If you are a commercial agent whose agency has been terminated or a principal considering ending a commercial agency arrangement it is essential to understand the consequences of termination.
The Commercial Agents (Council Directive) Regulations 1993 ("the Regulations") offer protection to self-employed agents, including the right to compensation or an indemnity payment on termination.
Our Commercial Agency experts explore the difference between compensation and indemnity. And how do you know which applies?
What is the difference between compensation and indemnity?
The requirement for a principal to pay either compensation or indemnity to a terminated agent stems from Regulation 17. The two entitlements are calculated very differently.
- Compensation requires the principal to pay a sum of money to the agent as compensation for the agent’s loss of the agency with reference to the value of the agency to a hypothetical purchaser at the date of termination.
An indemnity requires the principal to indemnify the agent for the value of the goodwill the principal continues to receive after the agency terminates.
How do I know if I should pay or be paid compensation or indemnity?
An indemnity is only payable if there is a written agency agreement and the agreement states that upon termination, the agent will be entitled to an indemnity.
If there is no written agency agreement or the agency agreement specifies compensation would apply upon termination, or if it is silent on the issue, then compensation would apply.
How is “compensation” calculated?
The method of valuation for Regulation 17 compensation was decided in the House of Lords case of Lonsdale v Howard and Hallam. The purpose of compensation is to compensate the agent for the value of the agency it has lost. It is calculated based on the value of the agency to a hypothetical purchaser at the date of termination.
The method of calculation of the level of compensation is complicated and will take into account the maintainable income stream of the agency, the expenses attributable to the running of the agency and the risk factors associated with the agency.
How is “indemnity” calculated?
An indemnity payment requires a valuation of the goodwill the agent has brought to the principal’s business and the continuing benefit the principal continues to derive following termination of the agency.
Indemnity is capped at a maximum of one year’s gross commission over a five-year period (or lesser period if applicable).
Do I have any other claims upon termination, and if so, what are they for?
An agent may also have claims under Regulations 7, 8 and 15.
Regulation 7 provides that an agent should be paid all commissions due to him during the course of the agency. If your principal has not paid you all commissions due to you up to termination, you would have a claim under Regulation 7.
Regulation 8 entitles you to claim for what are often referred to as pipeline commissions. These are sales mainly attributable to the agent’s efforts concluded during the reasonable period after termination.
You may have a Regulation 15 claim if you have not been provided with sufficient notice of the termination of your agency.
Are Compensation or Indemnity Payments Subject to VAT?
Before a change in policy in 2021, compensation and indemnity payments made under the Regulations were generally treated as not subject to tax.
However, new guidance from HMRC stated that this is no longer the case where there is a direct link between the compensation or indemnity payment and the supply of goods or services under an agency contract.
It is therefore important to consider whether any settlement offer for a claim for compensation or an indemnity by an agent is being made exclusive or inclusive of VAT, and the agent should always seek independent financial advice from their accountant or tax specialist on this point prior to accepting a settlement offer.
Need Advice on Compensation or Indemnity Under the Regulations?
Whether you're a principal or an agent, understanding your rights and obligations under the Commercial Agents Regulations is key to protecting your financial interests.
At Myerson Solicitors, our commercial agency experts regularly act for both agents and principals in resolving compensation and indemnity disputes.
Visit our Commercial Agency page or contact us today for specialist legal advice tailored to your situation.
0161 941 4000
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Robert Brothers
Senior Associate
Rob has 7 years of experience acting as a Dispute Resolution solicitor. Rob has specialist expertise in professional negligence disputes, shareholder and partnership disputes, complex contractual disputes, intellectual property, reputation management and commercial agency claims.
About Robert Brothers