It appears to make perfect sense for a company that wants to break into the Irish market for the first time to appoint an agent. Overheads are kept to a minimum, the company doesn’t have to rent a premises or hire any employees and if things go badly (i.e. the product doesn’t sell in the Irish market) they haven’t really lost anything. However, what happens when things go well and the product does sell in the Irish? It is not uncommon for the company to think that another agent could do an even better job or alternatively decide that it wants to sell directly to the Irish market without using a middle man. Sales/commercial agents who may have spent years building up a brand in the Irish market are being informed with increasing regularity by the companies who have engaged them that the relationship is being terminated or somehow indefinitely suspended. However, if you are the agent in question the termination may not be as financially disastrous in the short term as you might think and you may be entitled to significant compensation when the commercial agency is terminated. In this regard the agent should understand that “termination” is not just limited to the normal understanding of termination. For the purposes of the relevant legislation “terminate” also includes the non-renewal of an existing agency at the end of its stated term and also where the agent (being a person acting as a sole trader) actually dies (this is explained in section 4 below).
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.
2. WHEN IS AN AGENT NOT AN AGENT?
In order to be able to make a claim for compensation upon the termination of an agency, the person must first establish that he or his company is in fact a “commercial agent”.
The relevant Irish legislation (the Commercial Agent Regulations 1994 and 1997) defines 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:
a. 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.
b. 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.
c. 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 some “skill or consideration”.
3. YOU ARE AN AGENT BUT YOU ARE 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 Commercial Agent Regulations if the agency in question is of a particular type as set out in the legislation.
The Commercial Agent 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; and
- a commercial agent operating on commodity exchanges or in the commodity market.
In addition, it is important to note that franchisees or distributors are not entitled to claim under the Commercial Agent Regulations. The entitlements of franchisees, distributors and the above mentioned categories of agents are instead governed solely by the terms of the relevant contract.
4. "TERMINATION" MEANS MORE THAN "TERMINATION"
The Commercial Agent Regulations provide that upon termination by the principal of a commercial agency agreement (other than through default by the agent) the agent becomes automatically entitled to a termination payment in order to compensate the agent for damage suffered by him as a result of termination of the agency contract. However, 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.
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.
5. COMPENSATION !! ... FOR WHAT?
The rationale behind commercial agents being entitled to compensation upon the termination of the agency agreement is that the agent will 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.
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 years commission calculated on the basis of the average commission earned during the three years preceding the termination of the agency.
In contrast, the English courts have recently ruled that the damage for 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.
Irrespective of which approach the Irish courts decide to adopt, commercial agents will still be entitled to significant compensation upon the termination of the agency agreement assuming they meet the various requirements outlined above.
Commercial Agents who find themselves in the position of having their agency relationship terminated can be entitled to significant compensation. It is important for the agent to notify the principal promptly of his intention to pursue his entitlement under the Commercial Agent Regulations as the agent loses his right to compensation within one year following termination of the agency agreement.
In recent years many companies have appointed sales representatives and other agents in order to grow their business and tap into new markets without considering whether or not the individual is a “commercial agent”. As more and more of these types of contractual relationships break down the number of claims by agents for compensation under the Commercial Agent Regulations will no doubt increase dramatically.
The above information is a very brief overview of the law pertaining to commercial agency and should not be taken as definitive legal advice. If you are an agent or commercial representative who has recently had your agency relationship terminated or if you are a company who is considering the appointment of an agent but would like to mitigate against any potential liability in the event that the agency relationship is subsequently terminated please contact Barry Lee (Senior Associate) of Adrian Burke & Associates at firstname.lastname@example.org.