Considerations Before Terminating a Sales Agents Contract

All good things must come to an end and the relationship between agent and principal is no exception to this well-known proverb. There could be any number of reasons why the relationship needs to end. From a legal perspective, those reasons and the way in which the relationship is actually ended could be very important. The main reason is that they will determine whether the agent and principal are able to bring claims against each other as a result of the agency relationship ending (or terminating, to use the legal expression). Claims by the agent are far more common, but it is not unheard of for a principal to bring claims against a former agent.

This blog deals with the circumstances where an agent or principal takes steps to terminate the agency relationship. However, it is important to note that an agency relationship would also end automatically where a fixed term contract comes to an end. The effects of termination and the claims that can be brought will largely be the same following expiry of a fixed term contract. The issue that arises most commonly in that situation is whether the agency has actually ended or whether the parties have done something to continue it (notwithstanding what the agency contract says).

Issues to consider when thinking about whether to end an agency relationship

Agents and principals alike would generally prefer to agree an amicable parting of the ways but that is not always possible, particularly if the relationship between them has broken down or only one of the parties wants to end the relationship.

When thinking about whether to terminate an agency, both parties will likely have at least one eye on the potential financial consequences. With that in mind, here are some key points to consider:

1) Is there a written agency contract in place?

Note: if there is not a written contract, this does not mean that there is no contract at all. There will be some form of contract, even if a Court has to construct the key terms of that contract from discussions between the parties, emails and other correspondence and the way in which the parties have conducted themselves during the course of the agency relationship.

2) If there is a written agency contract, what does it say about termination of the contract?

Written contracts should contain provisions which deal specifically with termination of the contract. Those provisions will usually set out specific circumstances in which one or both of the parties may terminate the contract, any relevant notice periods in relation to termination, the effects of termination and any obligations which apply to the parties after the agency contract has terminated.

3) Do the Commercial Agents (Council Directive) Regulations 1993 (“the Regulations”) apply to the agency contract?

This is a very important point because, if they apply, the Regulations will automatically incorporate various rights and obligations into the agency contract, even if those rights and obligations are not specifically mentioned in the agency contract. Many of those rights and obligations cannot be overridden by the terms of the agency contract.

Many agency contracts will mirror what is said in the Regulations, but not all do. The Regulations set out certain duties which apply to agents and principals respectively and provide for specific remedies for an agent following termination of the agency contract, in certain circumstances. I deal with this in more detail below.

The principal might also need to consider how likely it is that customers introduced to the principal’s products by the agent will continue to buy those products after termination. In many cases this will not be an issue but in some instances, customers are fiercely loyal to the agent and may take their business elsewhere if the agent no longer represents the principal.

If an agent or principal is thinking about terminating the agency relationship, they need to clearly understand their rights and obligations and also the rights and obligations of the other party. In particular, what are the potential financial effects of termination? If in doubt, take legal advice because getting the position wrong could be very costly for the agent or principal.

What claims could the agent potentially bring against the principal following termination of the agency contract?

Under the Regulations and the agency contract, there are a number of claims that could potentially be brought by an agent against the principal following termination of the agency contract. Whether they can be brought will depend on the particular circumstances:

1) Outstanding commission for sales completed before the date of termination of the agency contract (under Regulation 7). In many cases this will be relatively straightforward to calculate, but in some cases the situation can be more complex due to the existence of house accounts, variable commission rates, rights of exclusivity for the agent or arguments about whether sales have been completed.

2) “Pipeline” commission under Regulation 8. This enables the agent to claim commission on sales that are completed within a reasonable period after the date of termination of the agency contract, provided certain criteria are met.

In order to claim this commission, the agent would need to establish that each individual sale was “mainly attributable” to the agent’s efforts during the agency. There is no clear definition of this, but the Courts have indicated that the agent has to show that they did something significant during the period of the agency which resulted in the customer placing the order. This can be difficult to prove in some cases.

