Monthly Archives: February 2014

A case of “heads I win, tails you lose”

Discussion from Ashby Cohen on a commercial agency case.There must be something about footwear and the 1993 commercial agency regulations. The leading case on how to calculate compensation on termination (Lonsdale v. Howard & Hallam) involved footwear. The case of Crocs Europe BV v. Craig Lee Anderson and another t/a Spectrum Agencieswhere the Court of Appeal ruled that a breach of a duty under the regulations did not necessarily entitle the principal to terminate the agency, also involved footwear.

Now there is a reported case which involved Hunter, the well-known manufacturer of wellington boots.

Mr Shearman was an agent under the regulations, for Hunter. His agency came to an end and he claimed compensation.

Assuming that Mr Shearman was entitled to anything at all on the termination of his agency (Hunter argued that he was not entitled to anything at all because his conduct meant that the termination of his agency was justified) the Court had to decide whether Mr Shearman was entitled to an indemnity under the regulations as opposed to compensation.

The question came about because clauses 14.4 and 14.5 of Mr Shearman’s agency agreement with Hunter read as follows:

“14.4 Upon termination of the Agreement the Agent shall not be entitled to compensation but shall be entitled (subject to clause 14.5) to be indemnified ….

14.5 The Agent will not be entitled to the indemnity referred to in clause 14.4 but will be entitled to compensation for the damage it suffers as a result of the termination of its relations with the Agent if the amount of such compensation would be less than the amount payable by way of indemnity.”

In other words, Mr Shearman was to receive an indemnity, unless compensation would be lower in which case he would get compensation. If Mr Shearman was entitled to compensation this would apparently amount to a sum approaching £1.5 million; whereas if he was entitled to an indemnity, this would be capped at an amount equivalent to his average annual commission income over the last 5 years of his agency which Hunter said would be no more than £204,000. So there was a big gap.

Regulation 17(2) provides:

“(2) except where the agency contract otherwise provides, the commercial agent shall be entitled to be compensated rather than indemnified.”

and regulation 19 provides:

“the parties may not derogate from regulations 17 and 18 to the detriment of the commercial agent before the agency contract expires.”

Hunter’s case was that regulation 17(2) provided that on termination an agent shall be entitled to be compensated rather than indemnified “except where the agency contract otherwise provides”. Hunter said that this allowed the parties to agree that on termination the agent will receive an indemnity rather than compensation.

There was nothing in the wording of regulation 17(2) which prevented an agency contract from providing for the agent to be paid whatever sum was the lower in value as between an indemnity payment and a compensation payment.

Mr Shearman accepted that the parties could agree that an indemnity payment would apply on a termination so that from the moment when they made that agreement, they both knew where they stood. He argued that the “except where the agency contract otherwise provides” wording was limited to this static situation.

What he said the parties could not do, is agree that an indemnity might apply depending on whether or not this proved more favourable to the principal – this would amount to a void derogation under regulation 19.

Thus the exception in regulation 17(2) did not apply to Mr Shearman’s circumstance and he was therefore entitled to be compensated rather than indemnified.

It appeared to the Judge that on an English law approach to interpretation, the meaning and effect of clause 14 was quite clear – the wording permitted Hunter to impose on Mr Shearman either compensation or indemnity, whichever was cheaper for Hunter.

However, he went on to review whether that interpretation was consistent with Community law obligations, the regulations having been made to implement a European Directive.

He had it in mind that the Directive and the regulations made to implement it, were to improve the position of commercial agents; he thought it improbable that the framers of the Directive intended to permit a category of choice which would lead to the agent having the worst of both worlds.

Accordingly, he concluded that the approach which clause 14 adopted was not compatible with the underlying thrust of the legislation.

Hunter appears from the report of the case, to have accepted that this meant that the whole of clause 14 should be struck down leaving Mr Shearman free to claim compensation.

Agents who have signed an agency contract which contains a clause providing that on termination they should be paid a sum which is the lower of the compensation and indemnity calculations, can draw comfort from the decision so as to claim an entitlement to compensation if that proves to be the higher figure.

Principals who have signed such a contract might seek to amend it so as to provide simply for an indemnity payment to be made on termination.