Terminating a commercial agency relationship

What is a commercial agent?

An agent is an intermediary who’s involved in the making of a contract between a manufacturer or supplier – known as a principal – and their customer.

If appointed in an EU member state, the agency may be subject to the Commercial Agents Regulations 1993 (the “regulations”), which implement the EU Commercial Agents Directive (86/653/EC). The regulations also apply to the purchase or sale of goods in Great Britain, although the EU directive will need to be considered for sales within the EEA. Similar regulations are also in place in Northern Ireland.

Ending the agency and notice

An agency can be brought to an end by:

• Expiry – where the agency is for a defined period, for example three years, at the end of that period unless it is renewed
• Termination – where one of the parties takes an active step to end it. The contract may be for an undefined period and will continue until one party terminates, or it might allow one or both parties to terminate during its term, either for no reason or for a reason specified in the agreement.

Where the regulations apply, the principal must give the agent the following notice prior to termination:

• One month for year one
• Two months for year two
• Three months for year three and subsequent years

If a principal does not give the right amount of notice, the agent may be able to claim damages for breach of contract.

Compensation and indemnity

Under the regulations, an agent is entitled to be “compensated for the damage it suffers as a result of the termination of his relations with his principal”. The amount of compensation paid will depend on the amount that a hypothetical buyer would pay for the agency at the date it is terminated. There is no cap on the amount of compensation an agent can receive. However, there is a risk of receiving limited compensation if the value of the agency at the time of termination is low.

As compensation is the default, an agent must actively choose indemnity if it wishes to receive this protection post-termination. If the agency agreement does not expressly state which rule will apply upon termination, the agent will automatically be entitled to compensation rather than an indemnity.

If the parties agree for the indemnity alternative to apply on termination, this can be much simpler and less costly for the principal. It limits the sum payable to the average of one year’s commission, averaged over the last five years.

As well as being easier to calculate, in most cases, the agent will receive less under the indemnity principle than under the compensation principle and it is based on new customers brought in by the agent or whether the agent has substantially increased the business from the principal’s existing customers.

The importance of careful wording

The regulations go into considerable detail regarding the terms of an agency relationship and the regulations cannot be overridden by a commercial contract, so the wording needs to carefully reflect the parties’ intentions while remaining within the scope of what is permitted. At the outset, it’s as important to consider how to get out of a contract, and the consequences of doing so, than it is to get into one!