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4 May 2016

Agency Law: How much do you need to pay an agent on termination?

Unless you are terminating the relationship with your agent on the grounds of a "fundamental breach" having been committed by the agent, you may need to make a lump sum payment to that agent. This lump sum can include notice payment, payment of commission on all orders taken up to the date of termination, commission on future orders mainly attributable to the agent's efforts for a reasonable period and a "compensation" or "indemnity" payment.

The compensation or indemnity payment will often be the largest portion of the “lump sum” payment.  Whether your agent is entitled to an indemnity payment or a compensation payment will depend on whether the parties have agreed to an indemnity.  If not, by default “compensation” will be the applicable type of payment.

Neither type of payment (compensation and indemnity) is straightforward to calculate.

Under a compensation payment calculation, an agent is entitled to a payment equivalent to the “value” of the agency as though it were a separate business.  In other words, what a notional third party might pay for the right to step into the agent’s shoes.

An indemnity payment calculation, which has the benefit of being capped at the equivalent of one year’s worth of commission, depends on a range of issues.  One of the key elements to be considered in determining the size of an indemnity payment is whether the agent has brought new customers on board.

A recent European Court of Justice (ECJ) decision has provided further guidance on the “new customers” aspect of an indemnity payment.

The ECJ was asked to consider whether “new customers” meant customers that did not have a business relationship with the principal before the agent was taken on, or whether it could include customers that already had an existing relationship with the agent with the principal, but for goods other than those carried by the agent (i.e. the customers were only ‘new’ in respect of the goods the agent was carrying but had previously been supplied other goods by the principal).

The ECJ found that the latter proposition applied.  “New customers” can include customers who have had previous dealings with a principal provided that those dealings have not included the goods which the agent in question has been carrying.

So if, for example, a principal has been dealing with a specific account, perhaps as a house account, in relation to a specific range of products, but then appoints an agent to obtain orders for a new range of products in the area, then depending on their contractual relationship, the agent may be able to include the existing account  in its list of ‘new customers’ for the purposes of an indemnity payment calculation.

Although this is an ECJ judgment, and not an English case and therefore not directly applicable, it may still hold sway with English courts and serves as a reminder of the importance of considering all the issues surrounding a potential termination, and usually taking legal advice at an early stage.

If you have any queries on agency law, including termination payments due to agents, please contact Richard Bailey at commercial@steeleslaw.co.uk or on 01603 598000.

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