Breach and the Agency Termination Payment

When an agency ends, the agent is usually entitled to a substantial termination payment. But that entitlement can be lost, defended or reduced, and breach of contract is where most of the fighting happens. A serious enough breach by the agent can wipe out the payment; a serious enough breach by the principal can let the agent walk away and still claim.

The articles below, from specialist commercial agency solicitors, map out where the line falls and what turns on it. Each is reproduced in full and attributed to its author.

Breaking up is hard to do

The foundation: what makes a breach “serious” enough to justify immediate termination, and the risk of getting it wrong, in either direction.

How do you know if a breach of contract is serious enough to allow you to immediately terminate and end the relationship? It is a common misconception that any breach, even small breaches, can allow the innocent party to terminate the contract, which isn’t the case. In order to justify ending the contract completely the breach must be ‘repudiatory’ (i.e. “serious”). A breach is ‘serious’ when it is so fundamental that goes to the very heart of the contract, permitting the innocent party to terminate the contract immediately and claim damages. Why is it important? It’s important because if you are an innocent party that ends a contract early because of a ‘serious’ breach but you misjudged the seriousness of it, then you are the one in ‘serious’ breach for ending the contract early. The other party would be able to claim damages from you. In addition, if an agent commits a ‘serious’ breach and the principal ends the contract with immediate effect then the agent will lose its right to claim compensation or an indemnity under the Commercial Agents (Council Directive) Regulations 1993 (the “Regulations”). These payments can be substantial and can run into six-figure sums. Given the considerable financial implications for both parties, allegations of ‘serious’ breach must be taken extremely seriously by both parties to an agency contract.

How do you know if a ‘serious’ breach has been committed? First, look at the contract to find out what each party has agreed to do or if a specific action will allow the innocent party to end the contract. If a ‘condition’ of the contract is breached, that may be a ‘serious’ breach. For example, if an agent takes on a competing line of identical products to its principal’s products and there is a clause in the contract which expressly prohibits this, then this may amount to a ‘serious’ breach, although it strongly advised to take specific legal advice. If there is no clear breach of a condition, a ‘serious’ breach can also occur when the innocent party has been deprived of most of the benefit of the contract. For example, if a party abandoned the contract or refused all further performance that would potentially amount to a ‘serious’ breach. Repeated late production of sales reports by an agent would not usually amount to ‘serious’ breach because the principal has not lost the whole benefit of the contract. The Courts have provided the following (very limited) guidance on what will amount to a ‘serious’ breach that can have the effect of denying an agent its right to compensation or an indemnity payment:

• Failure to meet a sales target alone is unlikely to be enough to justify immediate termination. The principal would need to demonstrate that any decrease in sales is a direct result of the agent’s failure to perform its obligations and is not related to any external factors such as market downturn. Even if the contract sets a minimum level of sales, falling below this still may not be enough;
• Serious, calculated and abusive language by an agent to its principal was sufficiently serious to permit ending a contract. In that case a faxed apology was found to be insincere and insufficient to remedy the breach. The Court did qualify this by stating that words spoken hastily in the heat of the moment and swiftly neutralised by an apology would not be a ‘serious’ breach.
• The Court has previously held that negative comments about a principal which were published online by an agent did not amount to a ‘serious’ breach if a reasonable person would think that the comments were intended to be humorous.

Deciding whether to end a contract immediately for a ‘serious’ breach is a difficult decision to make, often in heated circumstances. It is critical to take legal advice before reacting and to keep a paper trail of attempts to resolve disputes. All correspondence could end up being produced in Court and acting reasonably throughout can have an effect on the outcome of any claim.

Nichola McQuillan is a Senior Solicitor in one of Bolt Burdon’s Commercial Litigation Teams
Providence House, Providence Place, Islington, London N1 0NT
Tel: 020 7288 4700 Fax: 020 7288 4701
Email: info@boltburdon.co.uk
www.boltburdon.co.uk

Disclaimer: This column does not contain legal advice and is for general guidance only. Agentbase, Bolt Burdon Solicitors and the writer accept no liability in connection with the general guidance given in this column. Please ensure that you obtain legal advice before acting in reliance upon anything in the article. For example please be clear that the answers given in this column may not cover all possible angles, aspects, relevant considerations and/or points of law and so that all or any information which is given above needs in every instance to be referred for legal advice for clarification and amplification, before being relied upon.

