This article appeared in the February 2010 edition of Futura Magazine, a trade magazine for the fashion industry. You can see the original article here.
In recent years many clothing & footwear manufacturers have appointed distributors, sales representatives and other agents in order to grow their business and tap into new markets. Now, given the sudden and severe contraction in the Irish economy and in particular the clothing and footwear markets, agents are being informed with increasing regularity by designers / manufacturers that their agency relationship is being terminated or somehow indefinitely suspended. However, for the agent in question the termination may not be as financially disastrous in the short term as first thought – those who qualify as “commercial agents” are granted special rights under E.U. and Irish legislation and may be entitled to a significant lump sum compensation payment.
Directive 86/653/EC on the coordination of the laws of the Member States relating to self-employed commercial agents (the “Directive”) introduced the concept of a commercial agent to Irish Law. The Directive was implemented into Irish law by the Commercial Agent Regulations 1994 and 1997 (the “Regulations”). The Regulations give certain categories of self employed agents (known as “commercial agents”) significant rights as against the persons or companies who have appointed them. In particular, pursuant to the Regulations, an agent can be entitled to compensation when the agency relationship is terminated.
The rationale behind commercial agents being entitled to compensation upon the termination of the agency agreement is that the agent may have helped to grow and develop the goodwill of the principal’s business. As such, when the agency relationship comes to an end, the principal must buy out the agent’s interest in that goodwill in order to compensate the agent for the work they’ve put into building it up.
Although the level of compensation to which the agent is entitled under the Commercial Agent Regulations has not yet been determined by the Irish Courts, there are two possible approaches which the Irish courts may decide to adopt:
- The European Commission has suggested that the amount of compensation should be equal to the sum of two year’s commission calculated on the basis of the average commission earned during the three years preceding the termination of the agency.
- In contrast, the English House of Lords have recently ruled that the damage which the agent must be compensated for should be calculated based on what a hypothetical buyer could reasonably have been expected to pay, as at the date of termination, for the rights the agent had been enjoying (taking into account any real world factors which would influence the amount that a purchaser on the open market would pay for the agent’s business). Essentially, the House of Lords held that because the value of an agency relationship lies in the prospect of earning future commission, and the agent’s expectation that proper performance of the agency contract will provide him with a future income stream, the future income stream needs to be valued in order to assess the level of compensation.
“TERMINATION” MEANS MORE THAN JUST “TERMINATION”
The meaning of “termination” is given a broad interpretation in the context of a commercial agency relationship and the agent does not need to establish unfairness in his termination in order to maintain a claim. For example, if the agency contract is terminated as a result of the death of the commercial agent then the right to compensation under the regulations still arises.
In addition, it appears from English case law (which is not binding on the Irish courts but which can be persuasive) that the agent is entitled to a termination payment where the agency contract in question naturally terminates at the end of its fixed term and is not renewed. This represents a departure from the general rule in contract law that a commercial contract which is terminated in accordance with its terms does not give rise to a right of compensation for the counterparty. Essentially, if you are appointed as an agent by a manufacturer of textiles / footwear and your agreement with the manufacturer is stated to expire after say, 3 years, when that agreement naturally comes to an end, it may still be held to have been “terminated” and you may be entitled to compensation.
Termination of an agency agreement will not give rise to compensation in the following three limited circumstances; Where a principal has terminated the agency contract because of a default attributable to the commercial agent; Where the commercial agent has terminated the agency contract unless such termination is justified by circumstances attributable to the principal or on the grounds of age, infirmity or illness of the commercial agent; Or where the commercial agent assigns his rights and duties under the agency contract to another person.
WHERE TO START?
Before one even attempts to calculate the financial implications of an agency termination, one needs to ascertain that a “commercial agency” relationship was in place and that the factual requirements permitting a claim for compensation exist. Then it is important that the agent notifies the principal promptly of their intention to pursue entitlement under the Commercial Agent Regulations, as they lose the right to compensation within one year following termination of the agency agreement.
WHEN IS AN AGENT NOT AN AGENT?
The Regulations define a commercial agent as “a self employed commercial intermediary who has continuing authority to negotiate the sale and purchase of goods on behalf another person”. Essentially, in order to qualify as a commercial agent the person concerned must satisfy the following three tests:
The person must be self employed.
The fact that the agent is a company does not disqualify the agent from the concept of “self employment” (a company is still a legal entity). However, it is important that the agent (being an individual) does not carry out his duties in the course of a contract of employment.
The person must have continuing authority to act on behalf of the other party.
A commercial agency relationship cannot be said to exist where the purported agent has only acted on behalf of the other party on a once off basis.
The person must have authority to negotiate the sale and purchase of goods or negotiate and conclude such transactions for the principal.
In relation to the requirement that the agent must “negotiate” on behalf of the principal, it is important to note that this has been given a very broad meaning by the Irish courts and in many cases an agent can in fact qualify as a commercial agent even where the person could not be said to actually “agree prices” on behalf of the principal. The Irish courts have held that in determining if an agent has “negotiated” on behalf of the principal the proper test is whether the person has “dealt with or managed” the sale or purchase concerned and in doing so has used a material level of “skill or consideration”.
A further requirement in order to be able to make a claim for compensation upon the termination of a commercial agency is that the agency contract in question must be “evidenced in writing”. A verbal agreement (by itself) is not sufficient. However, by the same token, a detailed written agreement is not necessarily required in order to establish a commercial agency relationship. A series of written communications (e-mails etc.) may be sufficient evidence if they contain all of key terms of the agency contract.
WHEN AN AGENT IS NOT ENTITLED TO COMPENSATION
Even if an individual or company satisfies the above test and is able to establish that they are in fact a “commercial agent”, they may still be disqualified from claiming under the Regulations if the agency in question is of a particular type as set out in the legislation.
The Regulations specifically exclude the following individuals from the definition of “commercial agent”:
- a person who in his capacity as an officer is empowered to enter commitments binding
- on a company or association;
- a partner who is lawfully authorised to enter into a commitment binding on his partners;
- a receiver, a receiver and manager, a liquidator, an examiner or a trustee in bankruptcy;
- a commercial agent whose activities are unpaid;
- a commercial agent operating on commodity exchanges or in the commodity market;
- a consumer credit agent or a mail order catalogue agent for consumer goods, whose activities are considered secondary. (The activities of such agents are presumed unless the contrary is established, to be secondary for the purposes of the Regulations.)
In addition, it is important to note that franchisees or distributors (mentioned above) are not entitled to claim under the Regulations. The entitlements of franchisees, distributors and the above mentioned categories of agents are instead governed solely by the terms of the relevant contract.
This information is a very brief overview of the law pertaining to commercial agency and should not be taken as definitive legal advice. Barry Lee is a senior associate with Adrian Burke & Associates Solicitors. He advises clients on a wide range of commercial agreements including agency, distribution, franchise and licence agreements as well as terms and conditions of sale and purchase. Adrian Burke & Associates is a full service corporate law firm which provides specialist legal advice on corporate transactions, restructuring, banking, mergers & acquisitions, commercial litigation, corporate recovery & insolvency. For more information contact 01 665 0437 or e-mail firstname.lastname@example.org.