An agency relationship can end in several different ways, each with different consequences for both the agent and the principal.
1. The principal terminates the agent’s agreement
➡️ The rule: the agent is generally entitled to an indemnity.
➡️ The exception: the principal may avoid paying it by proving that the agreement was terminated because of circumstances justifying termination on account of the agent’s substantial breach of their obligations.
⚠️ In this situation, the principal bears the burden of proving the grounds excluding entitlement to an indemnity.
2. The agent terminates the agreement
➡️ The rule: the agent generally loses the right to an indemnity.
➡️ The exception: the agent may retain that right by demonstrating that termination was justified by circumstances attributable to the principal, or by the agent’s age, infirmity or illness, where equitable considerations mean that the agent cannot reasonably be required to continue the agency activity.
⚠️ Here, the agent must prove the grounds allowing them to retain entitlement.
3. With the principal’s consent, the agent transfers their rights and obligations to another person
➡️ The outgoing agent loses the right to an indemnity.
➡️ This does not mean that the results of their work cease to matter.
The customers they brought in may be taken into account when assessing their successor’s indemnity claim.
What does this mean for the principal?
Transferring the rights and obligations to a new agent postpones the potential obligation to pay an indemnity.
The ultimate extent of that obligation will depend on how the relationship with the new agent develops, particularly:
• the results achieved by the new agent;
• the continuing benefits from the customers acquired;
• how the relationship with the new agent ends.
Conclusion
How an agency relationship ends can affect the principal’s costs and the risk of a dispute. Before deciding to change agents or terminate an agreement, it is therefore worth analysing each possible scenario.