The sale must also have been completed within a “reasonable period” after the agency terminated. What constitutes a reasonable period will depend on the nature of the agency – for some types of goods, a significant period of time might elapse between samples being shown to the customer and an order being placed.

3) Payment in lieu of notice under Regulation 15 or under the agency contract if that specifies a longer notice period. This claim could be brought where the principal has failed to provide the required period of notice of termination to the agent. Note, there can be an overlap between this claim and unpaid commission under Regulation 7 – we would need to avoid “double counting”. The Regulations provide for statutory minimum periods of notice which must be given to the agent unless the agent is in fundamental breach of their obligations. These are:

1. 1 month’s notice during the first year of the agency contract;
2. 2 months’ notice during the second year of the agency contract; or
3. 3 months’ notice where the agency contract has entered its third year or for any longer period.

4) Compensation or indemnity under Regulation 17. These claims often have the highest value and lead to the most disputes between principal and agent. Compensation would be payable to the agent in these circumstances unless there is a written agency contract which specifies that an indemnity would be payable on termination. In most cases, an indemnity claim will result in a lower net payment by the principal to the agent after termination of the contract. This is because indemnity payments are capped at one year’s earnings, whereas the value of compensation claims is calculated on the basis of the open market value of the agency that has been terminated (similar to the valuations undertaken when many businesses are sold).

5) Either party could also bring a general claim for damages against the other. This would usually be on the basis that there has been a breach of contract by one party, which has caused loss or damage to the other. An agent would have to prove that they have suffered loss or damage over and above indemnity or compensation (to avoid a double recovery). In practice, it is very difficult to prove this. In theory, a principal could claim damages against the agent if they can establish that the agent has breached their contract and that breach has caused loss to the principal. It is not uncommon for a principal to bring such claims by way of counterclaim when faced with claims by the agent, but very few of those claims succeed in practice.

In what circumstances could the agent’s claims be brought?

The claims for unpaid commission under Regulation 7 and “pipeline” commission under Regulation will depend on the particular circumstances in which the agent is entitled to be paid commission and also whether the principal has kept up to date in making commission payments as they fall due. These claims are not related in any way to the circumstances in which the agency has been terminated.

In contrast, the claim for payment in lieu of notice under Regulation 15 could only be brought in the following circumstances:

1. The principal was legally required to provide a period of notice to terminate the agency (that period being specified by the Regulations and / or the agency contract); and
2. The principal failed to provide the required notice period.

Claims for compensation or indemnity under Regulation 17 can be brought by the agent in the following circumstances:

1. Where the principal terminates the agency, unless the principal has terminated because of default attributable to the agent which justifies immediate termination of the agency (see further detail on this exception below); or
2. The agent terminates the agency and such termination is justified due to circumstances attributable to the principal; or
3. The agent terminates the agency and such termination is justified on grounds of the “age, infirmity or illness” of the agent, which mean the agent cannot reasonably be required to continue their activities; or
4. The agency is terminated as a result of the death of the agent. This would only apply where the agent is an individual. It would not apply where the agent is a company. In such circumstances, the agent’s estate would be entitled to bring the claim for indemnity of compensation.

What conduct of the principal would justify an agent terminating the agency?

No guidance is given in the Regulations about what behaviour is needed to justify immediate termination of the agency by the agent as a result of circumstances attributable to the principal. However, in the UK, the idea of justification for termination has generally been equated to the existing legal concept of “fundamental breach of contract”. This is a concept with which the UK Courts are very familiar in general contract law.

