It is well known that commercial agents benefit from the wide protections afforded by the Commercial Agents (Council Directive) Regulation 1993 (Regulations), which include an entitlement to a termination payment pursuant to Regulation 17. But what of sub-agents contracted by the commercial agent, are they protected?
This article explores what sub-agents are, whether they benefit from the protection of the Regulations, and whether sub-agents are entitled to a share of the main agent’s termination payment.
Sub-agents are contractors of the commercial agent. The most common example is where the main agent, who has an agency contract with the principal, hires a sub-agent to help sell the products, usually for a cut of the commissions earned on sales made on behalf of the principal. The sub-agent usually has no contractual relationship with the principal. Its contractual relationship is with the main agent.
The current state of the law is that a sub-agent is not a commercial agent of the principal for the purpose of the Regulations because there is no contract between the sub-agent and the principal. The rationale here is that it would be unfair for the principal to assume liability for sub-agents in the absence of a contractual relationship.
It was until very recently thought that if the main agency was terminated and the main agent was paid a termination payment under Regulation 17, that the sub-agent would have no recourse to claim compensation or an indemnity against the principal but may have a claim to a stake in the termination payment made to the main agent.
The UK Court of Appeal in the case of Light v Ty Europe suggested that sub-agents may be entitled to a share of the main agent’s post-termination payment, on the basis that the payment is in recognition of the goodwill generated with the customers by the sub-agent. That made sense given it would be rather unfair for the main agent to be compensated for the loss of the agency suffered on termination but for the sub-agents to receive nothing.
This issue has recently been considered by the European Court of Justice (ECJ) in the case of NY v Herios (Case C-593/21) EU:C:2022:784 (13 October 2022). Although an ECJ judgment, and therefore not one by which the UK courts are bound to follow since Brexit, the ruling is still relevant to UK sub-agents because the Regulations implement the Commercial Agents Directive in the UK. It is, therefore, a judgment which is likely to be followed by the UK courts.
In NY v Herios, the main agent engaged a sub-agent to sell the principal’s goods. When the main agency was terminated, the principal paid the main agent a goodwill indemnity. The sub-agent claimed, in turn, a goodwill indemnity from the main agent arguing that under the Commercial Agents Directive the indemnity paid to the main agent was a “substantial benefit” derived from the sub-agent’s efforts. The ECJ agreed with that analysis.
The ECJ judgment reinforces the court’s opinion in Light that, in principle, a sub-agent can claim a share of the main agent’s goodwill indemnity pursuant to Regulation 17. However, it will be necessary for the sub-agent to show that the goodwill indemnity which has been paid by the principal to the main agent is a substantial benefit, which means it must be a significant advantage to the main agent and be connected to the services provided by the sub-agent (in other words, it must be in respect of the customer base introduced by the sub-agent). The sub-agent will also have to demonstrate that payment on an indemnity to it is equitable having regard to all the circumstances.
So, whilst a sub-agent is not a commercial agent for the purposes of the Regulations, a sub-agent can be an agent of the main agent with rights under the Directive and presumably under the UK Regulations.
This decision will provide confidence to sub-agents to pursue a share of a goodwill indemnity paid to a maim agent upon termination.
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