Redefining the relationship between agents and principals in the UK?

Revisiting and potentially scrapping the Commercial Agents (Council Directive) Regulations 1993 would redefine the relationship between agents and principals in the UK.

Under the current regulatory framework, agents are entitled to either compensation or indemnity upon termination by a principal of an existing relationship, with compensation being the default unless indemnity is specifically chosen in the contract.

This framework, which has evolved through decades of case law and commercial practice, has created a structured approach to valuing agencies and calculating the quantum of termination payments due to them to make up for the loss of goodwill they have helped to create. Understanding these valuation methodologies is important as businesses consider the financial implications of potential regulatory changes.

Current compensation calculations are based on the principle established in the landmark Lonsdale case from 2007, which determines value based on what a hypothetical purchaser would pay for the agency at the date of the termination. This approach involves analysing future income streams through the lens of historical performance, while carefully considering market conditions, growth potential, and inherent business risks.

The Green Deal Marketing case from 2019 further refined this methodology. An agency’s value ought to be decided based on a continuing scenario, but not an indefinite one, and be calculated on the date the agency would have come to an end. Compensation can be reduced for several reasons, including complications around exclusive agreements, and the value of the agency can be impacted if the agent has acted in a way that would have given the principal cause to terminate in the past.

The alternative indemnity pathway provides greater certainty and protection for principals through its statutory cap on payment to an agent of one year’s average remuneration over the preceding five years. As stated, this is not the default method of calculating termination payments and must be included in the contracts between the parties.

Under a deregulated framework, statutory protections would disappear, fundamentally altering the landscape of agency valuations and termination payments. For agents, particularly those who have invested significant time and resources in developing valuable customer relationships and territory coverage, this represents a potentially substantial loss of capital value.

Without regulatory protection, the recovery of such value would depend entirely on contractual terms and relative negotiating positions, potentially leading to significantly reduced termination payments.

For principals, while deregulation might initially appear advantageous through the reduction or elimination of mandatory termination payments, the practical implications require careful consideration within the broader context of commercial relationships. Many principals may find themselves needing to offer enhanced contractual terms or sophisticated performance incentives to replace the security currently provided by regulatory protection. This recalibration of commercial relationships could lead to increased upfront costs or ongoing payment obligations as the market adjusts to find new ways of attracting and retaining high-quality agents in the absence of statutory protections.

This article was originally authored by James Maynell FCA, Partner, Ballards LLP.