Terminating agents and distributors – can Covid and Brexit reduce the cost?

Over the last few months there has been a substantial increase in notices of termination being given to agents and distributors in the UK by overseas principals and suppliers, as well as by UK businesses to their overseas distributors and agents.  So, what is driving the trend? 

In two words – Covid and Brexit. 

With Covid restrictions generally easing in many countries and the cost of Brexit (in terms of money and paperwork not becoming any easier), many businesses are asking themselves whether Covid and Brexit provide an opportunity for a cheaper exit from their agency and distributorship agreements than might otherwise be the case. 

Covid

Sales down.  Profits down.  Commission down.  So, surely it is possible to terminate an agency agreement at a lower cost?  The answer is: possibly. 

Unless an agency agreement is terminated as a result of a serious breach by the agent, under the Commercial Agents Regulations the agent will have an entitlement to compensation or indemnity.  Which will apply will depend on the terms of the agency agreement. 

Dealing with each in turn:

• compensation is concerned with the value of the agency to a notional third party purchaser.  In some ways, compensation is similar to a price earnings ratio. But a principal should not assume that compensation will be determined solely on reduced sales = reduced commission = reduced compensation.  To some extent, it can be expected that there will be factored in the likely post-Covid upturn in sales. 

Nor should any reliance be placed on the urban myths about how compensation is to be calculated.  Compensation does not equal the commission earned in the last twelve months or the average of commission earned in the last two years. 

• Indemnity is subject to a cap being the average of the last five years’ commission.  But it is a cap.  Account is taken as to whether the agent introduced new customers or significantly increased business with existing customers and the extent to which the principal can be expected to benefit from such business going forwards.  It follows that as sales – and so commission – return to pre-pandemic levels, the effect of any downturn in commission over the last sixteen months will be ameliorated. 

In addition to claiming compensation or indemnity, agents who are properly advised will be thinking of:

• claim for failure to give proper notice;
• their entitlement to pre-termination commission;
• a claim for post-termination commission;
• their entitlement to back commission – that is commission on unfulfilled orders where the principal is responsible for non-fulfilment; and
• possibly, a claim for damages for breach of the principal’s obligation to act dutifully and in good faith. 

Brexit

Despite there being in place a free trade agreement with the European Union, the cost – in terms of money and management time – of doing business in the EU has been and continues to be significant for many businesses.  But this Brexit cost cannot be said to be an event force majeure or otherwise capable of justifying the ending of an agency or distributorship agreement without potential cost. 

Any attempt to claim force majeure will be met by the example of businesses which have taken or are taking steps to live (however painfully) with the consequences of Brexit. 

Distributors

So, what is the position of distributors? 

It is the case that there is no formal protection of distributors under English law.  But, in recent years through certain key judgments of the English courts, a level of protection has developed.  Indeed, the damages awarded and the reasoning given by judges have sometimes shown remarkable similarity to the way in which compensation is calculated under the Commercial Agents Regulations. On this basis going forwards, as for an agency agreement, it is possible that a distributorship could be terminated at a lower cost. 

In respect of those UK suppliers with overseas distributors, care is needed.  In a number of countries inside and outside of the European Union, there are mandatory laws protecting distributors which means that the fact that the distributorship agreement is stated to be governed by English law will be overridden. 

Take home point

Whether agency or distributorship agreement, the decision as to whether to enter into or terminate a contract should always be taken in reference to the business needs of the principal or supplier – it is just a case of remembering to take care.