For a business which uses agents, the start of a new year is also often the point when a review is undertaken as to whether a particular agent is achieving the business’ objectives – whether in respect of a range of products, particular customers, or geographical territory, or any combination of these. In this article, Stephen Sidkin explores the key things principals need to know when terminating a contract with an agent …
Sometimes there may have been resistance by an agent to engage in a new way of working with the business. On other occasions, it can simply be down to a personality clash with the director responsible for the business’ agents. But the bottom line is that the business’ objectives are not being achieved.
However, it is one thing to determine that a particular agent has to go. It is another to go about it in a way which minimises the exposure which the business has, given the statutory rights and entitlements which agents have under the Commercial Agents Regulations.
With this in mind, here is a list of some top tips that principals ought to bear in mind when considering how best to terminate an agency agreement …
1. It is important to determine why a particular agent has to go. Failure by the agent to achieve the level of performance desired by the principal may be insufficient to justify claiming that the agent has committed a material breach of the agency agreement. As such, is it possible for you to point to an ongoing series of smaller breaches? In the absence of being satisfied as to whether the breaches committed by the agent are sufficient to justify termination of the agency agreement, it may be possible for a principal to engineer a breach.
2. Establishing why you want to terminate the agency agreement is often the other side of the coin of understanding the exposure which you run if termination of the agency results in a successful claim by the agent under the regulations. It is, therefore, important to recognise that under the regulations the agent’s rights include: statutory notice; pre-termination commission; compensation or indemnity; post-termination commission ; and ‘back’ commission.
It should also be remembered that, with the exception of post-termination commission, it is not open to the principal and agent to agree to contract out from these rights, and that the rights are themselves cumulative.
3. Once you have determined your exposure, you should consider whether it is possible to reduce that exposure under the terms of the agency agreement. As such, if the agency agreement allows for the conversion of accounts into house accounts, your exposure to the agent under the regulations to pay compensation or indemnity (in the absence of showing material breach by the agent) will be reduced.
4. Sometimes the way in which the agency is terminated may make it easier to put in place a settlement agreement with the agent and, as such, again reduce the overall amount that is paid in order to achieve the termination of the agency.
Sometimes a meeting with the agent in order to terminate the agency, followed by a without-prejudice meeting in order to discuss a settlement, may do the trick. However, if a settlement is agreed, it is important that this is recorded in writing in order to reduce the possibility of the agent seeking to make further claims against you.
5. It is also important to plan for the future. The giving of notice of termination to the agent means there will come a point in time when the agent is no longer representing you in respect of particular customers or a particular territory. Plans should therefore be made for your representation in respect of such customers or territory when the agency agreement has come to an end.
6. Although it may seem counter-intuitive, determine what the terms of the agency agreement are with the agent before trying to determine how to terminate the agreement. It is an urban myth that because an agreement with the agent is not in writing, it does not exist. Equally, it is a myth that if a written agency agreement has not been signed by the parties, it will have no force. It is possible for an agency agreement to be made orally, by conduct, or in writing.
7. Where the principal and agent are in different countries, establishing what the agency agreement between them is (see point six) becomes even more important. If the agreement is in writing, it should state that the agreement will be interpreted in accordance with the laws of a particular country (for example, English law). This is important, as the law of the country will be used in interpreting the agreement, and goes some way to determining the rights of the agent on termination.
If the agreement is written, it should also state the way in which disputes between the parties are to be determined – for example, the English courts will have exclusive jurisdiction to determine disputes between principal and agent. Again, this is important in determining the forum for the determination of disputes. However, if the agreement is unwritten or is silent as to governing law and dispute resolution, EU law will determine both matters.
Lastly, bear in mind the following points:
• There are three separate countries with three separate laws and courts within the UK
• The EU Agents Directive (which is implemented in English law by the regulations) cannot be overridden by, for example, stating that the agency agreement will be governed by the law of the State of California
• Increasingly, countries outside of the EU have laws which protect agents to a similar – and in some cases greater – extent as EU law
Getting it right can reduce your exposure to an agent whose agency agreement has been terminated – but the converse is also the case …
Stephen Sidkin is a partner at Fox Williams LLP.