Properly drafted agency contracts save money

Businesses who sell their goods through a network of commercial agents are struggling to cope with the onerous demands on the Commercial Agents (Council Directive) Regulations 1993.

These Regulations, based on a European Union Directive, grant a strong set of rights to commercial agents, stronger in many ways than those granted to employees under employment legislation.

Amongst the most difficult provisions for manufacturing business are those which allow the agent a potentially large termination payment where the agent retires due to old age or ill heath or is terminated by the principal, except where this is justified by the serious fault of the agent.

The Regulations provide two methods of calculating the termination payment due.

The first, known as compensation, is, as a benchmark, calculated as being two years' gross commission, although a higher or lower sum can be awarded if the circumstances warrant it. The second method, known as indemnity, is fixed at a maximum of one year’s gross commission.

Unless the parties expressly agree for the indemnity method to apply, it is the compensation method which will be used, which could cost a principal twice as much!

The importance of a clear election for the indemnity method was emphasised in the recent case of Hardie Polymers Limited v Polymerland, decided in the Court of Session on 31 October 2001.

In this case the agent tried to argue that the principal hadn’t expressly elected for the indemnity system. However, the Court decided that, although the word "indemnity" was not used, the effect of the relevant clause in the agency contract was to give effect to the indemnity system of termination payments.

It is important that anyone using commercial agents to sell goods has their contracts reviewed to ensure that there is an effective election for the indemnity system. Failure to do this could result in a doubling of the potential exposure facing a principal on the death, illness, retirement of the agent or where the agent’s services are no longer required.
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