Same, same but different

Last year, in Shearman v Hunter Boot Ltd [2014] EWHC 47 (QB), the High Court considered a term in a commercial agency contract, which provided that upon termination the agent would The court found that this term was not consistent with the Commercial Agents (Council Directive) Regulations 1993, which were enacted primarily for the protection of the agent. Such a term did not provide for a particular type of payment in circumstances capable of being specified at the time of agreement. The term was found to be void; the agent was entitled to a compensation payment.

Unenforceable element

Recently, the High Court was asked to adjudicate on a similar term in Brand Studio Ltd v St John Knits Inc [2015] EWHC 3143 (QB), which provided as follows: '[The claimant] shall have the right to be indemnified as provided for in regulation 17 of [the Commercial Agents Regulations]. For the avoidance of doubt, [the claimant] shall have no right to any compensation under those Regulations upon termination or expiry of this Agreement provided that if the amount payable by way of indemnity under this clause would be greater than the amount payable by way of compensation, [the claimant] shall… have the right to receive compensation instead of an indemnity under the regulation…'.

It was accepted that, following Shearman, the term was void and unenforceable as a whole. However, in this case it was argued that, rather than strike out the whole of the term, the court should sever the unenforceable element, namely that part that provided for a compensation payment where such a payment was cheaper.

The court applied Sadler v Imperial Life Assurance of Canada [1988] IRLR 388, and asked whether removal of the provision identified would change the character of the contract so as to make it a different sort of contract to the one the parties entered into.

In answering this question, the court separated out the two parts of the term, finding that there was an agreement to pay the agent an indemnity, and a separate and distinct agreement that the agent would only be entitled to compensation if that was of lesser value than the indemnity.

With the term framed in this way, the court was satisfied that severance of the unenforceable part of the term did not significantly change the contract. The offending provision was severed, entitling the agent to an indemnity payment - in other words, the opposite result to that in Shearman.

Clearly, the analysis turns on whether the term is looked at as a whole or broken down into its constituent parts. Looked at as a whole, the term represents an agreement that the agent will receive compensation or indemnity, whichever is the cheapest.

When the term is viewed in that form, the severance contended for arguably does change the character of the contract considerably. It is no longer an agreement for a particular termination payment to apply, but rather an agreement that the agent will be entitled to one or other type of payment, depending on its value.

Form over substance?

Whether it is preferable to analyse the term as a whole or consider its constituent parts is probably a moot point. However, the difficulty with the latter approach is that the outcome will depend to a considerable degree on the sequence of words used in the particular term under consideration.

Consider the following contractual wording: 'The agent shall have the right to receive payment of an indemnity or compensation, whichever is the lesser.'

Such a term has an identical effect to the term in Brand Studio. However, it is not possible to separate out the constituent parts of this term in order to sever the unenforceable element. This term would therefore be void and the agent entitled to compensation. Notwithstanding the identical meaning and effect of these terms, the difference in syntax determines the outcome. Some may feel that this represents a victory of form over substance.

It is, of course, important to remember that the correctness of Shearman was not disputed. A principal cannot limit the entitlement of an agent to whichever termination payment turns out to be the cheapest.

However, following Brand Studio, such terms will not necessarily be struck out in their entirety. Where appropriate, the offending part of the term will be severed. If what remains is entitlement to an indemnity, the agent will be limited to such a claim. Whether this approach is possible will now depend on a close scrutiny of the contractual wording in each case. SJ

Lance Harris is a barrister practising from Old Square Chambers

@OldSqChambers

www.oldsquare.co.uk