In many industries, there has been a practice of engaging self-employed agents, contractors or distributors to undertake sales and marketing activities, often with no written agreement in place. In truth, depending on the business's circumstances, entering into a relationship with a self-employed agent was - and still is - viewed as a more attractive proposition than directly employing a unionised sales force that enjoys the protections of employment legislation.

In implementing the agency structure, many businesses were unaware of an important European Directive implemented into Irish law by the European Communities (Commercial Agents) Regulations 1994 and 1997 which give certain categories of self-employed 'agents' (known as 'commercial agents') significant rights, particularly on termination of the contract. As a result of these Regulations, engaging a sales agent has potentially costly consequences when the business decides that it wishes to terminate that relationship and these consequences tend to become apparent only when the agent has made a claim against the business.

A detailed description of the rights and protections given by the Regulations to commercial agents goes beyond the ambit of this article, but suffice it to say that the Regulations fundamentally alter the relationship between a principal and agent and provide 'commercial agents' with certain quasi-employment privileges, including:

• the right to receive a written statement of the terms of engagement
  
  
• an entitlement to commission on all orders accepted by the principal, unless the reason for the principal not being paid for an order is one for which it is not to blame
  
  
• if the customer's first order goes through the agent but subsequent orders go direct to the principal, the agent is entitled to commission on all orders unless the agency provides otherwise
  
  
• a statement from the principal showing how the commission has been calculated (the Regulations also give the agent the right to look at the principal's books to check the accuracy of the statement)
  
  
• unless the contract is for a fixed term, the right to receive a minimum period of notice that increases according to the longevity of the arrangement
  
  
• a right to commission on transactions concluded after termination of the agency contract where the order was received before termination
  
  
• a right to receive a 'compensation' or 'indemnity' payment if the agreement terminates (other than by reason of breach by the agent). Further, while the indemnity or compensation payment is not payable if the agent terminates his own agency, it remains payable if the agency comes to an end due to death of the agent or on the agent's resignation due to age or physical disability
  
  
• a right to commission on orders placed with the principal within a reasonable time following termination, where the orders resulted from the agent's activities

The Regulations also regulate the validity of restraint-of-trade provisions designed to operate after termination of the agreement has occurred.

There remains considerable concern and confusion over the concepts of indemnity and compensation and how much an agent may claim on termination. When implementing the Directive, Ireland allowed for the terminated agent to receive either compensation or an indemnity. If there is no written agreement, then the agent is entitled to receive compensation as, indeed, he will be entitled to if there is a written agreement that does not provide for an indemnity. With the indemnity, there is certainty, as it will not exceed a figure equivalent to an indemnity for one year calculated from the commercial agent's average annual remuneration over the preceding five years. If the contract goes back less than five years, then the indemnity is calculated on the average for the period in question.

Neither the Directive nor the Regulations address the question of how much compensation an agent may be entitled to and the situation in Ireland remains unsettled as the issue has not yet been determined by the Irish courts. It appears likely, however, that the Irish courts will go down one of two routes and follow either the practice in France or the recent UK House of Lords' Lonsdale decision.

It is common practice for French courts to value agencies at twice the average annual gross commission over the previous three years, and award compensation accordingly. The position in England centres on the Law Lords' judgment in Lonsdale (trading as Lonsdale Agencies) v Howard & Hallam Ltd in July of this year.

The Lords declined to follow the French practice, instead asserting that the correct position is to calculate the compensation by reference to the value of the agency, assuming it had continued, the value being the amount the agent could reasonably expect to receive from a successor continuing to perform his duties and receiving the commission which the agent would have received. Any transfer of the goodwill the agent had created with customers would be reflected in the valuation process.

In the event that the Irish courts follow the Lonsdale decision, the assistance of an expert valuer will be necessary to assess the notional value of an agency on termination. The logic of the Lonsdale judgment is that there will be very low and very high compensation awards, depending on the specific circumstances. In theory, the more successful the agent, the greater the value he has lost - and with absolutely no cap on the compensation, the end result may be a figure greater than either the indemnity or the 'French approach' would yield.

There are a number of agency claims before our High Court at present, so over the next few months the approach that the courts may take in assessing the dual questions of the amount of compensation (and also post-termination commission) to which an agent is entitled may become clear.

But regardless of whether the Irish courts are persuaded to follow the French practice or the English Lonsdale decision, principals should be conscious that, unlike unfair dismissal claims, an agent does not need to establish unfairness in his termination in order to maintain a claim. With the growth of ecommerce and concerns about the economic outlook, more and more businesses are now looking at the desirability of continuing with a sales force and the possibility of cutting out the middleman.

For businesses assessing their risk in such circumstances, it may be advisable to take expert legal advice before deciding to lay off their agents.

The European Community (Commercial Agents) Regulations 1994 and 1997 define a commercial agent as 'a self-employed intermediary who has continuing authority to negotiate the sale or purchase of goods on behalf of another person, hereinafter called the 'principal', or to negotiate and conclude such transactions on behalf of and in the name of that principal.'

For further information please contact Michael Kavanagh.