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Calculating Compensation for Commercial Agents

View profile for Christopher Buck
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Commercial agents are entitled to either compensation or an indemnity payment when an agency agreement is terminated. Read on to find out how it’s calculated…

The Compensation Rule Book

The compensation for commercial agents is set out in regulation 17 of the Commercial Agents (Council Directive) Regulations 1993 (SI 1993/3503) (1993 Regulations).

If the agreement by all parties states that, on termination, the agent is entitled to an indemnity payment then this is upheld. If compensation is set out, or if no mention of either option is made, the agent will receive compensation. Compensation is the default rule, as confirmed in regulation 17(2).

As well as being the default, compensation isn’t capped like an indemnity payment. Indemnity payments are capped, as set out in regulation 17(4) at the average annual remuneration, which the agent has earned over the previous 5 years - or the contract term where this is less than 5 years.

Calculating Compensation

The correct way to calculate compensation is by referring to the loss of value of the agency. This can be determined by how much a hypothetical buyer would buy the agency for at the time of the termination.

In essence, the compensation is for the damage suffered, and in particular, is deemed to occur either where:

  1. the agent is deprived of commission that they would otherwise have earned under the agreement; or
  2. any costs and expenses incurred by the agent through performing its duties under the agreement can’t be mitigated.

The intention behind compensation is more clear cut than its calculation. The European Court of Justice has stated that each Member State can calculate compensation differently. This means there’s no maximum cap on what can be awarded as compensation. The compensatory outcome will vary depending on whether the agency was doing well at the time of the termination, and may be valued at a greater sum than if the agency was doing badly at that time.

A Compensation Case Study

The case of Lonsdale v Howard & Hallam Limited [2006] involved an agency agreement between T and A, which required 12 months’ notice of termination. It was found by the court that, further to discussions between the parties regarding A’s performance, and the possibility of termination, T terminated the agreement. As such, A, as the agent, was entitled to compensation.

The court evaluated the compensation A was entitled to by:

  1. Reviewing and considering A’s future earnings;
  2. Assessing the post-tax sum; and
  3. Multiplying the post-tax sum by a multiplier of four.

After considering the above factors, the court held that A would be entitled to £130,000 as a fair representation of what a hypothetical buyer would have been happy to buy A’s agency for at the time of termination.

The notice period of 12 months was found to be irrelevant by the court, who stated that when calculating the value of A’s agency, this should be done under the assumption that the relationship between the parties would have continued.

The Lonsdale case outlines the factors you need to consider when calculating a commercial agent’s compensation on termination. The intention of compensation is to benefit the agent who, according to the 1993 Regulations, is the weaker party in the relationship.

If principals wish to limit the payment made to an agent on termination, an indemnity clause should be entered into the agreement, as this can be capped and provides a more certain valuation. It also avoids the default position of the compensation. Against this background, it’s clearly advisable to seek legal assistance when entering into a contract with agents. Claims for both compensation and indemnity must be made within a year of termination.

If you’re a principal or an agent and have any queries regarding commercial agencies, our Commercial Solicitors would be delighted to talk to you and give you the best advice tailored to your circumstances. You can also comment below if you would like to ask a question right now.

You can reach me by email or call our office to speak to one of my team on 01908 660 966.

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