Shearman (t/a Charles Shearman Agencies) v Hunter Boot Ltd

Under regulation 17 of the Commercial Agents (Council Directive) Regulations 1993, the parties may choose between indemnity and compensation, but that choice must preserve the protection afforded to the commercial agent by the Regulations and the Directive.

A clause which selects whichever payment is cheaper for the principal at termination does not provide a genuine contractual election. It creates a variable outcome which cannot be identified when the contract is made and is liable to give the agent the less favourable result. Such a clause is incompatible with regulation 17(2) and regulation 19. Where the parties accept that the offending clause cannot be severed, the entire clause falls away and the statutory default of compensation applies.

The claimant, a former commercial agent of the defendant, claimed compensation under regulation 17 of the Commercial Agents (Council Directive) Regulations 1993. The agency agreement stated that the agent would receive an indemnity unless compensation would be lower, in which event compensation would be payable.

The defendant argued that regulation 17(2) permitted the parties to agree that indemnity or compensation would apply according to which produced the lower payment. The claimant relied on the protective purpose of the Regulations, regulation 19 and the decision in Honyvem Informazioni Commerciali Srl v De Zotti. The central issue was whether the contractual mechanism was a permitted choice under regulation 17(2).

1. Construction of the agreement. Clause 14, read as a whole, provided for an indemnity unless compensation would be lower. It did not constitute an unconditional election of indemnity.
2. Purpose and statutory protection. The Directive and the Regulations permit contractual choice, but primarily protect commercial agents. The choice must operate consistently with the protective scheme as a whole. The interpretive obligation under European Union law is broad and may require departure from literal wording, subject to the limits identified in Vodafone2 v Revenue and Customs, including compatibility with the underlying thrust of the legislation.
3. Invalidity of the contingent mechanism. The agreement could validly provide for different systems in objectively identifiable circumstances, such as death or bankruptcy. Clause 14 did something materially different. It selected the system which, only at termination, proved cheapest for the principal. It therefore gave the agent no real entitlement to either system and was liable to produce the worst of both worlds for the agent. That result was inconsistent with regulation 17(2), regulation 19 and the protective purpose of the legislation.
4. Effect on the contract. The court concluded that the regime created by clause 14 was not permitted by the Regulations. Following Hunter’s apparent concession that the consequence would be compensation if the clause were invalid, and in the absence of an argument for severing clause 14.5, the entire clause fell away. If the claimant established an entitlement under regulation 17, the measure was compensation rather than indemnity.

The conclusion was given for the limited purpose of facilitating the trial and possible settlement. The judgment records that the case subsequently settled, although no order had yet been drawn up.