The most controversial provisions of the Commercial Agents Regulations are those concerning the payment of compensation or the giving of an indemnity to a terminated agent. This is understandable. The regulations represent a fundamental change in English agency law, and their poorly drafted provisions have left the courts groping for an accurate statement of the law.
The problem stems from provisions in the European Self-employed Agents Directive. It is arguable that the likelihood of problems was recognised when the directive was drafted, as it included a requirement for the European Commission to submit a report by 17 December 1994 on the implementation of the provisions into the national laws of member states. In addition the commission was required to put forward its proposals, if necessary, for amending the provisions.
But invariably the commission is late in what it does. The submission of this report was no exception and it was not published until July 1996, more than 18 months late.
Further, it fails to put forward possible amendments. Instead it consistently calls for German case law and practice in this area to be followed.
Under the indemnity system, a terminated agent is entitled to payment of an indemnity to the extent that he has brought new customers to the principal or has significantly increased the volume of business with existing customers. This is subject to the requirement that the principal continues to derive substantial benefits from such customers after termination. The payment of the indemnity must be equitable having regard to all the circumstances and, in particular, the commission lost by the agent on the business transacted with such customers.
The Directive provides a one-year ceiling on the amount of the indemnity. This is calculated from the agent's average annual remuneration over the preceding five years (or, if less, the average for the period in question).
In this respect the regulations follow the directive. However, as regards the volume of business with existing customers, the report points out that the German courts are concerned with whether the increase in volume is such that it can be considered to be economically equivalent to the acquisition of a new customer. In relation to new customers, the addition of a single customer is sufficient.
The concept of an indemnity reflects the continuing benefits to the principal resulting from the agent's efforts. The agent, however, will only have received commission during the duration of the agreement, which does not reflect the value of the goodwill generated for the principal. It is for this reason that payment of an indemnity is commercially justified.
As the report points out, the indemnity system was derived from the German Commercial Code.
The report provides a worked example of an indemnity under the directive. In doing so, it allows for assumptions to be included and an estimate made. The report refers to special circumstances justifying a departure from an established procedure. It also lists a range of factors which may or may not be taken into account.
The conclusion of the report is that this method of calculating the indemnity is “extremely precise and should lead to a predictable outcome”. This is, at best, a misconception.
It is the case that an indemnity may have a role to play in agency agreements. If, for example, the principal's business is mature and it is unlikely that an agent will introduce new customers or significantly increase business with existing customers, the principal may prefer the agent to have an indemnity rather than a right to compensation.
Another situation may be where the principal provides the agent with leads. An indemnity may also be useful in the case of an indefinite term agency agreement. But the position is far from being as cut and dried as the commission suggests.
The report also analyses the compensation system. This is derived from French law.
In the report the Commission dwells on the vagaries of the French courts in determining compensation. But, at the same time, the commission confusedly interchanges in the report the terms “indemnity” and “compensation”.
What cannot be denied is that the large majority of member states have adopted the indemnity route. There are only three exceptions:
France, which understandably has continued with existing French law;
Ireland, which failed to provide any choice in its legislation and has now been brought before the European Court of Justice by the commission; and
the UK, where the parties must positively elect for the inclusion of the indemnity in their agency agreements.
But to the evident disappointment of the commission, there has been no universal adoption of German principles in the countries which have adopted the provisions.
In its report, the commission considers business practice. It remarks on the reaction in the UK to the regulations and suggests that this is due to fear of the unknown. At the same time the commission points out that while there was some interest in the indemnity by UK principals as a result of the maximum limit, other principals have preferred the compensation route which means the agent has to prove actual loss.
Written before transcripts of two of the first cases concerning the regulations to come before the English courts were available, the report considers it likely that the English courts will take account of common law principles. But ironically, in neither of these cases did common law principles play a significant role.
Instead, the first case, Page v Combined Shipping and Trading, turned on the issue of the interpretation of the “proper performance of an agency contract” in relation to compensation for the purpose of the regulations. But the Court of Appeal failed to take account of the whole regulation.
In the second case, Skingsley v KJC Carpets, the district judge assessing the damages recognised that the regulations provide for “no-fault” compensation. The agency contract itself did not provide for an indemnity. But the district judge proceeded to make an assessment purportedly (but incorrectly) on the basis employed by the German courts.
This was despite the fact that the applicable law in Germany is concerned with the issue of an indemnity (and not of compensation) to agents on termination. The company decided to appeal against the judgment but it is understood that subsequently a settlement was reached out of court.
Overall, the commission is shamelessly ambivalent. The directive was derived from the original proposal in 1977 by the commission to the Council of Ministers. Further, the report, having pointed to the uncertainties which exist, is claimed by the commission to provide further clarification of the indemnity and compensation provisions in the directive.
The commission claims that in providing such clarification, the report should facilitate a more uniformed interpretation of the provisions. But in putting forward this view it has failed to discharge its duty under the directive. Clarification is not provided simply by an abdication of responsibility in favour of German law.
More particularly, it is difficult to see how the Commission can put forward these views given the vagaries and uncertainties noted in its report.
Principals in the UK need to take account of the existing cases and the report. But subject to this there are ways in which they can engage agents in order to try and limit the burden which the regulations impose on them.