Written by Steve Sidkin
11 April 03

Planning termination

In today’s difficult economy it is important that all parts of a business are working as hard as they can in order to contribute to the bottom line.  Clearly this includes the agents used by a business.

Where an agent is performing badly, it is natural for his principal to think in employment law terms as to the action to be taken.  Thoughts of codes of practice and disciplinary procedures will spring to mind.  However, in respect of agents there are neither codes nor procedures.  In view of this it is important to plan the termination of an agent given the many statutory rights which he will enjoy on termination under the Commercial Agents Regulations.

A rule of thumb

The Regulations do not provide clear guidance as to compensation or indemnity.  Equally the cases deciding compensation are unclear whilst there has been only one questionable judgment in respect of the calculation of indemnity.

It would seem from recent cases that a terminated agent will often be able to claim compensation equivalent to the last two years of commission paid to him.  Allowing for the other statutory rights which he may enjoy, it is easy for terminated agents to claim in excess of three years’ worth of commission.  Usually they back down on such claims.  But how far they may be prepared to do so can depend on the actions taken by the principal in dealing with an agent behaving badly.

The objectives concerning termination

If the management time or compensation involved is likely to be considerable, the following issues should be considered:

  • What are the reasons for termination and how they can be evidenced? –  To stand a chance of fighting off a claim for compensation or indemnity (“compensation”) the principal must show that the termination was as a result of the agent’s default which, in turn, was of such a nature as to justify immediate termination.  In order to get to this stage, you should review the agency agreement and check whether it sets out clearly defined, specific obligations on the agent and if these have been performed.  Usually the most important of these obligations is a minimum performance requirement setting out the value of orders to be obtained by the agent.  Prompt termination of the agency agreement following a failure by the agent to perform this obligation will give you the chance of avoiding paying compensation to the agent.

This is despite the fact that compensation under the Regulations does not contemplate the extent to which the agent contributed to the termination.  As such the principal is not prevented from referring to the agent’s actions even in a situation where the agent’s default does not justify immediate termination.

However, it is one thing to have such obligations and requirements in an agency agreement.  It is another thing for the principal to monitor the performance of them.  Without monitoring, it may be difficult to evidence the reasons for termination.

  •  To what extent should a without prejudice offer be made to the agent? – A principal terminating an agent may feel that there is an advantage to making a without prejudice offer to the agent in order to pre-empt a prolonged dispute.  There is no right or wrong answer.  Each case is dependent on its facts.  However, in those situations where termination deprives the agent of a significant part of his commission income, it may be possible to use a without prejudice offer in order to apply pressure on the agent in order to secure an early settlement.  Against this is the risk of setting a precedent in respect of your other agents.  
  • Settlement should follow termination and not vice-versa – Irrespective of the without prejudice offer made to the agent, it is important that the settlement follows termination.  The reason for this is that whilst the Regulations prescribe the right of the agent to an indemnity or compensation on termination, the Regulations also make it clear that the parties may not depart from the agent’s rights to his detriment before the agency agreement comes to an end.  As such if a settlement agreement is entered into whilst the agency agreement continues, the agent will not be bound by it if it can be said that in entering into the settlement agreement the parties departed from the provisions of the Regulations to the agent’s detriment.  
  • How are the activities undertaken by the agent to be performed after termination? – The reasons for termination of an agent may be various.  But ending an agency where the agent has not been performing will provide cold comfort if you have not put in hand arrangements for how orders are to be obtained and goods supplied in the immediate post-agency period. 

Some principals replace one agent with another.  If this is best for the business, then a new agreement should commence immediately following the termination of the old agency agreement.  But in the new agreement it is to be hoped that the principal will have inserted specific obligations and other provisions designed to reduce the bias in the Regulations in favour of agents. 

Furthermore the Regulations govern the apportionment of commission between new and previous agents.  A new agent will not be entitled to commission where under the Regulations the commission is payable to the old agent.  There are two exceptions.  First, where it is equitable because of the circumstances for commission to be shared between old and new agents.  Second,  when the parties have agreed to take advantage of one of the few occasions under the Regulations where it is possible for them to contract out.

Unless contracting out occurs, you face a double bind.  This is because the Regulations provide that if commission is paid to the wrong agent, you will be liable for non-payment to the agent who has not been paid.  However, in this situation whilst you will be entitled to have the sum refunded by the agent not entitled to the money paid, you will have to recover it.

  • Looking to the future, if an agent is not to be used, you should ask yourself what other courses of action are most appropriate for your business? – Employed representatives will bring with them a raft of employment law rights and benefits including the possibility of damages being awarded on termination of the employment contract.  Furthermore national insurance contributions will need to be paid.  Alternatively distributors may be the answer.  However, your goods may not lend themselves to being distributed either because of their physical nature or the mark-up which a distributor will require.  In addition there may be domestic and EU competition law issues involved.

Having regard to these issues should assist you in minimising the impact which the Regulations may otherwise have when terminating agents behaving badly.

This briefing note is for general information. For advice in applying this general information to your specific circumstances, please contact Stephen Sidkin or any members of the Fox Williams’ agentlaw team. (www.agentlaw.co.uk).

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