Compensation versus an indemnity - some essential differences

Compensation versus an indemnity: Some essential differences

Whereas most commercial sales agents will be aware that:

1). Compensation and indemnities are alternative bases for calculating the amount of any ‘compensatory’ payment due to an agent following the termination of his agency

And that:

2). The agent’s entitlement to a ‘compensatory’ payment would always by default be to compensation (as opposed to an indemnity) unless there was an agreement in place between the parties which incorporated a provision expressly actually opting for an indemnity

Many agents may not however be aware as to the essential differences between the two bases for calculation, such as that:

• Whereas the amount of an award of compensation is not limited by the Regulations, the amount (however) of an indemnity cannot exceed more than a year’s average earnings from the agency in question (with the calculation of that average being based on the last 5 years’ earnings, or on the relevant number of lesser years where the agency didn’t last for at least 5 years); and that:
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• The basis of calculating the amount of an indemnity entitlement is fundamentally different to how compensation is calculated.
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• As to the basis for calculating an indemnity, that (in general terms) is to (firstly) assess the extent to which the agent introduced new customers (and therefore new business) to the principal, and/or otherwise significantly increased the volume of business with already existing customers, and (secondly) to then assess the extent to which it appears likely that that new business will continue to benefit the principal post termination (based on an analysis of the last 12 months’ trading).
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• Whereas the further steps for arriving (as accurately as possible) at the correct amount of the indemnity are relatively complicated, the fundamental purpose of the indemnity calculation process is ultimately to establish a figure which ‘rewards’ the agent for the fact that he has (significantly) increased the principal’s business, and so (and at the same time) ‘compensates’ him on account of the fact that he will no longer however be receiving commissions in respect to that new business which he generated (i.e.: because the agency has been terminated).
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• By contrast, the amount of any compensation payment reflects and (following the decision of the House of Lords in 2007, in the case of Lonsdale v Howard & Hallam) is based on something completely different to an indemnity, which is the hypothetical sales value of the relevant agency, as at its point of termination. In other words: how much a willing third party would have paid for the relevant agency (had it not terminated, but instead continued).
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• In therefore calculating the amount due by way of ‘compensation’, it is essentially a process of establishing and multiplying together two basic numbers, which are the so-called ‘multiplicand’ and ‘multiplier’. Whereas the ‘multiplicand’ broadly reflects the level of the agent’s maintainable net earnings from the agency in question (and is calculated in a particular and sometimes complex way), the ‘multiplier’ is a digit the size of which reflects the overall impact of a number of commercial factors (all of which are deemed would be of importance to any prospective (hypothetical) purchaser of an established business), such as (a) whether the agency was growing or declining (and, in either circumstance, whether that growth or decline was reflective of a permanent trend, and of a market which was developing or contracting), (b) what appears to be the state, overall, of (and prospects for) the principal’s business, and potentially (c) the terms and consequences of any relevant clauses which may exist in any written agency contract between the principal and agent.
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• In contrast (therefore) to the aim of the indemnity calculation (i.e.: very generally speaking, to compensate the agent for the fact that he will no longer derive an income from business which he introduced, and which the principal is seen as nevertheless likely to continue to gain a benefit from, going forward), the purpose of compensation is (instead) to treat the terminated agency as an asset lost to the agent, and for which he should therefore receive a fair amount of money reflective of what he might have received on the open market had he instead sold the agency as at the point of termination rather than it having terminated.
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• As to which of the above two bases is fairer or more equitable is a matter of opinion, but, in either case, they are just one of a number of potential claims an agent has, following the termination of an agency (subject always to relevant time deadline or limitation periods).
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? David Bentley, Bentley Agency Law Limited, Bentley & Co Solicitors 7 Littlemoor Road, Pudsey, Leeds, LS28 8AF 

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

The ONLY law which we practice is the law as it relates to commercial agents.

Please ensure that you obtain specific legal advice before acting in reliance upon anything in this article, particularly since each individual’s circumstances may necessitate a unique approach, and also on account of the fact that the law may of course at any time change.