Expert Opinion: Terminating an Agency Agreement

Terminating an agency agreement with a third-party is one way businesses have looked to mitigate the impact of the Covid-19 on their finances.

Cheshire law firm, SAS Daniels, explains that an agency agreement can be subject to different regulations, and have set out what you need to know before terminating a contract.

The Coronavirus has forced businesses to adapt to a new way of working and, as a result, companies are forced to review their current contracts and reorganise the way in which they do business in order to save costs where possible. We have seen an increase in the number of queries surrounding terminating a commercial agency agreement.

What Is a Commercial Agent?

The first thing a business should check is whether the agent is in fact a commercial agent or an employee of the business.

The Commercial Agents (Council Directive) Regulations 1993, defines a Commercial Agent as a “self-employed intermediary who has continuing authority to negotiate the sale or purchase of goods on behalf of their principal, or to negotiate and conclude such transactions on behalf of and in the name of that principal”.

This can be on an exclusive or non-exclusive basis and the Regulations apply to all agency relationships whether the agency agreement is recorded in writing or not.

It is therefore important to be aware that even if your business has been affected by the Coronavirus and you wish to ‘cut out the middle man’ to save costs, the commercial agent has certain rights if you, as the principal, decide to terminate the agreement.

Termination Periods

Businesses should ensure that if they decide to terminate any Agency Agreement, they serve an appropriate notice that complies with the relevant termination periods.

The starting point is to consider how long the contract runs for, and what notice is specified for termination in the contract between the parties. A solicitor can help you determine the appropriate notice period.

According to the Regulations, where the agency agreement is terminated by the principal, the agent will have a right to either an indemnity payment or a compensation payment.

Indemnity Payment

A commercial Agent is only entitled to an indemnity payment if there is a written contract in place between the parties that specifies that the agent is entitled to an indemnity payment. This reflects the fact that the agent has bought the principal new customers, or has significantly increased the volume of business, and the business has substantially benefited from the agent’s involvement.

There is a cap for any indemnity payment which is equal to one year’s average annual remuneration over the last 5 years of the contract, or over the duration of the contract if shorter.

Compensation Payment

A compensation payment, on the other hand, is a payment for the damage suffered as a result of the agreement being terminated; there is no cap on compensation payment and it occurs when:

1. the agent is deprived of commission that they would otherwise have earned under the agreement; or
2. any costs and expenses incurred by the agent through performing its duties under the agreement can’t be mitigated.

There are a number of factors for businesses to consider when making a payment to the agent. We would advise that any agreement reached is documented.

In conclusion, if you are considering restructuring your business or simply considering letting go of commercial agents, you should ensure that you are aware of the consequences and that you comply with the Regulations by giving appropriate notice and making payment on either an indemnity or compensation basis.