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 them.
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 thing 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, we list below some top tips that principals ought to bear in mind when considering how best to terminate an agency agreement.
Top tip 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 the 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.
Top tip 2 – establishing why you want to terminate the agency agreement is often the other side to 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 borne in mind 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.
Top tip 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.
Top tip 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.
Top tip 5 – it is also important to plan for the future. The giving of notice of termination to the agent means that 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.
Top tip 6 – although it may seem counterintuitive, determine what are the terms of the agency agreement 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 an urban 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 or by conduct or in writing.
Top tip 7 – where the principal and agent are in different countries, establishing what is the agency agreement between them (see Top tip 6) 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:
- there are three separate countries with three separate laws and courts within the United Kingdom;
- the EU Agents Directive (which is implemented into 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; and
- increasingly, countries outside of the European Union 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.