When Does An Agent Lose The Right To Compensation Or Indemnity?

• Published date: 05 December 2022
• Subject Matter: Corporate/Commercial Law, Contracts and Commercial Law
• Law Firm: Fox Williams
• Author: Mr Steven Sidkin

Introduction

Is it possible to contract out of the entitlement of a commercial agent to compensation or indemnity under the Commercial Agents Regulations? The standard answer is no.

Indeed, the Regulations state that the principal and the agent may not derogate from the relevant provisions of the Regulations to the detriment of the agent before the agency contract expires. A similar provision is found in the EU Agents Directive.

But what if the agency contract contains an onerous obligation on the agent (for example, a performance requirement to achieve a minimum sales target) and the contract also provides that non-fulfilment by the agent of the obligation will entitle the principal to terminate the agency contract?

On the face of it, the onerous obligation may appear unreasonable. On the other hand, freedom of contract is an important principle of English law.

The Regulations

As mentioned above, whilst the Regulations do prohibit principal and agent from derogating from the entitlement of the agent to compensation or indemnity before the agency contract expires, they also state that the Regulations do not affect the application of any law which provides for an immediate termination of the agency contract because of the failure of the agent to carry out all or part of his obligations under the contract.

The Regulations go on to provide that compensation or indemnity shall not be payable to the agent where the principal has terminated the agency contract because of default by the agent which would justify immediate termination of the agency contract.

So, does non-fulfilment by the agent of an onerous obligation allow the principal to avoid a compensation or indemnity payment?

Can it be?

A literal interpretation of the provisions contained in the Regulations would result in the answer: yes - if the agent fails to fulfil an onerous contractual obligation, the principal can terminate the agency contract and avoid payment of compensation or indemnity.

On this basis, the principal could be expected to ensure that the terms of all new agency contracts entered into by the principal entitle the principal to impose onerous performance requirements on the agent. This would be because:

1. fulfilment by the agent of such onerous requirements would only benefit the principal; and
2. non-fulfilment by the agent would enable the principal to walk away from the compensation or indemnity liability.

A case of heads, the principal wins and tails, the principal is not...