Performance is at the heart of all agency contracts. Unless the agent performs, commission will not be payable and for the principal the reason for engaging the agent in the first place will not be met.
Sales targets and some recent cases
Often performance is measured by sales targets. Indeed, in two recent court judgments, a failure by the agent to achieve the sales target led the principal to terminate the agency contract.
In the first case, before the European Court of Justice, the agency contract laid down a target of 25 sales to be achieved per annum. However, less than seven months into the agency contract, the principal gave notice of termination. Its decision was based on the fact that the agent had achieved only one sale.
In the second case, before the English High Court, the principal decided to end the relationship on the basis that the agent had failed to comply with agreed sales targets.
So, is the answer for principals simply to set sales targets?
Many principals consider that, if they set sales targets for their agents, they are in a win-win position. If the agent achieves the sales target, the principal should achieve its turnover objective. If, however, the agent fails to achieve the sales target, the agency contract can be terminated without penalty.
If only it were that simple
Certainly, in the case of commercial agents, care is needed. Whilst there is no published judgment as to whether a failure to achieve a certain sales target allows the principal to freely terminate the contract (the two cases mentioned above were decided on other grounds), it seems from comments made by one High Court judge that the setting of an unreasonable sales target cannot be relied upon by a principal.
It follows that if the principal terminated the agency contract because of the agent’s failure to achieve the sales target, the principal would be exposed to the risk of the agent making a successful claim under the Commercial Agents Regulations if the sales target was unreasonable.
What is a reasonable sales target? Can principals take steps to reduce the risk?
The lack of a published court judgment highlights the difficulty in determining whether a target is or is not reasonable.
The starting point is whether the target is unreasonable objectively. Setting up the agent to fail is unlikely to be reasonable and, indeed, is counterintuitive to the very nature of the principal-agent relationship.
Certainly, providing in the agency contract for:
- the principal to set a sales target significantly higher than the sales in the previous year; or
- a ratchet mechanism which has the same effect,
might make it difficult for the principal to argue that the agent’s failure amounts to a material breach of the agency contract.
In contrast, sales targets agreed by principal and agent might be easier for the principal to rely on in the future. But what is agreed and how can it be evidenced? Certainly, a failure to address these issues may scupper the ability of the principal to rely on them in the future.
The consequences of getting it wrong
Whatever the type of agency (and whether or not the agent is or is not a commercial agent for the purpose of the Regulations) if:
- the agency contract is for a fixed term; or
- provides for notice of termination of the agency contract to be for a significant period (say, 6-12 months),
relying on the failure of the agent to achieve the sales target as amounting to a material breach of the agency contract and so justifying its termination – may prove costly. It can be expected that the agent will claim for what the agent has lost as a result of the agency contract being ended early.
In the case of commercial agents, termination of the agency contract by the principal without good reason is likely to lead in addition to the agent claiming either compensation or indemnity under the Regulations. As published court judgments show, this can prove to be a costly exercise for the principal.
Further, it can become worse for principals with commercial agents who wrongly call termination of the agency contract. In addition to:
- damages for failure to give proper notice for wrongly ending the term agency contract; and
- an award of compensation or indemnity to the terminated commercial agent,
there can also be claims for:
- post-termination commission – being commission on orders which reach the principal after termination and which are as a result of the agent’s efforts made before termination; and
- back commission – being commission which the agent may claim in respect of orders accepted by the principal and which the principal has then failed to fulfil for a reason for which the principal is to blame.
And what of Covid and Brexit?
It is possible to envisage that these two horseman of the Apocalypse may be called upon by either principal or agent to justify termination or claim for breach of the agency contract.
The principal may claim that either or both of Covid or Brexit amounts to the occurrence of an event of force majeure making performance of the agency contract impossible. Whether or not the principal is able to do so will depend on the terms of the force majeure clause. Unfortunately, in many contracts (not simply agency contracts) force majeure is often an orphan clause – included towards the end of the contract without much, if any, thought.
In contrast the agent may claim that Covid or Brexit needs to be taken into account in determining the reasonableness or otherwise of the sales target and, in turn, whether it was right for the principal to rely on the agent’s failure to achieve the sales target as meaning the principal could terminate the agency contract safely.
Take home points
- It is important for principals to give thought as to sales targets both in terms of what they are seeking to achieve and if it is intended that non-performance of the targets by agents is to amount to an exit route.
- Whether or not the principal is able to safely rely on the failure to achieve the sales target is likely to turn on the question of reasonableness.
- Overall, care is needed. Failure to get it right is likely to prove costly – particularly in the case of commercial agents.
If you have any questions about these issues in relation to your own organisation, please contact a member of the team or speak with your usual Fox Williams contact.