by Paul Samuel Director, Ashby Cohen Solicitors
Although the relationship between a commercial agent and his principal should be one of collaboration, after a while a tension often creeps in when the principal feels that the agent has become lazy and is not doing enough to promote his products.
The principal then has a problem. If he ends the agency, perhaps to appoint his own sales force in place of the agent, he faces a substantial risk of having to pay out compensation or an indemnity under the Commercial Agents (Council Directive) Regulations 1993 (“the Regulations”). One way in which the principal might have tried to protect himself against this is by including in the agency agreement a provision for him to amend the territory if he feels that the agent is not doing enough. The Regulations provide that the principal cannot exclude the agent’s right to a compensation /indemnity payment on termination. The exact wording in the Regulations (Regulation 19) is that “the parties may not derogate from [the agent’s right to a compensation/indemnity payment] to the detriment of the commercial agent before the agency contract expires”. How does a clause which gives the principal the right to reduce the territory, fit in with the prohibition that a principal cannot get out of having to make a payment upon termination by excluding in the agency contract the agent’s right to receive such a payment? The question came up in 2006 in a case called Vick v. Vogle-Gapes Ltd. Mr Vick was the agent for VogleGapes Ltd. Vogle-Gapes Ltd was not satisfied with Mr Vick’s performance. The agency agreement provided that if in their reasonable discretion Vogle-Gapes Ltd believed that Mr Vick was failing to maximise sales opportunities within his territory they could amend the territory.
This is what they did. Mr Vick brought a claim for compensation. The case did not in fact turn on the reduction in territory point but, rather, whether Mr Vick had by his behaviour treated himself as no longer being bound by the agency so that the company were not required to pay him compensation (this was the finding which the Court made and Mr Vick failed in his compensation claim). However, one point of discussion in the case was the reduction in territory point. There was a discussion that by reason of the company varying Mr Vick’s territory, Mr Vick could treat the agency as at an end and claim compensation. The argument for Mr Vick was that the Regulations (Regulation 19) prevented the parties from derogating from the agent’s right to a compensation/indemnity payment on termination. His point was that if there had not been an express right in the agency agreement to reduce the territory, the only way in which a reduction in his territory could have been achieved was by a termination of the agency agreement and the substitution of some other agreement. On the termination of the agency agreement, the compensation/indemnity payment would have become payable under the Regulations. Mr Vick’s argument was that because the express clause in the agreement enabled something to be done which otherwise could not be done without terminating the agency agreement, the clause served to derogate from his right to compensation. Regulation 19 prohibited this. Mr Vick’s argument was not accepted. It did not seem to the Court that it was a derogation from a right to compensation upon the termination of a contract, for the parties to agree to a provision in their contract which did not involve termination (but which, if they had not agreed it, the situation covered by the express clause could only have come about by the parties making some further agreement). Thus if the agency agreement when made had not included an express right to vary the territory, that provision could have been added later by agreement between Mr Vick and the company without terminating the agency agreement. The Court accepted that (if the agency agreement had not included the express clause) what the company could not have done was unilaterally modify the territory.
However it went on to state that this did not mean that by agreeing the express clause in the first place as part of the consideration for the making of the agency agreement, the parties therefore derogated from Regulation 17 (Regulation 17 being the Regulation which gives the agent the right to a compensation/indemnity payment on termination). A principal must act dutifully and in good faith so that any decision made by a principal to reduce the territory must be both genuine and rational, e.g. allowing the agent more time to devote to customers whom he was left to service. If the reduction was shown to be made in bad faith as a device to avoid having to make a compensation/indemnity payment, the strategy would fail and if the agent chose to treat the reduction as entitling him to treat the agency as at an end, the principal would likely end up having to make a compensation/indemnity payment. From the principal’s point of view the inclusion of a clause allowing him to amend the territory would at the very least give him a good negotiating position to deal with an agent whom he feels is not pulling his weight. From an agent’s point of view he should resist a clause in an agency agreement which gives the principal the right to vary the extent of the territory so that the principal (short of trying to come to an agreement to reduce the territory) faces the choice of either doing nothing or of terminating the agency and possibly facing a compensation/indemnity claim from the agent.
Article written by Paul Samuel of Ashby Cohen LLP, a leading law firm operating in all areas of employment law, partnership law and in matters arising out of the Commercial Agents (Council Directive) Regulations 1993
Ashby Cohen Solicitors Ltd 18 Hanover Street, London W1S 1YN Tel: 0207 408 1338 Email: email@example.com www.ashbycohen.co.uk
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