This concept can get quite complex, but at a general level the failure by the principal to comply with their contractual obligations under the agency must be sufficiently “serious” (or material) to justify immediate termination of the agency contract. A sufficient level of seriousness occurs when the breach is so fundamental that it goes to the very heart of the contract. This description makes it difficult for a non-lawyer to accurately assess whether a sufficient level of seriousness has been breached. Some examples might help:

• In some circumstances, where the principal unilaterally (i.e. without the agent’s consent) reduces the territory in which the agent operates.
• Where the principal attempts to revise the commission payable to the agent downwards without the agent’s consent or otherwise tries to change the basis on which the agent is paid, to the agent’s detriment.
• Persistent delays or failures to make payments that are due to the agent (NB a one-off failure or delay in delaying is unlikely to be sufficiently serious).

When would age, infirmity or illness justify an agent terminating the agency?

Again, this right would only apply to an agent that is an individual person. It would not apply to a company.

Looking first at age, the Regulations do not specifically reference the word “retirement” or set out a specific age from which an agent could not reasonably be required to continue their activities. There have actually been very few cases where the Courts have considered this issue, but in one case the Court decided that an agent was entitled to retire at the then statutory retirement age of 65. However, the statutory retirement age has now been scrapped, which allows workers to continue working beyond 65. It may be that 65 is still a suitable age, or perhaps the age at which the state pension becomes payable would be taken as a suitable age. We need some clarity on this from the Courts. Alternatively, some agency contracts do specify an age at which the agent could retire (and then claim compensation or indemnity).

If an agent becomes ill during the course of their agency, consideration may need to be given to whether the agent is able to continue with their agency activities. If they are not, then the agent would be justified in terminating the agency contract and would still be entitled to claim compensation or indemnity. Much would depend on the nature and severity of the illness or health issues and the agent would probably need to obtain medical evidence to support their position. Currently, there are no Court cases which have specifically considered this issue.

Ideally, the principal and the agent would be able to negotiate the agent’s exit from the agency contract in these circumstances. If that is not possible, the decision would have to be taken by a Court.

In what circumstances could the agent’s claims be lost?

The agent would lose their right to bring claims for payment in lieu of notice under Regulation 15 and / or compensation or indemnity under Regulation 17 in the following circumstances:

1. Where the principal terminates the agency because of default attributable to the agent which justifies immediate termination of the agency;
2. The agent terminates the agency (unless this is justified due to circumstances attributable to the principal or on grounds of the “age, infirmity or illness” of the agent (see above));
3. The agent assigns the agency contract to another agent, with the principal’s consent.

In what circumstances would the agent’s default justify immediate termination of the agency by the principal?

The Regulations do not give any guidance about the behaviour that is needed to justify immediate termination of the agency by the principal due to default by the agent. Again, the UK Courts have equated the idea of justification for termination with the concept of “fundamental breach of contract”.

How can a principal know whether a particular breach of contract by their agent is serious enough to enable the principal to immediately terminate the agency? Not all types of breach will be serious enough, so care must be taken. If a principal ends the agency contract early because of a “serious” breach by the agent, but misjudges the level of seriousness of the breach, the principal would itself be in “serious” breach for ending the contract early. In that situation, the agent would be entitled to rely on the principal’s “serious” breach to terminate the agency contract and bring a claim for indemnity or compensation under Regulation 17. If the principal gets the level of seriousness right and correctly terminates the agency, the agent will lose their right to claim indemnity or compensation. Clearly, there is a lot at stake.

If there is a written agency contract in place, this will often specify at least some of the circumstances in which a principal would be entitled to terminate the agency for a “serious” breach and avoid liability for compensation or indemnity. Courts are generally reluctant to interfere where the parties have agreed to such circumstances, unless they attempt to override what is set out in the Regulations.

