Principals and agents will be familiar with agency contracts coming to an end due to the agent failing to meet Key Performance Indicators (KPIs) contained in the parties’ contracts. However, whether a court will find that this breach is enough for a principal to terminate a contract will depend on the seriousness of the breach and whether the contract had been affirmed by the principal.
This issue was highlighted in the recent judgement in Green Deal Marketing Southern Limited (“GDM”) v Economy Energy Trading Limited (“EE”).
On 31 January 2017 EE summarily ended its relationship with GDM. This relationship had been initially operating under a written Partnering Agreement and as contended by GDM had subsequently been amended in June 2016 to be governed by a new agreement contained in Heads of Terms.
EE decided to end the relationship on the basis that GDM had failed to comply with agreed targets and that its field agents were guilty of large-scale mis-selling. EE claimed that it terminated the relationship during a telephone conversation with GDM in January 2017 by stating that it was suspending door to door sales for an unknown length of time. GDM interpreted the renunciation as a repudiatory breach by EE, which GDM accepted to terminate the agreement.
Having considered there was a binding contract (see here) the judge then went on to decide:
- whether there had been any breaches of the agreement by GDM; if so
- whether those breaches were repudiatory; and if so
- whether EE had affirmed the contract despite the breaches.
Whether there had been breaches of the agreement
The judge decided that GDM had persistently breached its KPIs in respect of cancellations. Furthermore he concluded that the agent had been mis-selling the principal’s products in breach of the contract.
Were the breaches repudiatory?
The judge decided that the commercial construction of the termination provision contained in the Heads of Terms was that, when GDM failed to comply with a KPI, EE would become entitled to terminate if it required GDM to achieve compliance within a specified period of time (being a reasonable period of time) and GDM failed to do so. The judge came to this conclusion as the contractual provision envisaged that a failure to achieve the KPIs was remediable. As such the judge felt that more was required for the breach to be repudiatory than simply the length of time that the breaches had occurred for, as EE needed to inform GDM that it had to remedy the breach.
In relation to the breach for mis-selling, the judge decided that whilst there had been some mis-selling by GDM’s field agents which constituted a breach of the contract, this was not a repudiatory breach entitling EE to terminate the contract. This was because for the mis-selling to have been a serious enough breach to warrant being a repudiatory breach it would have had to go to the core of the contract and cause EE to have been deprived of substantially the whole of the contract. The judge did not look favourably on EE separating out each instance of mis-selling as being a separate breach in order to create an aura of a repudiatory breach and instead confirmed that the breaches were in conjuncture with each other.
This finding is surprising considering that the companies worked in a regulated sector which is concerned about mis-selling, especially to vulnerable people. However, the judge considered that the regulator had started an investigation not due to GDM’s conduct but due to EE failing to take steps to rectify its behaviour. Instead of making constructive proposals to the regulator, EE had removed GDM from selling door to door. The judge decided that this indicated GDM had not breached the contract as it would not be sufficient to make GDM liable for EE’s compliance with the regulator.
Was the contract affirmed?
Finally, the judge decided that EE had affirmed the breaches of the contract that GDM had made. This is because EE had been content in continuing the contract when KPIs were being missed and mis-selling was occurring only to change its mind not due to any new breaches by GDM but because the regulator had started an investigation and EE wanted to take a drastic step in order to persuade the regulator to desist.
Therefore, the judge decided that GDM had lawfully terminated the contract by its acceptance of EE’s breach of renouncing the contract. However, the judge did comment that if he had decided that EE was entitled to terminate the contract due to a repudiatory breach he would have decided that this would have been on a different date to that argued by EE. This is because acceptance of a repudiatory breach of a contract must be clear and unequivocal and EE missed this opportunity in the telephone conversation on 31 January 2017.
What are the take home points?
- For a party to rely on a breach of the contract as repudiatory, the breach must go to the core of the contract and deprive one party of substantially the whole of the contract.
- Even in the regulated sector it is not sufficient to make the agent responsible for the principal’s regulatory obligations. The principal must play an active role in ensuring compliance with the regulator.
- A principal will have affirmed an ongoing breach of a contract if it only decided to act and end the contract due to an acute event, such as a regulatory investigation.
- In order to terminate a contract due to a repudiatory breach the party seeking to rely on the breach must be clear and unequivocal as to the termination.