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What if my principal is in breach of our agreement?

The other direction: when a principal’s breach lets the agent terminate and still claim, and the danger of misjudging it.

Most agents are aware that if their agency agreement is terminated by the principal they are entitled under the Commercial Agents (Council Directive) Regulations 1993 to payment of either compensation or an indemnity, depending on what their agency agreement says. An agent loses his entitlement to compensation or indemnity, though, if the reason for termination is that he is in breach of the agreement.

Often we are consulted by agents whose principals have breached the terms of the agency agreement. Unhappy with the actions of his principal, it is the agent who wishes to terminate the agreement. Is the agent in this situation still entitled to compensation?

The answer is yes, in principle, provided the actions taken by the principal are so serious that they amount to a fundamental breach of the agency agreement. Minor infringements of the agreement will not be sufficient. The key question for the agent to determine is what amounts to a fundamental breach.

Some of the breaches our clients typically encounter are:

Changes to territory

Generally an agency agreement contains details of the territory in which the agent is entitled to operate, often with exclusivity for that region. Unless there is express agreement by the agent, an attempt by the principal to unilaterally change the territories in which the agent operates is likely to constitute a fundamental breach of the agreement.

Changes to commission arrangements

The agent’s rate of commission is usually set out in the agreement and any attempt to revise this downwards or otherwise change the basis on which it is paid to the detriment of the agent is also likely to constitute a fundamental breach.

Outstanding commission

A one-off failure to pay the commission due to an agent, or late payment on one or two occasions, is unlikely to be sufficiently serious to entitle the agent to terminate the contract. However, persistent delays or failures to make payment resulting in a significant debt arising may result in a fundamental breach having been committed.

Administrative changes

Unilateral changes to administrative matters such as reporting requirements are unlikely to amount to fundamental breaches.

An agent whose principal is in breach of the agreement is in a difficult position. If the agent does nothing, and continues to perform in accordance with the agreement, then he risks ‘affirming’ the principal’s breach and losing his right to terminate. On the other hand, if he terminates the agreement on the basis of what he considers to be a fundamental breach, but it is subsequently found that the principal’s breach was not sufficiently serious, then the agent himself will be in breach of the agreement and will lose his entitlement to compensation, and may also find himself facing a damages claim from his principal.

It is therefore vital for an agent who thinks his principal has committed a fundamental breach to take urgent legal advice before taking any action.

Emma Butcher, Clarkslegal LLP
One Forbury Square, The Forbury, Reading RG1 3EB
Tel: 0118 958 5321
www.clarkslegal.com

Disclaimer: This column does not contain legal advice and is for general guidance only. Agentbase, Clarkslegal LLP and the writer accept no liability in connection with the general guidance given in this column. Please ensure that you obtain legal advice before acting in reliance upon anything in this article. For example, please be clear that the answers given in this column may not cover all possible angles, aspects, relevant considerations and/or points of law and so that all or any information which is given above needs in every instance to be referred for legal advice for clarification and amplification, before being relied upon

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Avoidance of agent termination payments

How principals try to avoid the payment, the leading cases on the agent’s breach, and the factors a court weighs.

Most principals are aware that when an agency is terminated they will be liable to pay the agent a termination payment under Regulation 17 of the Commercial Agents (Council Directive) Regulations 1993. This can be a very substantial sum, and in our experience, this can unfortunately result in principals considering ways they might seek to avoid such payment. Agents should be aware of this possibility and how to deal with it should it arise.

The good news for agents is that a principal can only exclude payment of an indemnity or compensation under Regulation 17 in very limited circumstances. The right to exclude such payment will only arise where the agent is in default of his obligations under the agency contract, and that default justifies the immediate termination of the agency contract.

This leads to the question “how serious does the agent’s breach need to be to justify termination with immediate effect?” The courts have considered this question in various cases with some interesting decisions. Each case must be considered on its facts, and ultimately it will depend on how serious the breach is.

