Every commercial agent has the right to a lump-sum payment in the event of the termination of their agency agreement. This payment can either take the form of compensation or an indemnity.

In order to obtain indemnity, a provision must be made in the agency agreement - if no such provision exists, the agent will be entitled to compensation only and not indemnity.

Deciding whether or not to make this provision is a very important matter, as its presence or absence can have major financial implications in the future.

In 2007, the House of Lords ruled in the case of Lonsdale v Howard and Hallam Limited that compensation for termination of an agency relationship should be determined by reference to the value of the agency. In European courts, this had previously been calculated as twice the average annual gross commission over the previous three years.

However, the House of Lords ruled in this case that a more reasonable figure would be obtained by calculating what a hypothetical purchaser would be willing to pay for the agency, with the date of sale being the date of termination.

There is no upper limit to the amount of compensation that can be awarded, and compensation is decided on a case-by-case basis, which makes this a potentially risky option for agents and principals alike.

As far as the calculation of indemnity is concerned, the recent case of Turgay Semen v Deutsche Tamoil GmbH offers some useful guidelines.

In this case, the Advocate General stated that indemnity should be limited by the value of commissions lost by the agent, provided that the method of calculating lost commissions truly reflected the expected gains and losses of the principal and agent in the period following the termination.

There is, however, a further important point to consider when it comes to indemnity on termination of a contract. Under English law, an indemnity is only due if the agent has attracted new customers or has significantly increased the principal’s business with existing customers. Compensation has no such qualification.

This last point could be particularly important if, for example, an agent were to take on an existing customer list of mature clients, as there would then be little scope to grow the business and so any subsequent indemnity payment is liable to be small or even non-existent.

Technorati Tags: Commercial Agency, Compensation, Indemnity, Termination of Agency