In a recent decision of the Court of Appeal, the question of when a principal can terminate a commercial agency contract on the grounds of an agent’s misconduct has been considered.
The Commercial Agency (Council Directive) Regulations 1993 (the “Regulations”) give a commercial agent whose agency contract has been terminated the right to be paid compensation, based on the value of the agency to his business, or an indemnity if expressly provided for in the agency contract. However, there is an exception to this right where the reason for termination is that the agent has committed a serious breach of contract.
In the recent Court of Appeal case of Crocs Europe BV v Spectrum Agencies, Spectrum were the UK agent for Crocs, the well-known shoe manufacturer. An employee of Spectrum created a video using Star Wars-style rolling credits which joked about Crocs’ poor response to orders, and posted it to a website where it was viewed by other employees of Spectrum and also by some third parties including customers and other distributors.
Shortly after discovering the video, Crocs terminated the agency agreement and Spectrum commenced proceedings claiming compensation. Crocs defended the proceedings on various grounds, but the main subject matter of the appeal was whether the posting and distributing of the video was a sufficiently serious breach of the agency contract to entitle Crocs to terminate it without paying compensation to Spectrum.
Crocs argued that the duty of a commercial agent to act dutifully and in good faith, which is imposed by Regulation 3, was an implied condition of the contract i.e. a vital provision which goes to the root of the agreement and breach of which automatically gives rise to termination. Alternatively, they argued that under the general law an agent owes his principal a fiduciary duty of loyalty, and that breaches of fiduciary duties will always entitle a principal to terminate.
The Court of Appeal found that the agent’s duty to act in good faith under the Regulations was not an implied condition of the contract. Nor was the breach one of a fiduciary nature. Although Spectrum did owe Crocs certain fiduciary duties including the duty of loyalty, not all breaches of such obligations would automatically give rise to termination of the contract.
The Court of Appeal concluded that the High Court judge’s original decision – that the breach was not sufficiently serious to entitle Crocs to terminate – was the correct one, although Mr Justice Bean was of the view that the breach was “quite close to the borderline”. Accordingly, Crocs were not entitled to terminate the agency agreement without paying compensation to Spectrum.
This decision serves as a timely reminder to principals of the need to proceed very carefully before terminating a commercial agency contract on the grounds of an agent’s misconduct. The consequences of terminating without a legal entitlement to do so can be a very expensive for a principal, as Crocs have found out. This may not be the end of the story, though, as Crocs have applied for permission to appeal to the Supreme Court, so the decision may yet be reversed.