Comments made by an agent

A common cause of complaint from principals is about comments which have been made by agents which they regard as damaging to their business. In the case of Crocs Europe BV v Craig Lee Anderson [2012] EWCA Civ 1400 the court considered comments which had been posted by the agent’s employees on the internet. A link was sent to the agent’s other employees and to third parties, including some of the principal’s customers and distributors. The website was later taken down.

Crocs argued these comments amounted to a fundamental breach of the agent’s duty which entitled it to terminate the agency contract with immediate effect without paying compensation.

The agent said the comments were a joke about the principal’s failure to respond to orders; the principal claimed the comments disparaged the products which it had appointed the agent to sell and entitled it to terminate the agency contract with immediate effect

The court found in favour of the agent in that case. It found the website had not disparaged the principal’s goods. The comments had referred to Crocs’ inability to meet delivery obligations, a state of affairs that was well known. The judge held that while the agent had breached the contract, the breach was not so serious as to justify immediate termination, and the agent had therefore not lost its right to compensation.

Failure to report

Individual instances of failures to report to a principal are unlikely to suffice to exclude a termination payment, but repeated instances might be, especially if they are accompanied by other serious breaches (Nigel Fryer Joinery Services Limited v Ian Firth Hardware Limited [2008] EWHC 767 Ch). Agents should therefore be careful to ensure they comply with their reporting obligations on an ongoing basis.

Undertaking work for other agencies

An agent who undertakes work in respect of other non-competing agencies or other competitive agencies but with the consent of his principal, is unlikely to be in breach of duty unless the agency agreement specifically forbids the agent from such conduct or requires the agent to provide its services exclusively to his principal.

An agent who acts for a competitor without the authorisation of his principal is likely to lose his right to a Regulation 17 payment since such conduct is likely to justify immediate termination. Agents should therefore ensure they always carry out their sales activities within the terms of their agency.

Expiry of a fixed term agency

In the case of a fixed term agency which is due to expire, a principal may lose its rights to exclude a termination payment if it does not take steps to terminate the agency on the grounds of breach, but instead lets the agency expire (Cooper & Others v Pure Fishing (UK) Limited [2004] EWCA Civ 375). Agents whose contracts have simply expired should seek immediate advice if the principal later seeks to exclude the termination payment on the grounds of repudiatory breach.

Specific clauses in an agency contract

Where there is a clause in an agent’s contract which entitles the principal to terminate with immediate effect upon the occurrence of specific events, it is unlikely that such a clause will operate to avoid a termination payment under Regulation 17. The agent’s conduct will need to be considered in the context of the requirements of Regulation 18.

Summary

The court has held that Regulation 3 does no more than set out the obligations of an agent, and a breach of those obligations does not automatically terminate the agency contract. Even where the agent’s a duty is a fiduciary one, a breach of that duty does not automatically or necessarily amount to a repudiatory breach of the contract.

The key question for the agent whose agency has been terminated and the principal is seeking to exclude a termination payment is how serious, in all the circumstances, has the agent’s conduct been?

Some of the factors which may influence the court’s decision on whether the breach was so serious as to entitle the principal to terminate with immediate effect are:

• In the case of comments made by an agent or an agent’s employee, were they made in an obviously jokey way?
• Was the circulation of such comments limited and temporary?
• Is there evidence of harm suffered by the principal?
• Does the breach go to the root of the agency relationship?
• Was it a one-off incident?
• Did the incident involve bad faith on the part of the agent?
• Did the incident involve a real risk of harm to the principal?
• Did the agent show an intention to abandon the agency contract?

The court’s decisions understandably tend to favour the position of the agent even when it appears the agent’s conduct can be called into question. This is consistent with the purpose of the Regulations which is of course to protect commercial agents.

Suzanne Carr, Senior Solicitor, Myerson Solicitors

Myerson are specialists in Commercial Agency Law and have significant experience in advising both agents and principals. If you have an issue with termination payments or any other contentious agency issue then the litigation experts at Myerson are happy to discuss your situation in a no-obligation telephone call to assess your claim, give preliminary advice and suggest a way forward. Please contact 0161 941 4000 or email lawyers@myerson.co.uk.

