Avoiding Agent Termination Payments

Most principals are aware that when an agency is terminated they will be liable to pay the agent a termination payment under Regulation 17 of the Commercial Agents (Council Directive) Regulations 1993. This can be a very substantial sum, and often results in principals considering ways they might seek to avoid such payment.

A principal can exclude payment of an indemnity or compensation under Regulation 17 in very limited circumstances. The right to exclude such payment will only arise where the agent is in default of his obligations under the agency contract, and that default justifies the immediate termination of the agency contract.

This leads to the question “how serious does the agent’s breach need to be to justify termination with immediate effect?” The courts have considered this question in various cases with some interesting decisions. Each case must be considered on its facts, and ultimately it will depend on how serious the breach is.

Comments made by an agent

A common cause of complaint is comments made by agents which are regarded as damaging to the principal’s business. In the case of Crocs Europe BV v Craig Lee Anderson [2012] EWCA Civ 1400 the court considered comments which had been posted by the agent’s employees on the internet. A link was sent to the agent’s other employees and to third parties, including some of the principal’s customers and distributors. The website was later taken down.

Crocs argued these comments amounted to a fundamental breach of the agent’s duty which entitled it to terminate the agency contract with immediate effect without paying compensation.

The agent said the comments were a joke about the principal’s failure to respond to orders; the principal claimed the comments disparaged the products which it had appointed the agent to sell and entitled it to terminate the agency contract with immediate effect

The court found the website had not disparaged the principal’s goods. The comments had referred to Crocs’ inability to meet delivery obligations, a state of affairs that was well known. The judge held that while the agent had breached the contract, the breach was not so serious as to justify immediate termination, and the agent had therefore not lost its right to compensation.

Failure to report

Individual instances of failures to report to a principal are unlikely to suffice to exclude a termination payment, but repeated instances might be, especially if they are accompanied by other serious breaches (Nigel Fryer Joinery Services Limited v Ian Firth Hardware Limited [2008] EWHC 767 Ch).

Undertaking work for other agencies

An agent who undertakes work in respect of other non-competing agencies or other competitive agencies but with the consent of his principal, is unlikely to be in breach of duty unless the agency agreement specifically forbids the agent from such conduct or requires the agent to provide its services exclusively to his principal.

An agent who acts for a competitor without the authorisation of his principal is likely to lose his right to a Regulation 17 payment since such conduct is likely to justify immediate termination.

If a principal becomes aware of any suspected competitive activity it should take immediate steps to investigate. It is advisable to ensure enough evidence of breach is obtained before taking any steps to terminate the agency.

Expiry of a fixed term agency

In the case of a fixed term agency which is due to expire, a principal should seek immediate advice if the agent is suspected of being in repudiatory breach of his obligations. If the principal does not take steps to terminate the agency on the grounds of breach, but instead lets the agency expire, it may lose its rights to exclude a termination payment (Cooper & Others v Pure Fishing (UK) Limited [2004] EWCA Civ 375).

Specific clauses in an agency contract

A principal who is in the process of appointing a sales agent may be wondering if a clause can be included in the agency contract which entitles the principal to terminate with immediate effect upon the occurrence of specific events. It is unlikely that such a clause will operate to avoid a termination payment under Regulation 17, and the agent’s conduct will need to be considered in the context of the requirements of Regulation 18.

Summary

The court has held that Regulation 3 does no more than set out the obligations of an agent. A breach of those obligations does not automatically terminate the agency contract. Even where a duty is a fiduciary duty, a breach of that duty does not automatically or necessarily amount to a repudiatory breach of the contract.

The key question when a principal is considering termination with immediate effect is how serious, in all the circumstances, the agent’s conduct has been.

Some of the factors which may influence the court’s decision on whether a breach is so serious as to entitle the principal to terminate with immediate effect are:

• In the case of comments made by an agent or an agent’s employee, were they made in an obviously jokey way?
• Was the circulation of such comments limited and temporary?
• Is there evidence of harm suffered by the principal?
• Does the breach go to the root of the agency relationship?
• Was it a one-off incident?
• Did the incident involve bad faith on the part of the agent?
• Did the incident involve a real risk of harm to the principal?
• Did the agent shown an intention to abandon the agency contract?

The court’s decisions understandably tend to favour the position of the agent even when it appears the agent’s conduct can be called into question. This is consistent with the purpose of the Regulations which is of course to protect commercial agents. Principals are therefore strongly recommended to seek legal advice before taking any steps to terminate an agency to ensure their position is protected.

Myerson Solicitors are specialists in Commercial Agency Law and have significant experience in advising both agents and principals. If you have an issue with termination payments or any other contentious agency issue then our expert team of Commercial Agency Solicitors can assist you. We are always happy to have an initial no-obligation chat to help guide you in the right direction. You can contact us on 0161 941 4000 or you can email the Commercial Agency Team for more information.