Commercial agents

The Commercial Agents Regulations 1993 apply to any contract with a self-employed intermediary (which may be a limited company) who has authority to negotiate the sale or purchase of goods.

It used to be thought that if a contract deliberately gave the intermediary no authority to negotiate, he would fall outside the Regulations.  However, since the 2005 case of P J Pipe & Valve Co. Ltd v Audco India Limited, provided the intermediary makes introductions and plays a significant role in persuading the buyer to buy the principal's products, he will be a Commercial Agent irrespective of whether he has negotiating authority or not.  As a result of this case, the regulations apply to many more businesses that was previously thought.

On the bright side - for principals - the 2007 case of Lonsdale v Howard & Hallam Ltd has thrown out the old rule (based on French law) that the starting point for calculating an agent's compensation is 2 years' net commission and replaced it with an assessment of the value of goodwill in the agent's business at termination.  The goodwill is valued just like any other business.  And the basic question is what would the agency have fetched on the open market?

It is open to the principal and agent to state in the contract that an indemnity should be payable on termination instead of compensation and this should be carefully considered at the outset.  So, before entering into or terminating any agency agreement you need to consider:

• whether the Commercial Agents Regulations apply
• when compensation will be payable
• how will compensation be calculated and whether an indemnity would be preferable
• what steps can be taken - on negotiating the contract and terminating it - to limit any compensation

We can guide you at all stages and if you do face a claim, we can help you to minimise the damage.

Email our employment team.