Ending a Sales Agency Agreement: Notice, Timing and Next Steps

Ending an agency agreement is rarely as simple as calling time. How much notice is owed, when the agency legally ends, what the agent must keep doing in the meantime, and how to protect a future claim all have rules attached, and getting them wrong can be costly.

The articles below, from specialist commercial agency solicitors, cover how an agency ends and what an agent should do as that point approaches. Each is reproduced in full and attributed to its author.

How much notice is required to terminate an Agency Agreement?

The mechanics: the statutory notice periods, when they apply, and the situations where no notice is required.

There are a number of different ways by which a sales agency relationship may terminate in terms of the period of notice required to be afforded by either party to bring it to an end:

Firstly, there might be a fixed term contract: A fixed term contract is where the principal and the sales agent agree that their relationship will continue for a pre-determined fixed period at the end of which the relationship may either then automatically roll into another fixed term period, otherwise automatically expire, or, and as a third possibility, will thereafter continue for an indefinite period going forward (pursuant to Regulation 14 of the Commercial Agents Regulations), and so that (as then a contract for an indefinite period) it would only in the future be terminable in accordance with the minimum notice provisions as set out in Regulation 15(2) (see below).

Secondly, there is (perhaps) the most likely scenario of the sales agency terminating after the statutory minimum number of months’ notice is served which minimum period reflects how long the sales agency has been ongoing, and (unless otherwise agreed) ending on the last day of the final month of the notice period, this is in accordance with Regulation 15(2), which provides that (in the absence of any agreed longer periods of notice pursuant to Regulation 15(3)) where the sales agency has lasted for less than a period of one year, the required period of notice to terminate it is not less than a month (with, unless otherwise agreed and as stated above, the actual last day of the notice period having to coincide with the calendar end of the final month in question). The minimum period of one month increases to not less than two months where the sales agency has been ongoing for more than 12 but less than 24 months, and rising to a minimum of three months where the sales agency has been ongoing for any period longer than two years. An example would be:

A sales agency has lasted 15 months, and notice to terminate is served by the principal on 21 January. In that scenario, the sales agent is entitled to a minimum of two months’ notice (as the agency lasted for more than a year, but less than two years) through to 31 March (i.e. as the end of the notice period (unless agreed to the contrary) has to coincide with the calendar end of the month).

Apart from in the instance of any termination due to the default of the other party which would justify immediate termination of the sales agency contract pursuant to Regulation 16 (again, see below), the minimum notice provisions of Regulation 15(2) cannot be derogated from.

A third possibility (and very similar to the second possibility as per the above) is the sales agency terminating after a minimum number of months’ notice is served which minimum period reflects how long the sales agency has been ongoing, but not ending on the last day of the final month of the notice period, this would reflect Regulation 15(4), which provision enables the parties to ‘otherwise agree’ that the end date for a notice to terminate a contract for an indefinite period does not need to coincide with the calendar end of the month. Example:

Parties have entered into a non-fixed term contract (i.e. a contract for an indefinite period) and agreed that the end of any notice period does not require to coincide with the calendar end of any month. The relationship has been ongoing for 15 months and the principal then terminates on 21 January. In that scenario, the sales agency would then be deemed to have terminated on 21 March.

A fourth possibility (pursuant to Regulation 15(3)) is that the parties agree in the contract that the period of notice to be served will actually be longer than the minimum periods (as explained above and as per Regulation 15(2)), in which case the period of any notice to be served by the principal cannot be stipulated to be any shorter than the period of any notice required to be served by the sales agent.

A fifth possibility (and as already flagged) is that the principal might terminate pursuant to Regulation 16 on the basis that the commercial agent has fundamentally breached the contract, and so that, in those circumstances, it [the principal] is entitled to terminate without having to afford any notice at all.

A further possibility is that it is the commission only agent who terminates the relationship without any notice on account of legitimate exceptional circumstances as envisaged by Regulation 18(b), such as that the principal has broken the contract in a way and to an extent that immediate termination is then justified (and so that no notice is required to be given by the sales agent).

The above points all (hopefully) explained, self employed commission only sales agents should additionally take particular note of the following further points:

During any notice period, they [the sales agent] should continue to act and carry out their functions entirely normally until actual termination, as they would still be under contract.

Secondly, where a commercial sales agent terminates his own contract, he would not ordinarily then be entitled to any form of compensation unless one of the exceptional circumstances as set out in the Regulations apply, all of which potential exceptional circumstances require very careful aforethought and consideration, including where the sales agent is considering terminating without any notice due to the principal’s breach (which particularly requires very careful assessment and handling in order for it to be confidently classifiable as circumstances entitling the sales agent to terminate and then be entitled to any form of compensation (including any indemnity)).

© David Bentley, Bentley Agency Law Limited, Bentley & Co Solicitors, 7 Littlemoor Road, Pudsey, Leeds, LS28 8AF
T: 0113 236 0550 e-mail: db@bentleyandco-solicitors.com
The ONLY law which we practice is the law as it relates to commercial agents.
Please note that, as far as we can, we take cases on a “success related fee”.

