Does your business use agents to negotiate or conclude the sale and purchase of goods with customers on behalf of the business? Are you self-employed and do you have the authority to negotiate such contracts on behalf of a business? If the answer to either of these questions is yes, it is likely that there is a relationship of principal and agent and the Commercial Agents Regulations may apply.

Under the Regulations, a commercial agent has a right to a lump-sum payment on the termination of his agency. 'Termination' means both termination by notice and expiry of the agreed period. This payment can take the form of either an 'indemnity' or 'compensation'.

The indemnity payment limits the sum an agent can receive as it is capped at one year's commission based on the average commission earned by the agent over the previous five years. An indemnity is due if an agent has attracted new customers or has significantly increased the principal's business with existing customers.

The compensation entitlement is more complex. It is calculated by ascertaining the value of the agency business at the time of termination, including the value of the goodwill. There is no upper limit to the amount of compensation that can be awarded.

Except where the agreement provides otherwise, an agent will be entitled to compensation rather than an indemnity. From a principal's viewpoint, it is therefore vital to have a clear and effective agency agreement in place in order to minimise risk and potential cost.

The decision as to which termination payment to include in the agreement will have financial implications both for a principal and an agent. The decision will depend on a number of factors including: the success of the business, the goodwill associated with the agent and the agent's scope to grow the business. It is therefore advisable to seek legal advice.

If you require any further advice or assistance please contact Sue Dowman or a member of the Corporate Commercial team at Wortley Byers on 01277 268355 or sdowman@wortleybyers.co.uk.

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