compensation payment.
Key differences between compensation and indemnity payments
If there is no written agreement in place, an agent will only be entitled to compensation as there needs to be a clause within a written contract stipulating such an indemnity payment. The key differences between the two payments are as follows:
- Non-capped payment: The courts do not place a cap upon the compensation they award whereas for an indemnity payment, the payment is capped to the amount of one year’s average remuneration based on the average of the previous 5 years (or less if the agency existed for less).
- Reward not reflective of clients: Compensation is purely based on the loss suffered by the agent but for an indemnity payment, it reflects the benefits that the principal gained through clients before and following the termination of the agency.
- Non-equitable payment: Compensation does not take into account equitable factors, whereas an indemnity payment does.
- Claiming both payments: An agent who has made a claim for an indemnity payment, can then claim for compensation on top. This is not the case for agents who are only entitled to compensation, they cannot then go on to claim an indemnity payment.
- Differences in amounts: An indemnity payment is usually less than compensation due to the cap.
Calculating compensation payments
To calculate compensation payments, the courts use a hypothetical purchaser and what they would be willing to pay for the agent at the date of termination. The calculation of compensation is quite complex, but they usually take into account the following factors:
- Net earnings of the agent, then applying an appropriate multiplier;
- Previous commission received to consider future performance;
- Any outstanding commission to be paid;
- Expenses incurred by the agent including overheads, labour and overall time devoted; and
- Deduct appropriate level of tax and NI.