Again, some examples might help:

• In one case, a Court found that serious, calculated and abusive language by an agent to their principal was sufficiently serious to permit ending a contract. In that case a faxed apology was found to be insincere and insufficient to remedy the breach. The Court did qualify this by stating that words spoken hastily in the heat of the moment and swiftly neutralised by an apology would not be a “serious” breach.
• Agency contracts often specify that circumstances where the agent becomes insolvent or bankrupt would justify termination.
• Failure by an agent to provide weekly activity and site reports to his principal, in circumstances where the requirement was set out clearly in the agency contract, the principal had explained clearly to the agent about the importance of those reports as a customer service tool, the agent had received several previous warnings about the need to produce reports and the agent failed to produce reports even after expressly agreeing to provide them following a meeting with the principal. In that case, the Judge made clear that all of the above circumstances were instrumental in his decision that the failure to provide reports was a serious breach which justified termination of the agency.
• Failure to meet a contractual sales target may be serious enough to justify immediate termination of the agency, depending on the precise wording used in the agency contract. However, even if it does justify termination of the agency contract it may not be sufficient to prevent the agent from bringing a claim for indemnity or compensation following termination. The principal would need to demonstrate that any decrease in sales is a direct result of the agent’s failure to perform their obligations and is not related to external factors beyond the agent’s control, such as an economic downturn or a global pandemic. If a Court comes to look at this issue, it will consider whether the sales target was reasonable. If the principal set an unreasonable sales target in the first place that could make it difficult for the principal to argue that the agent’s failure to hit that target amounts to a material breach of the agency contract.

In contrast, sales targets agreed by the principal and the agent would generally be easier for the principal to rely on as a basis for terminating the agency. However, exceptions to this have arisen as a result of the recent Covid pandemic where significant portions of the retail industry have been closed for significant periods of time as a result of local or national lockdowns. In those circumstances achieving sales targets set before the pandemic hit would be virtually impossible, despite the agent’s best efforts. The principal would need to give very careful consideration to terminating the agency contract in such circumstances.

• Taking on an agency for products which directly compete with the principal’s products without obtaining the principal’s consent.
• Actively poaching the principal’s staff or taking steps to completely undermine its customer base.

Practical steps to take when thinking about or facing termination of the agency contract

For both principals and agents, I would recommend that you keep a clear and detailed record of all discussions between the parties. If you have verbal discussions at a meeting, make a note of what has been discussed and / or, even better, send an email to the other party confirming your understanding of what has been discussed and agreed. Keep copies of all email exchanges.

Ending the agency agreement amicably is always the best option, if that can be achieved. It avoids getting into a costly and time-consuming dispute.

To be on the safe side, get early legal advice. Many people think it is better to deal with issues themselves to save money on legal fees. But as I said above, if you get it wrong it can be very costly. If you get legal advice at an early stage (i.e. before making any decision), you can be fully aware of the options, risks and the likely value of any claims before you make that all important decision.

Principal dealing with an underperforming agent

The first step should be to review the agency contract and identify any specific obligations that the agent is not complying with. If the principal is unable to identify specific obligations in the agency contract, they might need to consider the more general obligations set out in the Regulations (such as the obligation for the agent to comply with reasonable instructions given by the principal).

After identifying the relevant obligations, the principal should then point out any failures to the agent (in writing) and require them to comply with their contractual obligations. If that does not address the problems, the principal would need to take steps to manage the underperformance (if possible). In doing this it is essential to follow and document a clear process and within that process to give the agent ample opportunity to put across their views and to address, if possible, underperformance or other alleged failures that the principal complains of. Again, it would be prudent to record the steps being taken in writing and to explain why the agent is being instructed to take the specific actions. Communication is key, especially if you later need to persuade a Court that you have acted reasonably.

If the nature of the underperformance is a serious breach of the agent’s contractual obligations then, ultimately, the principal would be entitled to terminate the agency contract as a result of that breach. However, as noted above the principal would need to be very sure of their position before taking this action.

Agent dealing with a principal that is not complying with their obligations

The same points would apply to an agent who is having difficulties with their principal. The first step would be to identify obligations in the agency contract and / or the Regulations and to bring the failure to comply with those obligations to the principal’s attention.

The agent should then carefully record all attempts that they make with the principal to address the failures. If the principal refuses or is unable to resolve the issues, the agent would then need to consider whether they are entitled to terminate the agency contract.