Commercial agency and distribution agreements:
Terminating an agency agreement
There are many reasons why you may wish to end your arrangements with an agent. Maybe they are underperforming; maybe you want to bring their activities back in-house; maybe the agent wants to retire because of ill health, or maybe they have died. It could be that the agent has committed a fundamental breach of their agency agreement.
Whatever the reason, an important question when thinking about termination is whether the agent is due any sort of compensation payment and, if so, how much.
The answer will depend on whether the agency arrangement is governed by the Commercial Agents (Council Directive) Regulations 1993. If it is then the general rule is that, unless the reason for termination stems from a fundamental breach of contract by the agent, they will be entitled to either a compensation payment or an indemnity payment. If the regulations do not govern the agreement then whether anything is payable on termination will depend on the terms of the agency agreement.
Broadly speaking, the regulations will apply to commercial agents who are self-employed and who have continuing authority to negotiate the sale or purchase of goods on your behalf. They do not apply to agents who sell services.
Where the regulations apply, compensation payments will be calculated by reference to the value of the agent’s income stream for the business. Indemnity payments will be calculated by reference to different factors, including the ongoing benefit of any sales the agent has generated.
Compensation payments can range from a relatively modest amount to very significant sums of money. Indemnity payments can also be substantial but are subject to an overall cap of one year’s gross average earnings, calculated over the five years immediately preceding termination or over the life of the agreement if it has been in operation for less than five years. Such payouts can seriously affect a business’s finances, particularly if they are not planned or managed appropriately.
While it is not possible to exclude the right to a compensation or indemnity payment entirely, unless the agent has committed a fundamental breach of contract, it is possible to limit the amount that needs to be paid out if you include the right provisions in your contract when appointing a commercial agent.
The commercial law team at Myers & Co Solicitors in Stoke-on-Trent, Staffordshire, has a reputation for providing a first-class service to businesses and in dealing with complex commercial arrangements in a practical, effective and efficient manner. We have extensive experience in drafting commercial agency agreements, and in dealing with arrangements covered by the Commercial Agents Regulations, including termination provisions.
For advice on commercial agency agreements, or any other commercial law matter, please contact Dermot Callinan, director of business services at Myers & Co Solicitors, on 01782 577000.