Compensation or indemnity?

Indemnities or compensation claims – which are better for the agent?

Whilst agents are familiar with the concept of potentially being entitled to receive some form of compensatory payment on termination of an agency, they are not necessarily clear as to whether (firstly) that potential entitlement should be actually to ‘compensation’, or (instead:-) to an ‘indemnity’, (secondly) whether they (as the agent) can unilaterally and at any point in time make an election as between claiming either form of entitlement, and (thirdly) what anyway are the differences in practice (i.e.:- are the two different types of compensatory payments calculated in the same way?).

The first point to make is that ‘compensation’ and ‘indemnities’ are the alternative forms of compensatory payment, as set out in Regulation 17 of the Commercial Agents (Council Directive) Regulations 1993 - meaning to say that, unless otherwise agreed between the parties, an agent’s prospective entitlement to any form of compensatory payment on termination will always be to literal ‘compensation’ as opposed to an ‘indemnity’. In other words, being entitled to compensation on termination of an agency is the default position unless the principal and the agent had otherwise agreed that the prospective compensatory payment would instead be an indemnity (and so that if there was never any written agreement between the parties, the default position of an entitlement to compensation would therefore apply).

The second point to make is that whereas the amount which a principal might have to pay by way of compensation is not capped by the Regulations, the maximum amount of an indemnity is however capped, and that cap is (but need not necessarily be as much as) the equivalent of one year’s earnings from the agency in question, with that capped one year amount calculated as an average of the previous 5 years’ earnings (or instead calculated as an average of a lesser number of years, where the agency had been ongoing for less than 5 years).

The third point is that the ways in which ‘compensation’ on the one hand and ‘indemnities’ on the other hand are calculated are very different, with compensation being calculated on the basis of [very broadly speaking:- ] an assessment as to what was the hypothetical sales value of the agency as at the point of termination, and an indemnity calculation [again, very generally summarised as:-] reflecting the extent to which the agent, from either new customers whom he introduced and/or otherwise as a result of business he has significantly increased, has left the principal with a substantial benefit going forward.

From the above, and because there is no statutory cap as to the amount payable, it might be assumed that, from the agent’s point of view, compensation is automatically more favourable, as opposed to an indemnity. This, however, is not necessarily going to be the case, as there are many variable factors to consider, and so that, at the end of the day, an agent would unlikely know when entering into a new agency as to what would be the better option for him or her in terms of the relevant compensatory payment option when the agency terminates in the future (whenever and in whatever circumstances that may be). However, and whilst reiterating that an agent cannot unilaterally elect to receive an indemnity on termination, as to whether an indemnity or compensation could be predicted in advance or adjudged in retrospect to perhaps work out (or have worked out) better, you could it view it this way:-

If after taking account of all relevant expenses (including an appropriate amount by way of a salary) the agency is operating at a low profit level as at the point of termination, then the amount of compensation to which the agent may be entitled would potentially likely be less than would be the level of an indemnity where, notwithstanding the poor profitability of the agency itself, the agent has nevertheless successfully brought the principal new customers and/or has significantly increased the volume of business with existing customers, and the principal continues to derive substantial benefits from the business with such customers.

By contrast, if the agent’s commission income and profitability is good as at the point of termination, then the fact that compensation has no statutory cap may then stand him or her in better financial stead than being (or having been) entitled (just) to an indemnity, as any calculation as to the hypothetical sales value of the agency may arrive at a number which exceeds (and potentially significantly exceeds) the sum which reflects one year’s average annual income.

? David Bentley, Bentley Agency Law Limited, Bentley & Co Solicitors 7 Littlemoor Road, Pudsey, Leeds, LS28 8AF 

T: - 0113 236 0550 e-mail:- [email protected].

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