Commercial Agents Directive – Termination of Commercial Agency

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Introduction

The Commercial Agents Directive (Council Directive 86/653/EEC), implemented in Ireland with the Commercial Agents Regulations of 1994 and 1997, govern the relationship between a certain type of commercial agent and their principal.

Commercial agents are a useful and cost-effective way to expand business into new markets. The commercial agent will have a good knowledge of the market (especially if they live in that country) and their remuneration (‘commission’) is typically contingent upon their success in developing the principal’s business.

The purpose of the Commercial Agents Regulations is to afford protections to the self-employed commercial agent (beyond whatever contractual arrangements exist) in recognition of the imbalance in power between them and the typically larger principal on whom the commercial agent’s livelihood may depend.

The commercial agent will – particularly in long-standing commercial arrangements – have contributed to developing the goodwill of the principal’s business. When the principal business ends the relationship with their commercial agent, they are required, in effect, to compensate the agent for their interest in that goodwill.

Who qualifies as a Commercial Agent?

In order to qualify as a commercial agent, the person must:

  • Be self-employed;
  • Have continuing authority to act on behalf of the other party and
  • Have authority to negotiate the sale and purchase of goods or negotiate and conclude such transactions for the principal.

Accordingly, distribution agreements and franchisees are excluded from the scope of the Commercial Agents Regulations.

The Regulations specifically exclude the following individuals from the definition of a 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.

It is noteworthy that the Regulations apply to goods only – and not to services.

Notice Period

Article 15 of the Regulations provide the mandatory minimum period of notice is at least one month for the first year of the contract, two months for the second year of the contract and three months for the third and subsequent years.

A longer notice period can be agreed, however, a principal may not have a shorter notice period than the agent. Any attempted waiver of this right will be void.

Right to Compensation

The most important protection afforded to a commercial agent is the entitlement to compensation for damage as a result of the termination of its commercial arrangement with its principal. This entitlement may arise irrespective of whether the contract was lawfully terminated in line with the notice provisions (referred to above).

Article 17 of the Regulations provides that in certain circumstances, a commercial agent is entitled to compensation “for the damage he suffers as a result of the termination of his relations with the principal”.

In other jurisdictions – including the UK – there is also an option to receive an indemnity (i.e. a payment calculated based on the business the agent has built up) as an alternative to compensation but this does not arise under Irish law as Ireland did not exercise this option under the Directive.

Limitation Period

When pursuing a case, the agent must notify the principal that they will be bringing the claim within one year of the principal terminating the agency agreement.

When Compensation is Not Payable

Compensation is not payable in the following circumstances:

  1. Where a principal has terminated the agency contract due to a default on the part of the commercial agent;
  2. 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
  3. Where the commercial agent assigns his rights and duties under the agency contract to another person.

Method of Calculation of Compensation

The Regulations do not specify how such compensation should be calculated. The judgment in the UK case Lonsdale v Howard & Hallam [2007] UKHL 32 (the “Lonsdale Case”) set out a method for such a calculation.

The correct quantum of compensation was found to be the value of the agency at the termination date of the agency contract if it were to be purchased by a third-party purchaser for value, having regard to activities which may take place in the future.

The value of an agency is, therefore, generally dependant on both (a) the period of notice at which the principal can terminate the agreement and (b) the nature of the market in which the agency is sold.

Conclusion

The level of compensation to which a commercial agent is entitled has not yet been determined by the Irish Courts. However, the European Commission has suggested that the amount of compensation should be equal to the sum of two years of the agent’s commission calculated on the basis of the average commission earned during the three years preceding the termination of the agency.

Brian Kitt

Daragh O’Donovan
Partner
Tel.:+353 1 637 6200
Email: Daragh.ODonovan@orpenfranks.ie

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