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A breach during the notice period does not defeat the payment: the Volvo case

Where the exact line falls: a serious breach committed after notice has been given, but before termination takes effect, still does not cost the agent the payment. A Court of Justice of the EU decision (Volvo Car Germany v Autohof Weidensdorf, C-203/09); such decisions no longer bind UK courts since the end of 2023, though they may still be followed.

The European Court of Justice has found that Agents are entitled to compensation or an indemnity even if they commit a serious contractual breach during their notice period.

The European Court of Justice has boldly found that a commercial agent is entitled to payment of an indemnity under the European Commercial Agents Directive even if the agent commits a breach after notice of termination is given but before the termination becomes effective. This is so even if the breach would have justified immediate termination of the contract by the principal if it had been committed before notice of termination was given.

As is widely known, commercial agents are entitled to either an indemnity payment or compensation for the loss of their agency on termination of their agency agreement. However, this protection is excluded where the principal has terminated the agency contract because of a serious contractual breach by the commercial agent that would justify immediate termination of the agency contract.

In the present case the Agent entered into a dealership agreement with V for the sale of its vehicles. The agreement provided for a period of two years’ notice to bring the agreement to an end. V went ahead and served notice to terminate the agreement in accordance with this provision; however, during this notice period the Agent sold V’s vehicles to a related company at a discount.

This company resold the cars in clear breach of the terms of the agreement and had V discovered the breach in time they would have been entitled to terminate the agreement with immediate effect under German law.

The German court referred to the European Court of Justice the question of whether the Agent remained entitled to an indemnity despite its contractual breach and the court held that he was so entitled. The court pointed out that in order for the principal’s liability to pay compensation or indemnity to be excluded, termination must have occurred “because of” the commercial agent’s default. In this case termination had occurred in accordance with the terms of the agreement rather than because of the Agent’s breach. The Agent was accordingly entitled to payment of an indemnity.

The fact that V was not aware of the breach until after termination did not prevent the court from interpreting Article 18 strictly, thereby protecting the Agent in accordance with the objectives of the legislation. From an Agent’s point of view this is an excellent outcome and an example of the European Court standing up for the “downtrodden race”. However, it must be borne in mind that this type of breach may result in a reduced indemnity payment because of the requirement arising from Regulation 17 that “the payment of this indemnity [must be] equitable having regard to all the circumstances”.

It is unclear how this type of event will feed into calculation of an indemnity; however, it is unlikely to affect compensation payments.

The practical relevance of this finding is that if a commercial agent does commit a serious contractual breach during the notice period then he remains entitled to payment of an indemnity or compensation; however, if the principal discovers the breach then the Agent’s authority to continue acting can be removed thereby preventing accrual of further commissions.

It is also possible that a court may do its best to “find against” the Agent if it is left decidedly unimpressed by the Agent’s conduct during the notice period; this will, of course, depend on the nature and seriousness of the breach.

Thom Vaughan is a solicitor with E.A.D Solicitors LLP and specialises in commercial agency matters.
Head Office: Prospect House, Columbus Quay, Liverpool L3 4DB
Tel: 0151 735 1000
www.eadsolicitors.co.uk

Disclaimer: This column does not contain legal advice and is for general guidance only. Agentbase, E.A.D. Solicitors, and the writer accept no liability in connection with the general guidance given in this column.

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Repeated minor breaches of contract can constitute repudiatory breach

How a run of small breaches can add up to a serious one, plus practical answers on resigning, selling an agency, and a principal that stops trading.

Since the Commercial Agents Regulations were instituted in 1994, the courts have shown a marked tendency to favour the agent in any dispute, as agents are generally seen as the more vulnerable party.

However, a High Court case in April last year has found in the principal’s favour on a key issue which could have wider repercussion in future disputes.

In this particular case, the claimant sought to prove that they fell under the protection of the Commercial Agent Regulations so that they could claim compensation from their principal after their contract had been terminated.

Although the claimant had to develop customers’ interest in the principal’s product, obtain a quote from the principal and encourage customers to buy, they did not have the authority to make a sale on behalf of the principal themselves.

