How can principals 'squeeze' the agency to reduce payments to agents?

Terminating an agency agreement can be very costly, as commercial agents are entitled to many rights and protections: damages for failure to give the appropriate termination notice, pre-termination commission, post-termination commission, back commission and compensation or indemnity (as the case may be).  Further, these rights are cumulative. 

Whilst some of these entitlements, such as post-termination commission, may be excluded in the agency agreement, most of them cannot.

With this in mind, some principals have been creative in reducing their agents’ entitlement to compensation within the confines of the Commercial Agents Regulations.

The compensation due to a terminated agent is calculated by reference to the value of the agency at the time of termination to a notional third party purchaser.  In turn, this is likely to be affected by the commission earned by the agent prior to termination. 

In respect of compensation, the valuation of an agency:

  • is a reflection of reality and can be determined by reference to the agent’s net income stream; and
  • takes into consideration factors such as the health of the agency and the market for the product at the time of termination.

It follows that by decreasing the net income stream of the agency, the principal will be able to significantly reduce the amount of compensation due to the agent at the date of termination.

Whilst this is not a new strategy, we are now seeing  suppliers adopting what appear to be new tactics in an attempt to limit the compensation which may eventually be payable.

One tactic consists of excluding variants of existing models, new models, or “sub-brands” from the range of products covered by the agency agreement. By simply taking advantage of loosely defined terms in the agency agreement, a principal stands a reasonable chance of achieving its objective easily.

Another example is shown by turning a key customer account into a house account.

This can be achieved by relying on a clause in the agency agreement which entitles the principal to turn a customer account into a house account – usually with a payment being made to the agent.  In this situation, the principal is anticipating that such a payment made now will be cost effective in the future by reducing the amount of compensation which will be payable when the agency agreement eventually comes to an end. This is due to the fact that the sales generated from this account will no longer be included in the calculation of the compensation.

Turning a key customer account into a house account is also sometimes achieved by the principal informing the agent that the principal is taking back the account and then trying to sweeten the pill by promising the agent a reduced commission on the account (as the agent is no longer involved in servicing the customer), which the principal has in mind to further whittle away over time. In this situation, the principal is taking a chance that the agent will not claim that the principal’s action is a material breach, which would entitle the agent to treat the agency agreement as terminated and make a claim under the Regulations.

A form of Hobson’s choice?

If the agent chooses not to claim material breach, it is unlikely to be sufficient for an agent simply to express his dissatisfaction with the changes introduced by his principal and hope for the best. This is because although the agent may be dissatisfied, he will be continuing to perform the agency agreement, so allowing his principal more time to implement his “squeezing” strategy.

The agent’s continued performance may also entitle the principal to argue that his agent is prevented from commencing a claim against the principal since the agent will have performed the agency on the basis of the principal’s changes. 

Take home points for agents

As an agent be alert to:

  • your principal seeking to reduce your commission;
  • key customer accounts being taken back by your principal;
  • your principal seeking to make other changes to your agency agreement.

Ultimately the choice is yours!

The contents of this article are intended for general information purposes only and shall not be deemed to be, or constitute legal advice. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article.