Use it or lose it: Terminating agents for poor performance? Why the credibility of the principal is key

February 27, 2013

The Commercial Agents Regulations require an agent to act “dutifully and in good faith” and impose an obligation on the agent to look after the interests of his principal in performing his activities. Where an agent has been underperforming, and the lack of performance is so great as to constitute a repudiation of the agency agreement, the principal may accept the repudiation, bring the agreement to an end and avoid liability to pay compensation or indemnity (if specified in the agency agreement) to the terminated agent.

However, to be able to defend a claim for compensation or indemnity the principal must be able to show that the agency was terminated because of default attributable to the agent which would justify immediate termination of the agency. It follows that where a principal terminates the agency on the basis of underperformance by the agent it is crucial that the principal has a credible argument and supporting evidence to justify the termination.

The agency agreement should contain specific obligations and requirements on the agent. It will be easier for a principal to allege the agent is underperforming if he can prove a breach of clearly specified obligations. But obligations are nothing if the principal is not watching compliance. Where an agent fails to meet his obligations, the principal should discuss the failures directly with the agent and make a contemporaneous note of their conversations. Without any monitoring and a clear paper trail, it may be difficult for a principal to evidence genuine reasons for the termination of the agency.

Similarly, a principal should not allow a long period of time to elapse before terminating the agency. Prompt termination of the agency following repeated failures by the agent to perform his obligations will give the principal a stronger chance of proving he had a credible reason for terminating the agent and of avoiding paying compensation or indemnity to the terminated agent.

It would not be a credible argument for the principal to terminate an agent for poor performance when, for example, the agent has actually met or exceeded set sales targets. The same can be said when an agent is failing to meet set targets but the principal has raised no issue with the agent at the time such failures occurred. If a terminated agent can show that a principal had never raised any issues of poor performance, the credibility of the principal’s argument is likely to be called into question by the agent – and by a court, should the matter progress to that stage.

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