In the third of this series, we discuss options and common questions regarding termination of an agency contract. You can read our first article which provides answers to FAQs on commercial agency here and our second article on duties here.
Termination of an agency agreement is one of the most common reasons why agents and principals seek legal advice. Unlike most commercial contracts, in which termination provisions are usually negotiated between the parties and are set out in the contract themselves, the Regulations provide additional rights for agents in respect of termination which cannot be contracted out of.
Common issues of commercial agency termination
It is common for agents and principals to seek legal advice because the proper steps to terminate an agency have not been taken. Although an agency agreement can be terminated at any time, the written agreement (if one exists) will usually set out when and how an agent can be terminated, including what length of notice an agent will be given. The Regulations prescribe minimum lengths of notice that must be provided and if a principal fails to provide sufficient notice, an agent can bring a claim for payment of the remaining notice period from the principal under Regulation 15.
Regulation 17 provides that an agent is either entitled to an indemnity payment or compensation for the loss of their agency. The parties can agree on which of these the agent will receive, but a principal cannot avoid paying one of these unless an agent has committed a repudiatory (serious) breach of the agreement which would make it inequitable to pay them a termination payment.
What constitutes a repudiatory breach is often the subject of disagreement between agents and principals and there is very little case law to assist with determining this. However, one of the most common reasons for a principal wanting to terminate an agency is for poor performance of the agent or failure of the agent to meet their sales targets. Generally speaking, this is unlikely to be sufficient to amount to a repudiatory breach by the agent and thus absolve the principal of having to pay a termination payment to the agent. The breach must also be the reason for the agent being terminated. If termination has arisen for another reason, the agent will still be entitled to payment under Regulation 17.
Advice should be sought by principals prior to taking any action to terminate an agent for poor performance given the potentially costly implications of wrongly terminating.
Even when an agent retires due to age or ill health, they are still entitled to a termination payment under Regulation 17. An agent is also entitled to receive a termination payment if the agency contract is for a fixed term and that term comes to an end.
A principal may avoid having to make a termination payment if the agent decides to terminate the agreement. However, the reason for the agent terminating must not be due to a default on the part of the principal.
It is important to note that in the absence of a method of payment being expressly agreed in an agency contract, an agent will be entitled to compensation rather than an indemnity.
Pipeline commission
As well as potential claims under Regulation 15 (for notice) and Regulation 17 (for compensation or indemnity payment), agents may be entitled to payment of pipeline commission under Regulation 8. This is commission on sales that were made after termination of the agency agreement but which the agent should be compensated for because the sales were “mainly attributable” to their efforts during the period of their agency.
Claims for pipeline commission are also regularly subject to disagreement and require intervention from legal advisors as the wording of the Regulations is vague as to the length of time after the agency has ceased that an agent can claim pipeline commission for. The Regulations describe this as “for a reasonable period” which is subject to interpretation and often dispute given that pipeline commission claims can be quite valuable.
As the majority of commercial agency disputes settle without going to trial, there is a limited amount of case law on this subject, and the question of whether parties can contract out of Regulation 8 has not yet been addressed by the court. As such, principals and/or agents may seek legal advice on whether or not it is possible to exclude an agent’s entitlement to pipeline commission in an agency contract, or they may seek advice as to whether such a clause in a contract is valid.
Regulation 7
The agent will also be entitled to payment of any commission on sales received before the termination of the agency pursuant to Regulation 7. An agent is entitled to payment of pipeline commission and commission due under Regulation 7 even if the principal has terminated the agency due to the agent’s fundamental breach of the agreement which would mean they are not entitled to payment of an indemnity or compensation under Regulation 17. These are separate entitlements which are not contingent on each other.
Given the complex nature of termination, it is essential that both principals and agents seek legal advice on this issue prior to any action being taken. Our commercial agency experts can be contacted at cdr@stephens-scown.co.uk