Effect of invalid compensation / indemnity clause in commercial agency agreement

In the case of Brand Studio Limited v St John Knits Inc [2015] the court had to decide whether an agent was entitled to receive compensation or an indemnity pursuant to the Commercial Agents (Council Directive) Regulations 1993 (“the Regulations”) following the termination of its agency agreement. The issue arose as a result of the decision of the court in Shearman v Hunter Boot Limited [2014].

The Regulations

The Regulations provide that a commercial agent is entitled to receive an indemnity or compensation on termination of the agency (except in certain limited circumstances). Regulation 17(2) provides:

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

An indemnity is limited to a figure equivalent to one year’s remuneration calculated from the commercial agent’s average annual remuneration over the preceding five years (or over the period in question if less than five years). In contrast, there is no limit on the amount of compensation that can be awarded and it is instead calculated on the basis of the loss of value of the agency. The amount of compensation that can be awarded may often be higher than the indemnity that would otherwise be available to the agent. Principals frequently include indemnity provisions in agency contracts as a result. However, this will not always be the case and so some principals have tried to incorporate clauses which allow them to pay either compensation or an indemnity depending on which gives rise to the lowest payment at the time of termination.

Shearman v Hunter Boot Limited

In the Shearman case the agency agreement contained such a clause. However, HHJ Mackie found that it did not amount to a valid “agreement otherwise” and it was therefore unenforceable. The judge stated:

“I recognise that the right to choose may permit not only choice between the systems but also election of one where the termination is for one reason and the other where it is for another. Clause 14 does not provide for different systems in different situations, visible at the time of the agreement such as death or bankruptcy (as envisaged by, for example, the DTI guidance). It provides for different systems to apply in an eventuality not capable of being specified at the time of the Agreement, namely whichever system turns out at termination to be cheapest for the Principal. This does not seem to me to give effect to the choice which the Directive and the Regulations permit. The Clause does not give the Agent, in a real sense, the ‘Entitlement’ (as it is described in the heading to the Regulation) to either compensation, or alternatively, indemnity.”

Brand Studio Limited v St John Knits Inc [2015]

The defendant was an American company designing, manufacturing and retailing luxury women’s clothing. The claimant was a UK sales agency. The agency agreement provided as follows:

“Upon expiry or termination of this Agreement for any reason:

(a) If and to the extent that the …Regulations apply, [the agent] shall (if and to the extent so entitled in accordance with the provisions of the Regulations) have the right to be indemnified as provided for in regulation 17 of those Regulations. For the avoidance of doubt, [the agent] shall have no right to any compensation under those Regulations upon termination or expiry of this Agreement provided that if the amount payable by way of indemnity under this Clause would be greater than the amount payable by way of compensation [the agent] shall…have the right to receive compensation instead of an indemnity under the regulations…

In the event that any provision of this Agreement is held to be invalid or unenforceable, such provision will be deemed to have been severed from the Agreement, while the remainder of the Agreement will remain in full force and effect.”

The court had to decide as a preliminary issue whether the claimant agent was entitled to receive compensation. Following the reasoning in the Hunter Boot case the agent sought to argue that because there was no valid “agreement otherwise” it was entitled to compensation rather than an indemnity (presumably on the basis that would result in a larger payment). The defendant principal argued that the offending part of the clause could be severed. This would have the effect of leaving the indemnity provision in place.

The question of whether a clause could be severed in this way was not argued in the Hunter Boot case and so the judge here had to decide whether the provision could be so severed.

In a short judgment the judge concluded that the second part of the clause could be severed. This left the clause containing the concession by the agent that in the event of termination it would receive an indemnity rather than compensation.

Whilst each case and clause must be examined on its individual facts, the case serves as a useful reminder of the principle established in the Hunter Boot case and goes one step further in examining the effect of invalidity of the clause in question.

For more information about the Commercial Agents (Council Directive) Regulations 1993 or to find out more about how the Dispute Resolution team can help you please contact Rowan Turrall on 0118 952 7206 or email rturrall@boyesturner.com

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