If an agent disparages their principal the principal can terminate the agency contract, can’t they?

Posted by Kevin Manship on
The short answer is that the principal probably can terminate, but care needs to be taken as this is not an automatic right.  This is an important point because if the principal terminates when they are not entitled to, they would be in breach of contract and could face a claim from the agent.

These issues were highlighted in a Court of Appeal case, Crocs Europe BV v Craig Lee Anderson & Anor t/a Spectrum Agencies [2012] EWCA Civ 1400.

Blake Morgan acted for the Respondents (Spectrum) in successfully defending an appeal by their former principal, Crocs, against an earlier decision that Crocs had not been entitled to terminate an agency contract where disparaging remarks had been made about Crocs online. 

Regulation 3 of the Commercial Agents (Council Directive) Regulations 1993 implies into the contract between commercial agent and principal an obligation on the commercial agent to“…look after the interests of his principal and act dutifully and in good faith”.  There is a similar duty on agents under the common law.

Spectrum were the UK agents of the highly successful Crocs brand of footwear.  Love them or hate them, Crocs shoes were a phenomenon in the UK market and the agency was highly successful.  Unsurprisingly, Crocs became unhappy with the amount of commission it had to pay Spectrum and sought to re-negotiate the agency contract.  Crocs gave Spectrum an ultimatum to (i) agree contract variations proposed by Crocs (which would have reduced Spectrum’s commission by 50-60%), (ii) sell the agency to Crocs for £700,000 or (iii) Crocs would terminate the agency.

Spectrum declined options (i) and (ii) but were happy to continue to perform the agency under its existing terms.  Crocs was reluctant to terminate because it would have faced a significant compensation claim under the Regulations (estimated at £12m - £16m).  The contract continued with an awkward stand off for a number of months, until Crocs terminated on the basis that Spectrum had breached their obligations under Regulation 3. Crocs relied on a spoof ‘Star Wars’ crawl (mirroring the text which scrolls up the screen at the beginning of each Star Wars film) created by an employee of Spectrum which poked fun at the difficulties Crocs had had over a number of years in making deliveries to customers in the UK and the emailing of the link to that crawl to several customers of Crocs.

At first instance, the Judge concluded that Spectrum had breached their obligations under Regulation 3 but that the seriousness of that breach fell a long way short of the seriousness required to entitle Crocs Europe to terminate the agency contract.  He set out a number of factors which resulted in him reaching that conclusion, including that:

  1. The crawl was obviously intended to be humorous;  
  2. The circulation of the crawl was very limited and to persons who would see the joke;
  3. It was very unlikely that a retailer would see the crawl unless they had the specific link;
  4. The situation at Crocs which was the subject of the crawl’s humour was well known to Crocs’ retailers.

Crocs appealed to the Court of Appeal, arguing on a number of grounds that any breach by Spectrum of its obligations under Regulation 3 should automatically entitle Crocs to terminate the agency contract or, alternatively, that the first instance Judge had made the wrong decision and that the breach of contract was serious enough to entitle Crocs to terminate.

The Court of Appeal dismissed Crocs’ appeal and agreed with the first instance Judge that Spectrum’s breach was not serious enough to entitle Crocs to terminate.  The crawl did not disparage Crocs’ products, but referred to its well known inability to meet delivery obligations. The circulation of the crawl was limited and temporary, and it was removed soon after being posted. The crawl was “obviously jokey, though not everyone might see the joke and though [Crocs] was not amused” and there was no evidence of harm suffered by Crocs.

The case emphasises the difficulty faced by any principal considering terminating an agency contract where the agent has made disparaging comments about the principal or, indeed, in circumstances where the principal considers the agent to be in breach of their obligations.

The principal has to determine, objectively, whether such conduct is a breach of the agent’s obligations (it invariably would be) and whether such a breach goes to the root of the agency contract, in effect destroying the relationship between the parties.  The repercussions of getting that decision wrong can be very serious, particularly in cases involving commercial agents where the principal may face significant claims for indemnity or compensation. 

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Kevin acts for a variety of public and private sector clients and advises across the full range of commercial disputes.

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