According to the regulations, a Commercial Agent is a person who has “continuing authority to negotiate … or negotiate and conclude” the sale of goods on behalf of the principal.

The court decided that, although the agent could not “conclude” the sale, their involvement in the process could certainly be described as attempting to “negotiate” the sale, so the claimant qualified as a Commercial Agent and was eligible for compensation from the principal.

However, the principal contended that the agent had committed numerous breaches of contract. Under the terms of the agreement, the agent had to produce various sales reports for the principal, and was restricted from working for any competitors of the principal in order to prevent any conflicts of interest.

Not only had the agent failed to provide regular sales reports to his principal, he had also been spending roughly a third of his time working for another company, a fact which he had hidden from the principal.

While the judge determined that neither issue was in itself of sufficient seriousness to warrant a repudiatory breach of contract, when taken together these persistent minor breaches did constitute a repudiatory breach, and so the agent could not claim compensation for the termination of his contract.

This case therefore set an important legal precedent which effectively gives principals the power to remove agents who persistently commit minor breaches of their contract with impunity.

As long as the principal can substantiate their claims with a detailed paper trail and can show that they gave suitable warnings to their agent, they can terminate a commercial agency contract without having to pay compensation or indemnity.

Agent Q&A

Q. My principal has continuously failed to pay me and on a number of occasions has broken the terms of our written agreement. I could no longer stand it, so I resigned. Am I still protected by the regulations and can I claim compensation?

A. Yes. It is possible for an agent to claim repudiatory breach by the principal but the agent should well document their complaints of such breaches and give the principal an opportunity to correct them. If the principal fails to do this or ignores the agent completely then the agent would be entitled to terminate the contract and claim repudiatory breach and then bring a claim for compensation.

Q. Last year, I sold my agency to another party and received a payment. I understand that the agency is now being terminated by my former principal. Can I still claim compensation? Would it be different if I had received no payment?

A. I would like more information to enable me to answer this question. However, if you received a payment for your agency and effectively sold it to a third party then your rights to compensation would be extinguished as you were no longer acting as an agent. The Court would not entitle you to receive a double benefit i.e. payment for the agency as well as compensation. This would also apply if you had not received any payment because the sale of your agency to a third party is not a right which would automatically entitle you to compensation under the Regulations in any event. Your purchaser of the agency may be able to bring a claim. The other question is whether your principal agreed to your selling the agency to a third party. Many contracts have a prohibition against assignment of an agency by an agent to a third party without the principal’s consent. If you sold your agency without the principal’s consent then it would be arguable you or your successor would not be entitled to any compensation.

Q. I have been an agent for some 10 years and my principal says that as he is losing money, he cannot trade anymore. He proposes to cease at the end of this month. Do I still have a claim against him under the regulations?

A. Yes. Several cases have shown that an agent is entitled to compensation where the principal decides to stop operating in a certain type of business. In both cases, the principal remains solvent and so it was worth the agent suing them. Your difficulty in this situation could be that if the principal ceases trading and puts the company into liquidation then notwithstanding you may have a valid claim, it could be worthless if there are no monies for unsecured creditors. If the principal trades as a sole trader or is a partnership then unless he goes into bankruptcy he could still be liable for compensation notwithstanding his business has ceased trading.

Alain Cohen, Partner, Ashby Cohen Solicitors, London
Ashby Cohen Solicitors Ltd, 18 Hanover Street, London W1S 1YN
Tel: 0207 408 1338 Fax: 0207 491 0414
Email: info@ashbycohen.co.uk
www.ashbycohen.co.uk

Disclaimer: This column does not contain legal advice and is for general guidance only. Agentbase, Ashby Cohen and the writer accept no liability in connection with the general guidance given in this column.

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Missed sales target might not deprive a commercial agent of a termination payment

Why a missed sales target, even one the contract says ends the agency, may not defeat the payment.

An agency agreement is of course a contract between the principal and the agent. The approach of English law is that both parties to a contract are free to make whatever bargain they want. Agency agreements often contain a clause that if the agent does not meet a specified sales target, then the principal can terminate the agency without notice and without having to pay the agent anything. Under the “freedom of contract” approach, the clause is quite clear and the agent having agreed it, is bound by it. On this basis, a principal might think that with such a clause in the agency contract, he can rely on it to end the agency and get away without having to pay the agent anything. This is not necessarily so, especially if the agency is one where the Commercial Agents (Council Directive) Regulations 1993 apply (“the Regulations”).

