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Commercial agents: entitlement to compensation or indemnity?

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01/04/2014

Charles Shearman (t/a Charles Shearman Agencies) v Hunter Boot Ltd [1] concerned a claim by a commercial agent following the termination of his agency. The agreement provided, in essence, that, upon termination, the agent would receive an indemnity, unless compensation would be lower in which case he would get compensation. The question for determination by the High Court was what was the effect of Regulation 17(2) of the Commercial Agents (Council Directive) Regulations 1993 on this provision? Regulation 17(2) provides: “Except where the agency contract otherwise provides, the commercial agent shall be entitled to be compensated rather than indemnified”.

This mattered because, following the House of Lords judgment in Lonsdale v Howard & Hallam [2] compensation is calculated by reference to the value of the agency depending on the circumstances existing at the time of termination, including earnings potential and the price that a third-party purchaser would pay for it. According to the claimant, this would be a value of not less than £1,454,000. Under Regulation 17(4) any indemnity would be capped at an amount equivalent to the claimant’s average annual commission over the last five years of his agency, which, the defendant maintained, was no more than £204,000.

The court considered that a clause of the type in issue was not permitted by the Commercial Agents Directive (86/653/EEC). The words “Except where the contract otherwise provides” in Regulation 17(2) did not permit a provision of the kind in issue. The effect of that was that the clause fell away. Accordingly, if the claimant was entitled to anything – and that issue was still to be determined – it would be to compensation.

The lesson for principals is that unless the contract clearly states that an indemnity will apply on termination, compensation will apply. Principals cannot “hedge their bets” and see – post-termination – which remedy will be most favourable to them and apply that.

The judgment does not preclude the possibility of drafting a contract such that compensation will be payable following certain termination events and an indemnity following others, although the courts will be keen to ensure that the contract has not been structured in such a way that the agent is always left worse off.

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[1] [2014] EWHC 47 (QB)
[2] [2007] 1 WLR 2055

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