Overview of the Commercial Agents (Council Directive) Regulations 1993.

The Regulations implement the EC Commercial Agents Directive (86/653/EC).

The intention of the Directive was to enhance and protect the position of commercial agents, described colourfully by one judge as “a downtrodden race”. Further, to harmonise the different national laws on commercial agency agreements. However, despite this intention, significant differences do exist between national laws implementing the Directive. This sometimes comes as a surprise to those who had expected to enjoy uniform outcomes with their European counterparts.

The Regulations came into force on 1 January 1994 and since then there has been a wealth of case law exploring the meaning of the different provisions. We have been prominent in developing the law by obtaining important judgments for clients relating to agent conduct, the age of retirement and valuation of compensation.

There is no doubt that the Regulations remain an excellent source of protection for commercial agents and help to balance the power with principals. They also provide a straightforward source of contractual terms for the parties to fall back on in the event that they have not addressed an important right or obligation, for instance, time for payment of commission.

Provision of Notice

How much notice am I entitled to?

This depends on your length of engagement. The Regulations provide that the period of notice shall be–

(a)1 month for the first year of the contract;
(b)2 months for the second year commenced;
(c)3 months for the third year commenced and for the subsequent years;
and the parties may not agree on any shorter periods of notice.

Unless otherwise agreed by the parties, the end of the period of notice must coincide with the end of a calendar month.

Example: You met the principal at a trade show in Birmingham and reached a verbal agreement that you would sell his products as his agent. This agreement commenced on 28 January 2009. Nothing was said at the time about the issue of notice.

Sales are strong; however, without warning your principal terminates your agency on 5 December 2013. At this point in time you have acted for more than 2 years. Further, there was no agreement that notice would expire before the end of a calendar month.

In this case, you would be entitled to a notice period until 31 March 2014, therefore a period of just under 4 months.

What happens if my principal does not want me to work during my notice period?

The starting position is that you are entitled to continue acting and should point this out to your principal. You could consider seeking court intervention if it is particularly important to you to continue for the period of notice. Alternatively, if you accept this proposal then you will nevertheless be entitled to “payment in lieu of notice”, which will equate to what you would have earned had you been allowed to continue acting. This can be calculated as a representative average of the preceding period and if matters are litigated will involve a court “doing the best it can” with evidence placed before it.

Notice Period for Fixed Term Agencies

An agency agreement for a fixed period that continues to be performed by both parties after the given period expires is deemed to be for an indefinite period, with the same consequences on notice periods. In this event, the expired fixed period will be counted towards the period relevant for notice entitlement.

The Giving of Notice by You

If you determine that your agency is “not working out”, for instance, competitors are affecting profitability, and you don’t wish to continue acting, then you should write to your principal providing notice as set out above. You should state the date you will cease acting and you may also wish to deal with issues such as return of samples, payment of outstanding commissions etc.

However, you should always consider seeking legal advice before terminating an agency because as soon as notice is given, it may be impossible to retract it. Terminating the agency yourself, if not on the grounds of ill health, age, infirmity or serious breach by the principal is likely to mean that you will not be entitled to any compensation or indemnity. As these are potentially lucrative entitlements you should consider the position very carefully before acting.

Compensation or Indemnity?

What is the difference?

Upon termination of your agency you may be entitled to claim payment of an indemnity or alternatively compensation. The indemnity right was originally based on German jurisprudence and provides for a payment capped at one year’s average commission based on the previous five years or lesser period if applicable.

The compensation provision is notionally based on French jurisprudence; however, the approach is to value the agency based on a market methodology. Sometimes this involves instructing an accountant or business valuation expert to provide a written report setting out their view as to the appropriate value.

Regulation 17(2) provides that “Except where the agency contract otherwise provides, the commercial agent shall be entitled to be compensated rather than indemnified.” Therefore in the absence of any specific agreement to an indemnity (this will usually be set out in your written contract, if you have one – look for references to being “indemnified”) the compensation alternative will apply.

How do I calculate my entitlement to compensation?

As noted above, business valuation principles are applied to arrive at a suitable valuation. This can be done by you, a solicitor or an accountant. Clearly the views of an accountant will be most credible and a written report will often be required by the courts, but a rough and ready “feel” for the subject can be obtained by applying basic, well established principles.

Often this will involve an analysis of historical commission income, perhaps over a three or five year period, plus related expense overheads, sometimes including the number of hours spent on the agency. The key to maximising an agency’s value is to “work smart” by keeping overheads low and minimising time spent. Whilst this advice sounds exceedingly obvious you should bear in mind that agents will, in certain cases, be relaxed about incurring additional overhead costs because they can be offset by tax efficiencies.

For more information on our Commercial Agency services please fill out call back request form or call EAD today on 0151 735 1000.

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