A client recently asked us for assistance in respect of legal correspondence it has received from one of its former commercial agents based in the UK. 

This client is a leading supplier of clothing and accessories in the UK and internationally. The agent sought to recover from our client compensation under the Commercial Agents (Council Directive) Regulations 1993 (the Regulations). 

Challenge

The agent had worked with our client for several years, selling our client’s goods within the UK and EU markets. Where an organisation sells goods on behalf of a manufacturer or distributor as an agent, that relationship will be governed by the Regulations.

The Regulations provide for a payment mechanism on termination of the relevant agency contract for any reason (that isn’t attributable to the agent itself). 

This often-forgotten rule can bring about a surprise for both agent and principal at the end of the engagement. Given the relevant legal principals – the sums in question can often be substantial, especially if the sales volume was significant. This case was no different – our client was subject to a six figure claim that it certainly hadn’t expected especially when it had parted with the agent on good terms. 

Process and Insight

Under English law, an agent’s claim for compensation under the Regulations is assessed using the legal mechanism of the “hypothetical purchaser.” 

In other words, the value of the compensation is equal to what an imaginary third party would have paid to step into the agent’s shoes and take over the agency as if it was never terminated. This is a real world analysis, and real world factors would come into play in assessing this value. 

We began by conducting a thorough review of the agency agreement and the facts surrounding the agency. How much was being sold by the agent? To what types of customers? How were the prevailing market conditions relevant to our client’s goods? Was the agent making more or less in commission recently? In what currencies and jurisdictions were the goods primarily being sold in? 

We had to explore this both by talking with our client’s representatives – they knew the market the best – and conducting our own research with our commercial hat on in order to tease out what the agency agreement might have been worth. 

In simple terms: if we could demonstrate that the agent’s calculations had key issues, we could negotiate a settlement. 

Solution

In reviewing the agent’s correspondence, it was quickly apparent that it had used the wrong mechanism to calculate the claim in compensation. On that basis, we felt that we had strong grounds to resist the agent’s claim and encourage a reasonable settlement that would avoid the significant costs of litigation. 

Rather than focusing on the legal arguments, we drafted extensive correspondence citing numerous relevant facts and economic analysis. The objective was to demonstrate that even if the agent had legal grounds to claim compensation under the Regulations, the claim wouldn’t exceed the amount of costs that the agent would incur in pursuing it (even if it won). 

This quickly brought the agent to the table. We were swiftly able to agree with the agent’s lawyers a robust settlement agreement that drew a line under the claim with an extremely significant reduction in its value. 

If you need help with any claims under the Regulations or otherwise structuring your agency arrangements in way that works for your business, please do not hesitate to contact us.