In the fourth of this series, we discuss the differences between indemnity payments and compensation payments which an agent is usually entitled to under Regulation 17. You can read our other articles in this series here:
Regulation 17 cannot be contracted out of, however Regulation 18 provides instances which can mean that an agent loses their entitlement to a payment under Regulation 17.
Indemnity payments
Provisions for an agent to be paid an indemnity payment as opposed to compensation upon termination are usually sought by principals. This is because the Regulations impose a cap on the amount of indemnity payment the agent can receive. It is also an equitable calculation which must be justifiably due in order for an agent to be entitled to the maximum payment under the cap. If, for example, an agent has been underperforming, a principal may argue that they should not be paid the full amount of the indemnity. Regulation 17 also stipulates that an agent should only be entitled to an indemnity payment if they have brought in new customers or significantly increased the volume of sales which the principal continues to benefit from.
Calculation of indemnity payments can be fairly complex and can be subject to disagreement. Generally, however, the amount will be calculated based on the average commission that the agent has received over the past 5 years of their agency, or if the agency is less than 5 years old, over the life of the agency and will be capped at one year’s average commission.
Compensation
A compensation payment is calculated on the basis of what a hypothetical purchaser would pay for the agency. So if the agency is successful and commissions would have been expected to increase year on year had the agency continued, it would be more valuable to a hypothetical purchaser and therefore attract a higher compensation payment for the terminated agent.
The calculation assumes that the agency would have continued, even if that is not the case. A principal cannot therefore avoid paying compensation to an agent simply because, for example, they are bringing their accounts in house and the agent is no longer needed.
Compensation calculations are usually complex and, as they are likely to be the most valuable aspect of the termination payment that the agent is entitled to receive, it is usually the most contentious aspect of a dispute between a principal and an agent. A solicitor with expertise in commercial agency matters will be able to provide a rough calculation of what an agent might expect to receive, however this can vary dramatically depending on a number of factors and multipliers. As such, the end result may be a lot different than the original estimate and ultimately expert evidence from a forensic accountant is likely to be needed to provide an accurate value.
Due to the complex nature of calculations under Regulation 17 and the wide scope for interpretation of the Regulations, it is important for principals and agents alike to seek legal advice when dealing with this issue. Our commercial agency experts can be contacted at cdr@stephens-scown.co.uk