Case law: Court gives guidance on interpreting agency agreement termination provisions

Businesses appointing commercial agents should carefully consider the effects of provisions in their agency agreement determining whether indemnity or compensation payments apply on termination, following a recent ruling.

A business appointed a commercial agent. An agent is legally entitled to either compensation or indemnification if their agency is terminated. Which of these alternatives applies can make a significant difference to the amount payable to the agent. The parties usually choose which is to apply in their agency agreement and, if they do not specify either, the agent is entitled to compensation by default.

In a recent case, an agency agreement provided that on termination of the agreement, the agent would be entitled to indemnification, unless the amount that would be payable as compensation would be less, in which case the agent would be entitled to compensation instead. In effect, it provided that whichever option turned out to be cheaper for the principal should apply.

In a previous case, the court decided such a clause was unenforceable: the purpose of the rules was to protect agents, who were considered to have less bargaining power than their principals. The court in that case therefore ruled that it was possible for the parties to an agency agreement to choose one option, or to say one option will apply in one circumstance and the other in another circumstance. But a clause which effectively said that whichever option turned out to be cheaper for the principal should apply was not enforceable. If such a clause was not enforceable then the 'default' position applied and the agent would only be entitled to compensation.

However, in that case the court did not have to consider whether the relevant clause was severable, ie, whether one part of the clause could continue to be treated as enforceable even though another part of the same clause was not.

In this case, however, the agency agreement contained a clause saying that if any provision was held to be invalid or unenforceable that provision should be treated as severed and the remainder of the agreement given full force and effect - ie. the agreement should be construed as if the invalid or unenforceable provision was not in it.

The High Court decided that:

  • The relevant clause had two parts. The first part said that the agent was entitled to be indemnified if the agreement was terminated. The second part said that the agent would be entitled to compensation if the amount of compensation payable would be less than the amount payable on an indemnity basis
  • While the second part was unenforceable, the first part was enforceable
  • Under the severance clause, the second part could be severed from the agreement, leaving the first part in full force and effect
  • Since the first part was enforceable the agent was therefore entitled to be indemnified on termination. The default position - which would have meant the agent was only entitled to compensation - did not apply

Operative date

  • Now

Recommendation

  • Businesses proposing to terminate a commercial agency agreement should carefully consider the effect of any provision in the agreement purporting to determine whether the indemnity or compensation basis should apply on termination, and the effect of any severance clause on that provision

Case ref: Brand Studio Ltd v St John Knits, Inc [2015] EWHC 3143

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