Please ensure that you obtain legal advice before acting in reliance upon anything in this article, particularly since each individual’s circumstances may necessitate a unique approach, and also on account of the fact that the law may of course at any time change. Furthermore, please be very clear that the answers given in this column may not cover or otherwise refer to all possible angles, aspects, relevant information 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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Date of Termination of a Commercial Agency Agreement

Pinning down when an agency actually ended, and why that date is critical to the one-year claim deadline (Claramoda v Zoomphase).

The recent case of Claramoda v Zoomphase has highlighted the importance of having a clear contract when entering into a commercial agency agreement.

Mr Claramoda was the agent for Zoomphase, a clothing supplier, for conducting sales to shops. He had been the sole agent for the supplier in the UK and Ireland since 1998. The agency was terminated at some point between October 2006 and January 2007, the exact date of termination was in dispute, and was a key issue in the case, as the agent was seeking compensation under the Commercial Agents Regulations.

Under the regulations, a written claim for indemnity or compensation must be made within a year of the termination of the agency agreement. Mr Claramoda put in his request for compensation in November 2007.

The High Court determined that the effective date of termination in the case was January 2007, so the claim was within the specified time limit.

Settling on this date was not a simple matter, as there was very little written documentation covering both the initial agency agreement and the termination itself.

The agreement was very informal, and many conditions had been left deliberately vague in order to give both parties more leeway. With regard to the termination, the date had not been clearly stated because although the supplier wanted to form its own in-house sales team, it still wanted to have the option to use the agent for one more season until their own team had been formed.

Although the main selling season had ended in October 2006, commercial activity between the two parties had continued beyond that date. An email was sent to the agent by the supplier in November regarding order information, and customer queries were forwarded on to the agent until January 2007, showing that the agent still had the authority to negotiate on the supplier’s behalf up to that date.

While the agent was not actually negotiating sales at this point, which is how the Regulations define the role of an agent, the Court ruled that he was still working on behalf of the supplier, and so the agency relationship was still in effect.

Paul Gershlick, a partner at the law firm Matthew Arnold and Baldwin LLP, explained: “This case highlights the importance of agreeing everything clearly in writing. Even if parties to a contract start off intending only to have good relations, this does not always turn out to be the case further down the line. That’s when the value of a good contract is noticed.

“There is a further reason for principals to have contracts with their agents: under the Commercial Agents Regulations, they may be worse off if they don’t stipulate in writing that the indemnity alternative applies rather than compensation, agents could be able to claim for more money on termination.”

Alain Cohen, Director, 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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Termination: the end or the beginning?

What to do once termination is on the table: the notice period, settlement traps, post-termination duties, and the deadline to notify a claim.

Whenever an agency terminates, this ordinarily sets in train a series of potential events about which agents needs to be very much aware. The following summary is not intended to cover off all relevant points, nor to constitute an exhaustive list of all issues about which an agent needs to keep uppermost in mind, however, it may assist some agents’ knowledge with regards to this situation:

• Firstly, it is necessary to establish that the agency has definitely actually terminated. As to this, sometimes an agency will apparently be terminated verbally, or otherwise in terms which do not clearly establish the fact of the end of the relationship (or of the relationship now being into a notice period), and if in fact there was any misunderstanding that the agency has ended an agent may subsequently then be in fundamental breach of his obligations by effectively meantime having downed tools and not continuing on with his functions. Accordingly, and without thereby (and by his choice of words or actions) inadvertently terminating the agency himself (and ordinarily, save for certain exceptions, an agent deemed to have terminated his own agency would not then be entitled to any compensation/indemnity), the agent needs to promptly take legal advice as to how to establish that the relationship has come to an end (or that he is now operating through a notice period). The foregoing all explained, it is ordinarily the fact that there is actually no doubt when agencies have ended, as there will normally have been some form of written communication.
• Secondly, and assuming that the agency wasn’t terminated on a forthwith basis, there will be a notice period to navigate and, as to this, agents must be very careful to ensure that they fully comply with all of their ongoing obligations, right through to the termination date, as a notice period still constitutes part of the contract period. As to this, and as I say, an agent needs to be aware that the notice period is still part of the agency term, and so that he must continue to observe all of his obligations to the principal in the same way as previously.
• Thirdly, an agent needs to be aware not to accept any offers to settle his prospective claims arising following (notice of) termination, without first having taken (written) legal advice. The agent also needs to be particularly wary (as an example) not to accept any proposals to pay commission on the basis that such payments would actually also compromise all and any other rights and entitlements which the agent may have.
• Fourthly, an agent needs to ensure that he complies with all post termination obligations, including as to the timely return of company property, the observing of any confidential obligations and the compliance with any effective post termination restrictive covenants (again, after having first taken advice).

Finally as regards any ending of an agency relationship, the agent needs to be aware of the absolute requirement to effectively notify the principal within 12 (twelve) months of the date of termination (pursuant to Regulation 17(9) of the laws relating to the UK) of his intention to pursue a claim (for compensation or an indemnity, as appropriate). Beyond that, there will also be relevant overall limitation dates applicable in respect to whichever country’s laws apply. All of this ought (likewise) to be referred to specialist legal advice.

