An agency agreement is of course a contract between the principal and the agent. The approach of English law is that both parties to a contract are free to make whatever bargain they want. Agency agreements often contain a clause that if the agent does not meet a specified sales target, then the principal can terminate the agency without notice and without having to pay the agent anything. Under the “freedom of contract” approach, the clause is quite clear and the agent having agreed it, is bound by it. On this basis, a principal might think that with such a clause in the agency contract, he can rely on it to end the agency and get away without having to pay the agent anything. This is not necessarily so, especially if the agency is one where the Commercial Agents (Council Directive) Regulations 1993 apply (“the Regulations”).
The Regulations were introduced to protect commercial agents (as defined), particularly when the agency ends. They contain rules which override freedom of contract, for example the Regulations impose minimum notice periods. Another area where they override freedom of contract relates to an agent’s entitlement to a termination payment.
The Regulations provide for a termination payment to be made to the agent when the agency ends. In effect, they state that the principal cannot exclude this right (thus overriding freedom of contract) except in one instance. This instance is as follows: the right to a termination payment does not arise where the principal has terminated the agency contract because of default attributable to the agent which would justify immediate termination by reason of the agent’s failure to carry out his obligations. In other words, for a principal to escape having to make a termination payment, the agent’s failings must be so serious that the Court, looking at the nature and consequences of the breach, decides that the principal was justified in terminating with immediate effect.
On the face of it, the agent’s failure to reach the sales target is a breach which the contract expressly says entitles the principal to terminate without having to give notice and without having to make a termination payment. The parties were free to agree this and this is what they agreed. Yet if freedom of contract were to prevail the parties could specify that any breach – however minor and inconsequential – would entitle the principal to terminate with immediate effect and without making a termination payment.
But there might be many reasons why the target was not met – it might be because of a general deterioration in the market, or because of the principal not making deliveries on time or because the products have gained a poor reputation in the market place or because a competing product has entered the market. None of these reasons can be put down to “default attributable to the agent” or to his failure to carry out his obligations. In these circumstances, it is thought that the agent is likely to have a good claim to a termination payment notwithstanding that the agency was terminated because the sales target was not reached. Of course, the agent’s claim would be stronger again if the sales target clause was merely for the agent to use his best endeavours to reach the target rather than simply that the target would be reached.
If a principal wants to include a sales target then, as well as giving himself the right to terminate if the target is not met, he might be wise giving himself the option in the agency agreement to convert the agency (if it was an exclusive one) into a non-exclusive one or to amend the territory. In this way, he postpones the obligation to make a termination payment because any such obligation only arises on a termination and not upon a partial termination nor upon a conversion to non-exclusivity – in legal terms a reduction in territory or conversion would be viewed as a variation of the agency contract in accordance with the provision in the contract which allows for this and which the parties had agreed at the outset. Also, a benefit of reducing the extent of the territory would be that the agent would not have so many customers to cover as before and so, in theory at least, would have more time to devote to the customers he has left to service (but because the agency continues, the principal will still be liable to pay commission to the agent on sales by the principal to those customers in the removed area whom the agent had acquired as customers for the principal and if the agency had been converted from an exclusive to a non-exclusive one, again the principal would have to pay commission to the agent on sales to customers whom the agent has previously acquired).
The legal position surrounding a termination because an agent has failed to reach a sales target is not clear. A lot will depend on the precise wording of the sales target clause and the circumstances leading up to the failure to meet it. However, an agent should not think that he necessarily forfeits his right to a termination payment and a principal should not think he necessarily escapes his obligation to pay one, if a target is not reached and the agency is terminated. Of course, an agent would be best advised not to have agreed a minimum target clause in the first instance.