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Business efficiency is the watch word of industry. The media regularly reports on chief executives looking to strip large portions of costs from the overhead base. Where the spotlight falls on staff, perhaps an answer lies in using agents as opposed to sale representatives.
Certainly an employed sales force has advantages. But these must be balanced against the burden of a myriad of employment laws and the employment tax payable by employers. In addition employed sales reps have to be paid whether they produce sales or not. Contrast this with the use of agents who are remunerated by commission. No sale, no commission – it is as simple as that.
Whilst the virtues of agents are evident, what cannot be overlooked is the existence of the Commercial Agents Regulations.
The Regulations implemented into British law the European Self Employed Agents Directive. This Directive stems from a time when harmonisation throughout the EU was all the rage. One way that it was thought that this could be obtained was to put in place a level playing field across Europe when it came to using agents.
When the Regulations first came into force, many companies were taken by surprise. Even today there is a considerable misunderstanding as to how the Regulations work and the ability of companies which use agents to avoid them.
As a result of the Regulations agents enjoy more rights and protections than they did previously. Equally it is not possible to contract out of many of these rights and protections. So what are the rights, and for the principal, what can be done about them?
An agent is entitled under the Regulations to a minimum period of notice. From day one an agent will have one month’s notice rising to two months’ on the first anniversary of his appointment. From the second anniversary the agent is entitled to three months’ notice. In each case the Regulations require notice to expire at the end of a calendar month. Therefore without careful date selection, an agent could be entitled to three months and thirty days’ notice! But drafting the agency agreement so as to provide for notice to expire at any time will provide a way out.
An agent is also entitled on termination to commission earned but unpaid. Usually this does not cause a principal a problem. However, the Regulations can require an agent to be paid commission even before the principal has been paid by the customer. This is a provision from which it is not possible to contract out. But with careful drafting some of the sting of the cashflow disadvantage which this can result in can be reduced.
To many principals it seems unfair that although proper notice of termination is given, an agent should be entitled to claim a sum of money on termination. But this is what the Regulations provide. The underlying philosophy is that the agent has contributed to the value and goodwill of the principal’s business and should be recompensed as such on termination.
The Directive provides agents should be entitled either to an indemnity or compensation on termination. Member states were given the opportunity to choose which to adopt. Most member states have opted for indemnity. France, Ireland and Cyprus went for compensation. Only the UK failed to make up it’s mind and provided for both indemnity and compensation. However, indemnity will only apply if the parties have elected for it.
Until recently most properly advised principals would opt for indemnity insofar as the maximum which an agent can receive on termination is equal to the average annual commission earned over the five years prior to termination. In contrast for many years there had been a tendency when quantifying compensation to apply the so called benchmark of two years’ worth of commission. However in February 2006 the Court of Appeal decided that compensation should be an amount equal to the value of the agency at the time of termination as if it had been purchased by a third party. Putting to one side that this decision conveniently overlooks the fact that agencies are rarely bought and sold in the UK, it means that there remains uncertainty as to how to value the agency at termination. Certainly in one case in which the writer was involved, the agent client’s auditors came up with a valuation with eight times earnings. In another case involving the energy sector, a valuation of 9.5 times earnings was claimed.
The rights given to agents under the Regulations are cumulative. They do not, however, stop with compensation or indemnity. Instead the Regulations envisage that it is possible that an agent could have undertaken work prior to termination which bears fruit after termination in terms of orders reaching the principal. In such a situation the agent will be entitled to post-termination commission, subject to two provisos. First, that the orders reach the principal within a reasonable period following termination. Second that this is one of the rare provisions in the Regulations from which the parties can contract out.
If the principal fails to fulfil an order for a reason for which it is to blame, the Regulations entitle the agent to claim "back commission". The bad news for principals is that such claims are usually raised only following termination and can go back over a period of six years. The good news, however, is that agents are often poorly organised and without good forensic skills and records it may be difficult for an agent to properly quantify his claim for back commission.
The Regulations also provide that the principal has an obligation to act dutifully and in good faith towards the agent. If the principal foresees a downturn in the volume of business which may be undertaken by the agent, the principal must inform the agent accordingly. Failure to do so will trigger a potential claim by the agent for damages.
The Directive has been implemented in all member states of the EU together with Lichtenstein, Norway and Iceland. However, despite the harmonisation objective, differences exist across the EU and, so far as the UK is concerned, even between England and Scotland. For example, the Scottish courts are generally more pro-agent than the English courts. Meanwhile German law has interpreted the obligation on the principal to provide the agent with all documentation that the agent may need as including samples!
A business given the opportunity to choose between an employed sales force or agents should adopt the business model which is right for it. Legal issues will exist in any event. But with care many of them can be addressed leaving the business with the structure which is best for it.
Stephen Sidkin leads the Fashion Law Group at Fox Williams LLP and specialises in advising on agency and distributorship agreements (www.fashionlaw.co.uk ; www.agentlaw.co.uk )
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