Commercial Agency – Indemnity and Breach of contract during notice period.

Barry Riley

– The implications of the Commercial Agents Regulations and Directive

The Commercial Agents Directive (as implemented in England and Wales by the Commercial Agents Regulations on 1st January 1994) is intended to harmonise the laws of member states in respect of commercial agency contracts, enhancing the position of agents in relation to their principals. On termination of an agency contract (including where the principal gives contractual notice to terminate), the agent is entitled to either compensation or an indemnity.

Article 17(2)(a) of the Directive states that a commercial agent is entitled to an indemnity if:

1.he has brought the principal new customers, or significantly increased the volume of business with existing customers, of which the principal continues to derive substantial benefits as a result; and

2.payment of this indemnity is equitable, having regard to all the circumstances.

Article 18(a) states that the indemnity is not payable where the principal has terminated the agency contract because of a default by the commercial agent, which would justify immediate termination of the agency (and thus no compensation or indemnity) under national law.

The ECJ has ruled in the above case that once a principal has given contractual notice to terminate a commercial agency, they then cannot withhold an indemnity due to the agent after discovering a breach of contract by the agent, during the notice period. The words “because of” in Article 18(a) suggested that there needed to be a direct causal link between the agent’s breach of contract, and the decision by the principal to terminate the contract.

However, the agent’s breach of contract may be taken into account when deciding if payment of the indemnity is equitable under Article 17(2)(a). This will be looked at when the courts assess whether the indemnity is equitable in all the circumstances. It may well have the effect of reducing any indemnity payments which an agent may otherwise be entitled to, due to its breach.

However, principals will be disappointed with the latest decision by the ECJ, although many have suggested that it should come as no surprise, due to the underlying aim of the Directive being primarily to protect an agent from a stronger principal. Principals are now in the unfortunate position where upon giving contractual notice to terminate, there is technically no ability to exclude the indemnity which is due to the agent, if they are found to be in breach of the contract during the notice period.

Barry Riley
briley@metcalfes.co.uk
DDI – 0117 9453 042

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