Is it possible to contract out of the entitlement of a commercial agent to compensation or indemnity under the Commercial Agents Regulations? The standard answer is no.
Indeed, the Regulations state that the principal and the agent may not derogate from the relevant provisions of the Regulations to the detriment of the agent before the agency contract expires. A similar provision is found in the EU Agents Directive.
But what if the agency contract contains an onerous obligation on the agent (for example, a performance requirement to achieve a minimum sales target) and the contract also provides that non-fulfilment by the agent of the obligation will entitle the principal to terminate the agency contract?
On the face of it, the onerous obligation may appear unreasonable. On the other hand, freedom of contract is an important principle of English law.
As mentioned above, whilst the Regulations do prohibit principal and agent from derogating from the entitlement of the agent to compensation or indemnity before the agency contract expires, they also state that the Regulations do not affect the application of any law which provides for an immediate termination of the agency contract because of the failure of the agent to carry out all or part of his obligations under the contract.
The Regulations go on to provide that compensation or indemnity shall not be payable to the agent where the principal has terminated the agency contract because of default by the agent which would justify immediate termination of the agency contract.
So, does non-fulfilment by the agent of an onerous obligation allow the principal to avoid a compensation or indemnity payment?
Can it be?
A literal interpretation of the provisions contained in the Regulations would result in the answer: yes – if the agent fails to fulfil an onerous contractual obligation, the principal can terminate the agency contract and avoid payment of compensation or indemnity.
On this basis, the principal could be expected to ensure that the terms of all new agency contracts entered into by the principal entitle the principal to impose onerous performance requirements on the agent. This would be because:
fulfilment by the agent of such onerous requirements would only benefit the principal; and
non-fulfilment by the agent would enable the principal to walk away from the compensation or indemnity liability.
A case of heads, the principal wins and tails, the principal is not doing too badly!
Not so fast
It is not the case under English law that all contractual breaches are equal. Instead, the language of the Regulations which provides for immediate termination of the agency contract because of the failure of the agent to carry out his obligations is aimed at the concept of repudiatory breach.
A repudiatory breach is a breach by one party which is so serious that the innocent party can decide whether to terminate the contract immediately or affirm (carry on) the contract and claim damages.
This was confirmed some years ago in a case where the judge tested the ability of the principal to rely on the non-fulfilment by the agent of an onerous obligation in the agency contract by reversing the proposition. It was his view that if it were to be the case that the principal could rely on non-fulfilment of any contractual obligation by the agent then this would entitle the principal to evade the obvious intent and purpose of the Regulations, namely, to provide protection to commercial agents.
So where does this leave us?
Despite – or possibly, because – of the above view, there have been no reported judgments of what amounts to non-fulfilment by an agent of a performance requirement, such as achieving a minimum sales target.
If the issue should arise as to whether a principal can rely on the non-fulfilment by the agent of a performance requirement, the test if very likely to be:
Was the agent’s failure to perform so serious irrespective of the particular performance requirement?
In borderline cases, the parameters of the particular performance requirement in the agency contract may well be taken into account in determining 1 above.
It therefore follows that there will be situations where performance by the agent is so poor that there can be little doubt of the repudiatory breach by the agent.
In contrast, there will be other situations where performance by the agent is such that whilst the performance requirement has not been met, it will be a “brave” principal which seeks to claim repudiatory breach.
And between the two – uncertainty as to whether non-fulfilment of a performance requirement does or does not amount to a repudiatory breach entitling the principal to walk away and avoid payment of compensation or indemnity.
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