Compensating Commercial Agents: At Last Some Good News For Principals?

If you engage self-employed agents to promote your goods, rather than using an employed sales force, the Commercial Agents Regulations are likely to have a number of important implications for your business. Most significantly, you may have to pay compensation to your agents on the termination of their agency, save in certain limited circumstances.

The article below addresses the impact of a court decision earlier this year which goes some way towards clarifying how such payments should be calculated.

Herbert Smith considers the recent case of Tigana v Decoro
The Commercial Agents Regulations (Council Directive) 1993 introduced significant potential liabilities for businesses which engage self-employed agents to promote their goods rather than using an employed sales force. Most importantly, Regulation 17 requires the principal to make a payment of "compensation" or "indemnity" to the agent on the termination of the agency, save in limited circumstances in which the agent loses his entitlement. However, the Regulations do little to clarify how such payments, and particularly compensation payments, should be calculated.

On 3 February 2003, Mr Justice Davis delivered judgment in the High Court case of Tigana v Decoro [2003] EWHC 23. From the perspective of principals, the decision brings some long-awaited good sense to the approach to awarding compensation under the Commercial Agents Regulations, but it is not entirely cause for celebration.

This was a claim by an English agent against a Hong Kong based furniture company whose products he had introduced into the UK market. The contract was for an initial one-year term with a provision for renewal if agreed between the parties. At the end of the year, the principal notified the agent that it did not intend to renew the contract, following which the agent claimed (inter alia) for compensation under Regulation 17.

The judge departed significantly from the approach of the Scottish appeal court in the case of King v Tunnock [2000] IRLR 570 which had been of concern to principals since the judgment was given in March 2000. In that case, the Scottish court concluded that since the compensation regime under the Regulations was derived from French law and practice, and since the main objective of EC Council Directive 86/653 (which the Regulations implement) was to harmonise the law of Member States relating to commercial agents, the Regulations should not be construed as being radically different from the French approach. Accordingly, the court adopted the French approach of using two years’ gross commission as a "benchmark" for compensation, which could be varied at the discretion of the judge in appropriate (but ill defined) circumstances.

In Tigana v Decoro, Davis J rejected the two-year benchmark:

He held that the English court is not bound to enquire into the law of France or any other Member State in assessing the agent’s entitlement. It is for the court to exercise its own judgment under the Regulations, and not try to mimic what a French court would do in a particular case.

So how is the English court to exercise its judgment in determining the level of compensation to be awarded? Davis J accepted that the court must necessarily adopt something of a "broad brush" approach, but said that there must nevertheless be some methodology to the assessment. He set out a number of factors which, he suggested, are likely to require consideration in deciding what (if any) compensation to award:

• the contractual period of the agency and its actual duration up to termination;
• the terms and conditions of the agency under the contract;
• the nature and history of the agency and the particular market;
• the matters specifically mentioned in Regulation 17(7), namely the extent to which: (a) the principal has received substantial benefits linked to the agent’s activities; and (b) the agent has incurred expenses in the performance of the contract on the advice of the principal which he has not been able to amortize;
• the nature of the client base and contracts placed (eg. one-off or repeat);
• whether the agency is exclusive or non-exclusive, for both principal and agent;
• the extent to which the principal retains benefit from the agent’s activities;
• the extent to which the agent is free to deal with customers after termination;
• whether there are any payments under Regulation 8 or other Regulations;
• the manner in which the agency came to an end;
• the respective financial contributions to the goodwill accruing during the agency;
• the extent to which there may have been loss caused by any relevant breach.

Comment
This approach has the advantage of allowing the judge to conduct a sensible balancing exercise based on the merits of the particular case, rather than being constrained to start from some apparently arbitrary "benchmark".

It is significant that the judge’s "balance sheet" of factors to be taken into account in assessing compensation includes both: (i) the extent of loss suffered by any breach, reflecting the judge’s stated view that damages which would otherwise be payable for breach of contract or duty are to be subsumed into an award of compensation; and (ii) the amount of commission awarded under Regulation 8 on sales concluded within a "reasonable period" after termination which are "mainly attributable" to the agent’s efforts during the agency. In other words, the judge appears to have recognised the possibility of duplication between compensation and other categories of payment to the agent and to have allowed a mechanism to reduce or eliminate such duplication.

Further, the judge recognised the desirability of keeping awards of compensation generally within the range of awards made under the alternative regime of "indemnity" established by Regulation 17 (which will apply in place of compensation if specifically chosen by the parties in the agency contract and which has a "cap" of one year’s gross commission). The judge commented that given the Directive’s aim of harmonization and the cap applicable to indemnity awards "One would have thought that a court might at least be rather slow (save in a very meritorious case) to make an award of compensation very significantly in excess of the maximum available under the indemnity provisions".

On the negative side, however, the judge’s "balance sheet" approach leaves a significant amount of uncertainty for both principal and agent as to the level of compensation that might be awarded in any given case, an uncertainty which is exacerbated by what might be seen as a surprisingly high award made in this particular case. Despite the short period of the agency (a total of less than 15 months) and the absence of any restrictions on the agent acting for competitors, the judge awarded the agent compensation equivalent to his net remuneration over the entire period of the agency – approximately US$450,000. This was in addition to an award of (at least) US$600,000 for 9 months’ post-termination commission under Regulation 8 – a factor the judge specifically took into account in assessing the award of compensation. Overall, therefore, the agent received some US$1,050,000 in circumstances where his total gross remuneration under the agency contract was approximately US$565,000.

It is apparent from the judgment, however, that Davis J considered this to be an unusual case. The agent had introduced the principal’s products into the United Kingdom from scratch and had secured very substantial orders from the corporate buyers he introduced, bringing UK turnover from nil to some US$9 million in just over one year. Further, the principal had continued to reap substantial benefits after termination from the customer connections introduced by the agent. It is clear that the judge saw this as a particularly meritorious case, despite the short length of the agency and the other factors referred to above, and the award of compensation must be seen in this light.

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