The Regulations were introduced to protect commercial agents (as defined), particularly when the agency ends. They contain rules which override freedom of contract, for example the Regulations impose minimum notice periods. Another area where they override freedom of contract relates to an agent’s entitlement to a termination payment.

The Regulations provide for a termination payment to be made to the agent when the agency ends. In effect, they state that the principal cannot exclude this right (thus overriding freedom of contract) except in one instance. This instance is as follows: the right to a termination payment does not arise where the principal has terminated the agency contract because of default attributable to the agent which would justify immediate termination by reason of the agent’s failure to carry out his obligations. In other words, for a principal to escape having to make a termination payment, the agent’s failings must be so serious that the Court, looking at the nature and consequences of the breach, decides that the principal was justified in terminating with immediate effect.

On the face of it, the agent’s failure to reach the sales target is a breach which the contract expressly says entitles the principal to terminate without having to give notice and without having to make a termination payment. The parties were free to agree this and this is what they agreed. Yet if freedom of contract were to prevail the parties could specify that any breach, however minor and inconsequential, would entitle the principal to terminate with immediate effect and without making a termination payment.

But there might be many reasons why the target was not met, it might be because of a general deterioration in the market, or because of the principal not making deliveries on time or because the products have gained a poor reputation in the market place or because a competing product has entered the market. None of these reasons can be put down to “default attributable to the agent” or to his failure to carry out his obligations. In these circumstances, it is thought that the agent is likely to have a good claim to a termination payment notwithstanding that the agency was terminated because the sales target was not reached. Of course, the agent’s claim would be stronger again if the sales target clause was merely for the agent to use his best endeavours to reach the target rather than simply that the target would be reached.

If a principal wants to include a sales target then, as well as giving himself the right to terminate if the target is not met, he might be wise giving himself the option in the agency agreement to convert the agency (if it was an exclusive one) into a non-exclusive one or to amend the territory. In this way, he postpones the obligation to make a termination payment because any such obligation only arises on a termination and not upon a partial termination nor upon a conversion to non-exclusivity, in legal terms a reduction in territory or conversion would be viewed as a variation of the agency contract in accordance with the provision in the contract which allows for this and which the parties had agreed at the outset. Also, a benefit of reducing the extent of the territory would be that the agent would not have so many customers to cover as before and so, in theory at least, would have more time to devote to the customers he has left to service (but because the agency continues, the principal will still be liable to pay commission to the agent on sales by the principal to those customers in the removed area whom the agent had acquired as customers for the principal and if the agency had been converted from an exclusive to a non-exclusive one, again the principal would have to pay commission to the agent on sales to customers whom the agent has previously acquired).

The legal position surrounding a termination because an agent has failed to reach a sales target is not clear. A lot will depend on the precise wording of the sales target clause and the circumstances leading up to the failure to meet it. However, an agent should not think that he necessarily forfeits his right to a termination payment and a principal should not think he necessarily escapes his obligation to pay one, if a target is not reached and the agency is terminated. Of course, an agent would be best advised not to have agreed a minimum target clause in the first instance.

© Alain Cohen, Ashby Cohen Solicitors Ltd
18 Hanover Street, London W1S 1YN
Tel: 0207 408 1338 Fax: 0207 491 0414
Email: info@ashbycohen.co.uk
www.ashbycohen.co.uk

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Agency termination: some new thoughts on whether a principal can reduce an agent’s claim for compensation or indemnity

The principal’s angle on reducing, rather than defeating, the claim: indemnity record-keeping, termination-dependent clauses, and fixed-term expiry.

Compensation or indemnity

The Commercial Agents Regulations provide for an agent to be entitled to claim compensation or an indemnity on the termination of an agency agreement (subject to a number of exceptions).

