No way out?

March 4, 2015

No matter the intention of the parties at the start of a relationship, there always comes a time when one party to an agency agreement wishes for it to come to an end.

How easy or otherwise it is for the party who wishes to bring the agreement to an end to do so will depend on the contract between the parties.

Where an agency agreement is to last for an indefinite period, the starting point is that the Commercial Agents Regulations provide that the period of notice shall be:

  • 1 month in the first year of the contract;
  • 2 months for the second year of the contract; and
  • 3 months for the third year commenced and for subsequent years,

to expire at the end of a calendar month.

However, often an agreement is drafted for an initial fixed period and provides that thereafter either party has to give notice to the other to terminate the agreement to expire at the end of the initial period or another key date.

So what if a 2 year initial term agreement commenced on 1 July 2015 but you decide on 1 October 2016 that you wish to terminate it? On the face of it, you must to continue the relationship for a further nine months until 30 June 2017.

But this is not your only option.

If it is the agent who wishes to terminate, the agent could try to act in such a way as to make it likely that the principal will terminate the agreement early. However, this can be a risky strategy for the agent as potentially it will be exposed to a claim for damages. Even if such a claim is not made by the principal, the agent will lose its entitlement to compensation (or indemnity) on termination.

For the principal wanting an early exit from the contractual relationship, arguably the way out is easier but carries greater risk. Hopefully the agency agreement provides for various duties to be undertaken by the agent and, as such, it may be possible for the principal to rely on these in order to performance manage out the agent. Even if there is an absence of such contractual duties, the Regulations themselves provide various statutory obligations on the agent which the principal may be able to rely on. Further there are overarching common law fiduciary duties which the agent will owe and these too may be capable of being relied on by the principal.

The greater risk for the principal in getting it wrong is the exposure that it will face to a statutory claim by the agent for compensation (or indemnity). In effect the flip side of the agent’s position.

But there may be an alternative depending on the scope of the agent’s appointment. If the agent’s appointment is for:

  • a specific territory;
  • type of products;
  • type of customers; or
  • a combination of any of the above,

it may be possible for the principal to take advantage of the limited scope in order to effectively minimise use of the agent. The effectiveness of this manoeuvre will depend on the terms of the agency agreement but the fact that it is possible has been confirmed in a number of reported court judgments.

Another option for either principal or agent is to simply break the agency contract. However, the risk in doing so is clear.

It follows that it is open for the party who wishes to bring the agreement to an end to try to negotiate an exit. The reasons for doing so and the way in which the negotiations progress will depend on various factors and, in particular, whether it is the agent or the principal who wants out.

Ultimately, it depends on the commercial reasons why the particular party wishes to exit the agreement and the relationship the parties have with each other as to which of the above is the most appropriate option. Bear in mind though that if the relationship isn’t working for one party, it is likely that the same applies to the other party, and they may be willing to find a solution that turns out to be to the benefit of both.


Related pages:

Agency, Distribution and International Trade more

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Laura Monro
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Direct dial: +44 (0)20 7614 2646
lmonro@foxwilliams.com

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