© David Bentley, Bentley Agency Law Ltd, Bentley & Co Solicitors
7 Littlemoor Road, Pudsey, Leeds, LS28 8AF
T: 0113 236 0550 e-mail: db@bentleyandco-solicitors.com

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Preparing before the end: what agents should be doing

A practical checklist for building a strong claim before the agency ends, across all the entitlements the Regulations provide.

All too often it is only when the agency agreement comes to an end that agents will consider the protections provided by the Commercial Agents Regulations. But preparing the ground for a strong claim, whether it is for compensation or indemnity as well as the other entitlements provided by the Regulations, should begin before termination occurs.

Commission that is still the agent’s

Orders confirmed after termination

Even after the termination of the agency agreement, an agent can have an entitlement under the Regulations to commission on sales made by their principal after termination. Where the agent initiated or largely influenced an order which reaches the principal within a reasonable period after termination, then in principle the agent is entitled to commission. What is reasonable is subject to market or industry norms.

It can also occur where the order reached the principal or the agent before termination but was accepted by the principal after termination had occurred.

Such commission is sometimes called ‘post-termination commission’ or ‘pipeline commission’. But irrespective of its name, for an agent to claim such commission it is important that the agent:

• can point to actions taken before termination which led to the order being received after termination. The key here is keeping good records as well as keeping the principal updated as to what the agent is doing to obtain orders; or
• is aware of what orders received before termination are likely to be accepted by the principal after termination. The key here is keeping in regular contact with customers and maintaining records of such contacts.

It is also worth noting that it is possible to exclude or limit post-termination commission in the agency agreement. However, many principals do not do so. As a result, an agent may be able to rely on what is provided by the Regulations.

The issue of non-fulfilment

Back commission is another entitlement. This commission arises where a principal has accepted an order but then fails to fulfil the order for a reason for which the principal is to blame. Examples can arise in terms of defective goods, late delivery, or simply a failure to order enough stock to fulfil all orders accepted from customers!

In this situation the customer will not pay the principal and, as a result, the principal will not pay commission to the agent. However, despite this the agent has a right to such commission. This right is not capable of being contracted out by the agency agreement. But if at the time of termination an agent has incomplete records of orders received from customers and as to whether they have or have not been fulfilled, an agent can miss out on commission, going back up to 6 years!

Compensation or indemnity

Before the agency agreement ends the agent should ensure that they know whether they are entitled to claim either indemnity or compensation under the Regulations. The two are different although urban myths abound as to how they are to be determined.

For indemnity to apply principal and agent must have made an election for indemnity and recorded this in the agency agreement. If this is not the case, then compensation will apply by default.

Indemnity and compensation are different, not least as indemnity is subject to a cap equal to the annual average of the commission earned by the agent in the 5 years preceding termination (or a shorter period if the agency agreement has existed for less than 5 years). If an election for indemnity has been made, the agent must be able to show that they have introduced new customers or significantly increased business from existing ones and that the principal continues to benefit. Further payment of the indemnity must be fair having regard to all the circumstances and, in particular, to the commission lost by the agent in respect of such customers as a result of termination of the agency agreement.

In contrast compensation is forward looking and based on what a hypothetical third-party purchaser would pay for the agency at or immediately before termination, factoring in net income, prevailing market conditions, and industry multiples.

What is evident is that an agent is more likely to succeed with their claim for either indemnity or compensation where good records have been kept including:

• Customer introductions
• Invoices
• Reports
• Delivery records
• Receipts for investments made
• Correspondence confirming instructions received from the principal

Finaly in respect of compensation and indemnity an agent must bear in mind that (unlike other entitlements under the Regulations) the clock starts ticking as soon as the agency agreement ends. Notification of an intention to claim compensation or indemnity must be given no later than with a year after the termination of the agency agreement. It is therefore important that the date on which the agency agreement ended must be determined as soon as possible so as to know the period in which such a notice must be given. This may sound straightforward but sometimes it is not as there can arguments as to when the agency agreement came to an end.

It follows that this is a case of miss it and lose it!

Investment at the principal’s request

What of the situation where the agent has invested at the principal’s behest, perhaps financing marketing initiatives, adapting premises to suit a new product, or acquiring software and equipment on the principal’s instructions. These costs need to be tracked closely as an agent may be able to claim for wasted investment. Indeed the Regulations refer to the inability to amortise costs “incurred in the performance of the agency contract on the principal’s advice” as a factor in calculating compensation. The upshot? Such investment may amplify the agent’s claim provided that it has been suitably documented in real time.

Summary

When looked at from a distance, an agent’s entitlements under the Regulations form a portfolio: post-termination commission for deals closed later, back commission for principal-caused failures to fulfil, compensation or indemnity, and reimbursement for investment requested by the principal.

By managing these matters whilst the agency agreement is still in existence, collecting data, preserving correspondence, documenting requests, defining timelines, the agent is likely to be in a better position to maximise their claims under the Regulations.

Stephen Sidkin is a partner at Fox Williams LLP (www.agentlaw.co.uk; www.distributorlaw.co.uk; www.foxwilliams.com)