Termination: When will I be entitled to Compensation or an Indemnity?

by Christopher Tayton Clarkslegal LLP

Commercial agents and their principals will be familiar with the general rule under the Commercial Agents Regulations 1993 that a commercial agent is entitled to receive compensation or, if provided for in their agency agreement, an indemnity, if their agency agreement is terminated by their principal. If the agency agreement says nothing about what happens on termination, then the entitlement will be for compensation rather than an indemnity. (We refer to compensation and the indemnity as “an award” in the remainder of this article).

The same entitlement to an award applies where the agency agreement comes to an end because the commercial agent retires on grounds of age or ill-health or if the commercial agent dies during the term of the agreement, in which case their rights pass to their estate. Even where a fixed term agency agreement comes to an end, it seems an award will be payable, although the Regulations are not entirely clear on this situation.

The termination of an agency agreement does not always entitle the commercial agent to an award. The main exception is where the commercial agent, rather than the principal, terminates the agency agreement, which generally results in the agent losing their rights to any payment. However, if the commercial agent’s termination of the agreement is justified due to a default on the part of the principal they will still be entitled to an award. Similarly, a principal can avoid paying an award to their agent if the agent’s conduct justified the principal immediately terminating the agreement.

Exactly how serious the commercial agent or principal’s default needs to be before the other party can take advantage of this exception to the general rule is one of the more difficult questions under the Regulations. The Courts have made it clear that a simple breach of the agency agreement by either party is not sufficient. It has to be what is called a repudiatory or fundamental breach of contract, which is a breach which goes to the very heart of the contract, to qualify.

Identifying whether a fundamental breach has occurred is not straightforward, and it is not recommended that any principal or commercial agent seeks to take advantage of these exceptions to the general rules without first taking legal advice, as each case will depend on its specific facts and the terms of the agency agreement. A number of cases where fundamental breach has been alleged have come before the Courts.

Recently, a principal successfully avoided paying an award because its agent had persistently refused to comply with the principal’s instructions to provide weekly reports and to work exclusively for the principal (subject to written approval from the principal). In another case, an agent terminated their agency agreement because their principal had reduced their sales territory (as they had been entitled to do under their agency agreement), and had been late or failed to pay commissions, and was unsuccessful in their claim for an award.

The final exception to the right of a commercial agent to receive an award is where the agent assigns their agency to a third party, by sale or gift, with the consent of their principal, in which case they forfeit their right to payment of an award on termination.

Chris is a dispute resolution lawyer working out of the firm’s Reading and London offices.

Chris has particular expertise in the Commercial Agents Regulations (acting for both principals and agents), advertising law and restrictive covenants in employment contracts.

He also advises on IT and software related claim, and is a member of the Society for Computers and Law.

Head Office: Thames Valley Office: One Forbury Square, The Forbury, Reading RG1 3EB Tel: 0118 9604691 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.

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