10 December 2018 - Article
Under English Law, Commercial Agents and Principals are allowed (and indeed encouraged) to elect whether compensation or an indemnity will be payable upon termination of the agency relationship. If the parties fail to make an election, the default position is that compensation will be payable. Whether you are a Principal or an Agent, it is important to give careful thought as to which of these alternatives you should elect, as they can produce very different results.
In the recent case of Charles Shearman v Hunter Boot Limited, Hunter resisted a claim for compensation by its Agent, Shearman, under the Commercial Agents Regulations 1993 (which gave effect to the European Directive in English law). It was accepted that, if Shearman was entitled to compensation, he would have received at least £1,454,400 whereas if he were awarded an indemnity, he would have earned no more than £204,000.
The clause in the agreement which caused confusion was clause 14. Its meaning and effect were clear: upon termination of the agreement, the Agent would be entitled to be indemnified unless the amount of compensation would be less than the amount of an indemnity, in which case, he would be entitled to compensation. In other words: the worst of both worlds for the Agent, but a perfect outcome for the Principal.
It was not disputed that, under English law, clause 14 should be given its literal meaning. The question was whether that approach would produce a result which was inconsistent with the Regulation and the purpose of the Directive. To the extent the two produced different results, which one should prevail?
The question was referred to the Court as a preliminary issue and Mackie J handed down his judgment on 22 January 2014 in favour of the Agent.
In arriving at his decision, the Judge paid heed to the background and purpose of the Regulation, namely to protect the position of Agents who were seen to be vulnerable when dealing with their Principals.
He acknowledged that it is open for the parties to freely elect to choose not only between the two systems (compensation or indemnity), but also to elect for one where the termination is for one reason and the other where it is for another. However, in this case, the parties sought to provide for different systems to apply in an eventuality not capable of being specified at the time of the Agreement – ie, whichever system turns out to be cheapest for the Principal. This, the Judge concluded, produced a result which went against the purpose of the Directive and was not, therefore, enforceable. Accordingly, the whole of clause 14 fell away and, if anything, the Agent would be entitled to compensation and not an indemnity.
In attempting to achieve the best of both worlds, the Principal lost the right (and therefore the protection) of electing for an indemnity, potentially costing it in excess of £1,000,000.
This case highlights the importance for both Agents and Principals to think carefully before electing between the two regimes and sends out a clear message to Principals – play the Regulations at your peril!