If an agent has a right to claim compensation then at some point it will be necessary for the amount of the compensation entitlement to be valued. The leading case on valuing an agent’s compensation entitlement, Lonsdale, provides for the value to be the amount that a notional third party purchaser would pay for the agency immediately before its termination.

This should be contrasted with an indemnity payment. This payment is calculated very differently to compensation in that:

• the agent will only be entitled to an indemnity payment if and to the extent that the agent has brought the principal new customers or significantly increased the volume of business with existing customers, and the principal continues to derive substantial benefits from such customers.
• There is also a requirement for the payment of the indemnity to be equitable in the circumstances.
• The maximum amount payable by way of an indemnity is capped, which is not the case with compensation.

Unless the principal can establish that the agent is in serious breach of the agency agreement, the terminated agent will have an entitlement to a payment either of compensation or indemnity. However, there are some steps that a principal can take to try to minimise the amount claimed by an agent by way of compensation or indemnity.

Minimising the entitlement

The agent will only be entitled to an indemnity payment if the parties have agreed that the indemnity regime will apply to the agreement. If this is the case then the agent’s entitlement will depend on the extent that the agent has brought the principal new customers or significantly increased the volume of business with existing customers.

It follows therefore that the principal should keep a careful record of the customers given to an agent at the start of the agency relationship, and those introduced by an agent during the course of the agency relationship, and the level of business done with each customer over the course of the agency relationship. It should then be possible to exclude from the indemnity calculation commission paid to the agent on sales to customers which do not satisfy the above criteria. It follows that the better a principal’s records, the stronger the principal’s chances of reducing the overall indemnity entitlement!

In the absence of there being an agreement for the agent to be paid an indemnity, the agent will be entitled to compensation.

Whilst there is less that can be done by a principal to reduce the value of the compensation entitlement, if the grant or continuation of the agency is dependent on particular circumstances, then it is important to make clear to the agent that this is the case and that the agency agreement will terminate if those circumstances change. For example, if the principal is a distributor of products manufactured by a supplier, it should be made clear in the agency agreement that the agency will terminate if the principal loses the distribution rights for the relevant products. If the agent then makes a claim for compensation, the principal can seek to rely on a case where the principal was a distributor of Pandora jewellery in the UK, and appointed Mr and Mrs McQuillan as jewellery agents to service the territory. On termination of the McQuillans’ agency agreement, the court heavily discounted the compensation payable due to the risk of termination by Pandora of the distributorship agreement with the principal (the distributorship agreement could be terminated on two years’ notice).

However, it should be noted that it can be questioned whether McQuillan v McCormick was correctly decided. It is the case that the judge claimed to be following the Lonsdale judgment, in which the compensation payable was discounted heavily due to the closure of the principal’s business. However, was the judge in McQuillan v McCormick mistaken in discounting the compensation payable to Mr McQuillan due to the risk of the principal’s business with Pandora disappearing? Should such a heavy discount only have been applied if Pandora had actually given notice to terminate the distributorship agreement with the principal, and not simply for the risk that Pandora might do so at some point in the future?

What of the situation where the principal is dependent on one or two customers introduced by the agent? In this situation the principal is a “captive supplier”. As such how much would the notional third party purchaser pay to acquire the agency where the commission income stream could simply cease as a result of the decision of either or both customers at short notice?

Equally how is compensation payable to an agent on the expiry of a fixed term agency agreement to be valued. The case of Whitehead v Jenks & Cattell Engineering Limited established that an agent whose fixed term agency agreement expires is entitled to compensation. However, a notional third party purchaser is likely to pay very little, if anything at all, for an agency which is about to expire, and it is unclear how the value of the compensation payment is to be determined.

Take home points

A principal should, if possible, agree at the outset of the agency relationship for the agent to be entitled to an indemnity payment on termination. Fewer questions remain regarding the calculation of an indemnity payment as opposed to the calculation of a compensation payment, and there are more ways in which the principal may be able to convincingly reduce the value of the payment to be made.

Where indemnity is not agreed by the agent or no election is made, a principal should consider setting out in the agency agreement whether particular circumstances exist and that the agency will terminate if those circumstances change.

Stephen Sidkin is a partner at Fox Williams LLP (www.agentlaw.co.uk)
© Fox Williams LLP

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