In the second of this series, we discuss the duties that principals and agents owe to each under an agency contract. You can read our first article which provides answers to FAQs on commercial agency.
The duties owed by principals and agents to each other are often set out in a written agency agreement – although this is not mandatory. However, these duties are supplemented by codified duties which are set out in the Regulations, specifically Regulations 3 and 4.
Duties of an agent
Regulation 3 states:
“(1) In performing his activities a commercial agent must look after the interests of his principal and act dutifully and in good faith.
(2) In particular, a commercial agent must—
(a) make proper efforts to negotiate and, where appropriate, conclude the transactions he is instructed to take care of;
(b) communicate to his principal all the necessary information available to him;
(c) comply with reasonable instructions given by his principal.”
These duties go beyond the usual contractual duties that commercial parties owe to each other. In particular, they require a duty of good faith on behalf of the agent towards the principal which imposes a higher burden on the agent to perform under the contract.
Good faith can be a point of contention between the parties as whether these duties have been breached is open to interpretation, but it may be used as a reason for a principal to terminate an agency and may result in a claim by the agent for compensation under Regulation 17 which the principal considers the agent should not be entitled to due to their alleged breach of good faith.
In these circumstances, it will need to be proven that the breach was so severe that it should be considered as repudiatory in order for the principal to be able to avoid being liable to pay the agent under Regulation 17.
Duties of a principal
Regulation 4 states:
“(1) In his relations with his commercial agent a principal must act dutifully and in good faith.
(2) In particular, a principal must—
(a) provide his commercial agent with the necessary documentation relating to the goods concerned;
(b) obtain for his commercial agent the information necessary for the performance of the agency contract, and in particular notify his commercial agent within a reasonable period once he anticipates that the volume of commercial transactions will be significantly lower than that which the commercial agent could normally have expected.
(3) A principal shall, in addition, inform his commercial agent within a reasonable period of his acceptance or refusal of, and of any non-execution by him of, a commercial transaction which the commercial agent has procured for him.”
As can be seen, the duties of good faith are reciprocal. As such, a principal will not be able to avoid liability for a payment under Regulation 17 as a result of their own bad faith or breach of the Regulations.
A common issue that arises between agents and principals is a delay or refusal by a principal to provide the agent with information or documentation relating to the product that the agent has been tasked with selling. This then hinders the agent’s ability to make as many or any sales and affects their ability to earn commission. If the agent is unable to meet their targets as a result of the bad faith actions of their principal, the principal cannot subsequently rely on these actions to avoid payment to the agent under Regulation 17.
Regulation 5 states that the above duties cannot be contracted out of.
In addition to the above duties, the parties may agree other duties within the agreement itself. Breach of these duties by the agent may result in the principal terminating the agency for repudiatory breach of contract which would mean the agent would not be entitled to a compensation or indemnity payment, unless the breach was brought about by the actions of the principal – which in itself is bad faith on the principal’s behalf and a breach of the Regulations.
Prior to taking any action for breach by the other party of their duties either under the Regulations or the contract itself, it is essential to seek legal advice to ensure any action to terminate is lawful. Our commercial agency experts can be contacted at cdr@stephens-scown.co.uk