A vital lesson for principals

A judgment given in a recent case before the High Court provides a reminder to principals of a fundamental point to remember when considering how to proceed in the face of a serious breach of the agency agreement by the agent.

The case concerned an agency relationship between the principal and its former agent. The parties had been involved in discussions over a period of time concerning the future of the agency relationship and, specifically, whether the agency agreement should be brought to an end or an alternative should be agreed (such as the agent becoming an employee of the principal). These discussions took place on a “without prejudice” basis, meaning that they were inadmissible in Court proceedings. The final “without prejudice” communications which were sent from the principal contained what the principal referred to as a “termination proposal” for the agency agreement.

In response to the termination proposal, the agent wrote to the principal on an “open” basis (meaning that the correspondence was admissible in Court) and sought to rely upon the “without prejudice” termination proposal. The judge found that the agent was not entitled to do this, and that the agent’s attempt to claim that the principal had terminated the agency agreement by way of the “without prejudice” termination proposal was instead a serious breach of the agency agreement by the agent.

So far, so good for the principal.

However, the point which then had to be considered was whether the principal had ever ‘accepted’ the serious breach by the agent, thereby bringing the agreement to an end. When a party to an agreement commits a serious breach of it which entitles the innocent party to terminate immediately, the innocent party has to make it clear (usually by some positive action and within a reasonable time) that it ‘accepts’ the breach and considers it as bringing the agreement to an end. If the innocent party does not take any action in response to the breach of contract, it runs the risk of being found to have decided to waive the breach and affirm the contract. As soon as the innocent party waives the breach, it will lose its right to rely on the breach to bring the agreement to an end, and the agreement will continue.

The reason that this is so important in agency cases is that, if a principal has the right to terminate the agency agreement because of a serious breach by the agent, the principal can avoid having to pay compensation or an indemnity to an agent. This “get out of jail free” card is therefore extremely valuable to principals.

The problem in this case was that the principal was found by the Court not to have ‘accepted’ the agent’s serious breach. In addition, it was decided that the principal had instead, by its actions or inaction, accepted the agent’s offer to continue with the agency agreement for a period of time after the serious breach by the agent. As a result, the principal lost its right to terminate the agency agreement for serious breach, and the agent’s claim for compensation succeeded.

The agent was awarded compensation on a multiplier of 4 x the agency’s net maintainable earnings. This is further bad news for principals, who usually argue in compensation cases that a multiplier much lower than 4 is appropriate. The principal had done so arguing for a multiplier of 2 or even 1. The principal succeeded in the argument that all costs, both fixed and variable, should be taken into account.

The case is therefore a salutary reminder to principals of the following two points:

1. If the agent commits a serious breach of the agency contract, the principal may well have a right to terminate the contract immediately and avoid paying compensation or indemnity.
2. If the principal has the right to terminate the contract because of the agent’s serious breach, it’s a case of ‘use it or lose it’. Silence by the principal and continuing performance of the agency agreement may be fatal for the principal in these circumstances.