Agency termination: why it is important to know when it has happened

In some situations, it is clear. The principal informs the agent that the agency is at an end. The reasons can be various. But, as a certain Prime Minister might say, the end means the end. 

In other situations, whether or not an agency relationship is continuing or has terminated may be unclear. In these situations, what is important is to determine whether the agency has terminated and, if so:

  • which party terminated the agency;
  • when termination happened; and
  • in what circumstances such termination took place. 

The reason why this is important is because the answers to the above questions will be central to the claim (if any) by the agent for compensation or indemnity under the Commercial Agents Regulations. 

It is the case that compensation or indemnity under the Regulations is only payable following the termination of an agency, not before. 

If the principal terminates the agency, compensation or indemnity is not payable if the principal terminated because of the serious breach of the agent. In contrast, if the agent terminates the agency, compensation or indemnity will not be payable if the agent has walked away from the agency (rather than terminating for reasons attributable to the principal and which justify the agent walking away). 

An agent will lose his entitlement to compensation if he has not notified the principal of his claim within one year from the termination of the agency. Further, as a matter of law, the amount of any compensation or indemnity to which the agent is entitled will be calculated as at the date of the termination of the agency, and the amount may vary depending on the date of termination. 

These issues are best illustrated in the following example.

The relationship between a principal and an agent has deteriorated. As a result, the agent has instructed lawyers to write to the principal claiming that the agency is at an end. What is not clear, however, is the date on which the agency ended. 

The principal knows that in 2016 the agent was refusing to comply with the reasonable requests of the principal. Further, the relationship between principal and agent deteriorated to such an extent that at the start of 2017, the agent refused to receive samples from the principal. 

What then, if any, is the claim that the agent may now make. 

If the agent should now say that the agency termination occurred in 2016, the agent will be out of time to bring a claim for compensation or indemnity as the Regulations require that notice of an intention to claim is given within a period of 12 months from the end of the agency. 

In contrast, if the agent claims that the agency terminated in, for example, late 2017, then the agent may well be in difficulty with a claim for compensation as the amount of compensation due to an agent is calculated by reference to the value of the agency on termination to a hypothetical third party purchaser. This requires the agency business to be valued. Frequently, the value of the agency is determined by reference to the annual net income of the agency multiplied by a multiplier which reflects the purchaser’s confidence in the reliability of the attractiveness of income stream of the agency business. 

Given that the agent refused the samples in 2017, it is difficult to see how sales made after that date can have any connection with the agent and, as a consequence, it will be likely to be difficult to persuade a court that the agency has a high or even any value. 

In contrast the agent may be in a better position if the agency agreement provided for indemnity. In this situation it is necessary to determine whether the agent has brought the principal new customers or significantly increased business with customers which the agent inherited from the principal. A determination is then made as to the commission generated from such sets of customers over the 5 years preceding termination. But even in this situation if the agent has been inactive in obtaining orders in the months leading up to termination of the agency this is likely to adversely affect the amount which may be claimed by way of indemnity.

Take home points for agents

For agents the answers are straightforward. Be clear as to:

  • which party is terminating the agency;
  • when termination happened; and
  • in what circumstances such termination took place.
Stephen Sidkin
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