The Commercial Agents (Council Directive) Regulations 1993 have provided agents with significant protection since their establishment. On termination of an agency agreement, principals are often required to pay significant termination payments by way of compensation or indemnity.
When advising principals, it is crucial to consider the impact of any relevant conduct by the agent which may impact these payments. Agents acting for competitors can be a notable issue.
The extent to which agents can be restricted in acting for competitors is partially determined by the agency agreement and is an important factor for principals to consider in the preparation of an agency agreement.
Conflict of Interest
At common law, an agent is under a duty to avoid a conflict of interest with their principal.
The duty to avoid conflicts is often considered in line with the duty imposed by the Regulations for an agent to act dutifully and in good faith (Regulation 3). However, the courts have been reluctant to find that an agent acting for competing principals has breached this duty.
In Rosetti Marketing Ltd v Diamond Sofa Company Limited and another  EWHC 2482, the High Court found that if there is no express term prohibiting the agent from acting for a competitor, a term may be inferred into the contract which allows them to act for multiple competing principals.
This case emphasises the importance of a principal giving careful consideration to the preparation of a written agency agreement to govern the relationship with their agent and to protect their business from competition.
Agency Agreement - Restricting Competition
If a principal wishes to restrict their agents acting for competitors, they should include this explicitly in the agency agreement. The terms included should be clear and reasonable and make commercial sense.
For the term to be considered reasonable, it should:
- relate to the geographical territory the agent covers and;
- relate to the same kind of goods as sold under the agency agreement.
Where an agent acts for a competitor in breach of a clause in the agency contract which prevents him from doing so, this may give the principal the right to terminate the agency under the contract or the Regulations and potentially avoid paying the agent a termination payment.
An agent acting for two principals about directly competing products without the informed consent of the principals involved is highly likely to be acting in conflict and in breach of their duty of good faith to their principals.
When Will an Agent Acting For A Competitor Lose The Right To A Termination Payment?
The agency agreement can include an express clause that provides that an agent acting for a competitor (without the principal's consent) will be a material breach of the agency contract, giving the principal the contractual right to terminate the agency agreement with immediate effect.
However, this will not necessarily cause the agent to lose their right to a termination payment under Regulation 17, even if the agency agreement states as much.
For an agent's breach to negate the agent's right to a compensation/indemnity payment under Regulation 17, the breach must be sufficiently serious to justify termination of the agency at common law. This is called a “repudiatory breach”.
When determining if the agent's competitive activity is a breach which is sufficiently serious to justify immediate termination, the court will consider the following:
- Whether the principal has consented to the agent acting for the competitor, whether verbally or in writing;
- Whether the principal has raised the breach with the agent and allowed the agent an opportunity to remedy the breach;
- the impact of the agent acting for the competitor, and;
- How promptly, after learning of the breach, the principal acted upon it. If the principal was aware of the breach and has failed to raise it with the agent or take steps to terminate within a reasonable timescale, they may be found to have lost their right to terminate with immediate effect on the grounds of repudiatory breach.
Can A Principal Avoid Paying A Termination Payment?
Whether the principal can avoid paying a termination payment will depend on whether the breach is repudiatory.
An agent will only lose the right to a termination payment if the breach is repudiatory and the termination was on the grounds of repudiatory breach. If the breach is not repudiatory, the principal may still be entitled to terminate the agency under the terms of the agency agreement but the agent will not lose his right to a termination payment in those circumstances.
Agency agreements sometimes seek to exclude payment of compensation or indemnity following termination by the principal - principals ought to be aware that just because they have a contractual right to terminate the agency, the clause excluding the right to the termination payment is likely to be a derogation from Regulation 17 and unenforceable if the clause attempts to exclude a termination payment in circumstances where the breach was not repudiatory.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.