11 July 2008

Compensation for Commercial Agents

The Commercial Agents Regulations 1993 (CARS) offer protection to self-employed commercial agents. In particular, they entitle agents to statutory compensation if the principal (the person on whose behalf the agent acts) terminates the agency relationship.

This compensation is separate to any contractual damages that the agent may also be entitled to and is for damage suffered as a result of the termination.

Agents who have authority to negotiate on behalf of the principal are entitled to compensation, but the term ‘negotiate’ is not defined in the regulations.

In a recent case, the judge said that CARS are there to provide protection to agents by giving them a stake in the goodwill that they have generated for the principal. Therefore, courts should not limit or restrict the interpretation of the word ‘negotiate’. Here, it was decided that the agent who encouraged clients to buy the goods and liaised with the principal about pricing was ‘negotiating’ within the meaning of CARS.

The courts have previously said that compensation should be calculated by reference to the market value of the agency – the price a purchaser would pay to take it over. Factors to be considered included the growth of the product market, the net profit made by the agent and a discount for the future rate of interest.

In this recent case, the principal argued that the valuation placed on the agency was inaccurate, as it was based on a hypothetical market and therefore the compensation should not be payable. The judge rejected this argument and said that in the absence of a ‘real’ market a hypothetical market should be used, otherwise genuine compensation claims could be wrongly set aside.

However, agents are not entitled to compensation if they have breached the agency contract to such an extent that it justifies immediate termination. It was held in this case that persistent minor breaches could amount to a serious breach, barring the agent from claiming compensation.

For further information please contact Nigel Maud on 01483 887718.