If you use agents in relation to your SaaS agreements, when you terminate the agency agreement under the Commercial Agents Regulations 1993 you must pay the agent compensation, regardless of the reason for the termination. A recent High Court decision McQuillan v McCormick 2010 has given some guidance on how the termination payment should be calculated.
Commercial Agents Regulations 1993
These are mandatory Regulations which apply to all agency agreements made with an agent based in the EU. They will apply regardless of where the supplier is based. The Regulations include mandatory rules on notice periods that have to be given to agents, payment terms and compensation or indemnities payable to the agent if the agency agreement is terminated.
Indemnity or Compensation
It is possible in the agency agreement to choose between paying an indemnity or compensation to the agent on termination of the agency agreement. If the agency agreement says nothing then compensation will be automatically payable.
If you specify an indemnity in the agency agreement, the amount payable is limited by the Regulations to a maximum of 1 year’s gross commission based on the average commission paid over the last 5 years.
If the agency agreement is silent or you specify paying compensation, a court will determine how much the agent is entitled to. There is no cap on the amount that can be awarded to an agent. In the past the amount awarded by courts was generally limited to 2 year’s gross commission. However, as few cases are disputed in court no guidelines existed until now on how this amount should be determined.
Calculation of Compensation
The High Court has recently identified the following factors which should be considered when determining how much compensation an agent should be paid on termination:
- loss of value of the agency relationship
- state of the market
- no cap on the amount
- future possible income stream to the supplier after termination
- whether the agreement is exclusive or non-exclusive
In this case the agent received approximately one year’s commission from the court.
Implications for Drafting Agency Agreements
This case my be appealed by the agent, but it now seems clear that it is not necessarily the best option to include an indemnity in an agency agreement. Courts will be entitled to assess compensation on a case by case basis. Accordingly, it may be a false economy to automatically agree to pay an agent an indemnity, as if compensation is chosen the risk of paying 2 year’s commission now seems low.
Irene Bodle is an IT lawyer specialising in SaaS agreements with over 10 years experience in the IT sector. If you require assistance with any SaaS, ASP, software on demand contracts or any other IT legal issues contact me:
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