What is an Agency Agreement?
An "agency" is a legal relationship wherein one party (the "principal") gives power to another party (the "agent") to do a particular act on the principal’s behalf. The individual contracts or agreements involved in establishing an agency can take a number of forms, and the acts or responsibilities that one party agrees to perform on behalf of another can be very varied.
An "agency agreement" might include a simple short form written or oral agreement that one person will perform a specific task for another. It may also involve the creation and operation of a business entity (such as through the establishment of a corporation, joint venture or limited liability company formed by two or more parties). In addition, a for-fee or commission based employment agreement might be considered an agency agreement where the employed party is selling or acting on behalf of the employer and entitled to a commission or some other form of remuneration for their efforts.
Regardless of the arrangement , agency relationships, with few exceptions, allows a "principal" (sometimes referred to as a "principal-obligor") to agree with another "principal" (sometimes referred to as a "primary obligor") to contract with a third party as an "agent" (also called an "agency-obligor"). Through these arrangements, the agent empowers the principal to market, sell, produce, manage or otherwise act in relation or on behalf of the third party’s business and/or its assets (the "agency subject matter").
In many agency agreements, although perhaps without express agreement, the principal will indulge in the exercise of such power to manage the agency subject matter. Thereafter, the parties may terminate the agency (through written agreement or oral or other conduct) but the agent may continue to exercise power and control over the agency subject matter notwithstanding the cessation of the agency.
Agency Duties that Survive the Termination of an Agency Agreement
The concept of surviving duties is distinct from the separate but related issue of the survival of indemnification obligations. Within the context of agency agreements, surviving duties refer expressly to obligations that continue after termination of the agreement. Surviving duties are often the result of the nature of a legal duty, such as confidentiality or fiduciary duties in which a continuing or post-termination duty exists. Moreover, under case law, even while an agency agreement is in effect, the principal and agent may owe to each other fiduciary duties independent of their contractual duties because of the principal-agent relationship. Id. at *3-4 (citing Restatement (Second) of Agency § 387). For example, the continuous nature of a license agreement also gives rise to a duty of confidentiality to survive termination. Thus, in the context of surviving duties, it appears that fraud or breach of fiduciary duty claims against agents for actions taken during the agency relationship do not survive the termination of the agent’s agency and do not rise to the level of duties that survive the termination of the agency or independent of the agency relationship. See id. at *3 (citing Restatement (Third) of Agency § 8.04 ("An agent has a duty to act loyally to the principal in carrying out the agent’s responsibilities.") (emphasis added).
Legal Principles Underlying Agency Duties that Survive
The legal basis for which certain agency duties continue after the termination of the agreement is often dependant upon the facts and circumstances surrounding the termination of the agreement. While some agency agreements can be cancelled by either party, causing all agency duties to cease with the termination of the agreement, other agency agreements must be carefully reviewed to ascertain the meaning of applicable terms such as the "period of the agreement expires" or "on termination," etc. A court will use the common meaning of such terms, unless the context demonstrates that the parties intended otherwise. For instance, even where an agreement is terminated for cause, where it continues for a reasonable period of time after termination to allow the terminated agent to wind down its business affairs, common law fiduciary duties may possibly arise that go beyond the express terms of the agreement. This is especially true where the principal takes advantage of the confidential information or goodwill of the agent to benefit from the termination of the agreement.
Typical Agency Duties that Survive
Common agency duties that survive after termination of the agency agreement include non-disclosure; a fiduciary duty; an accounting duty; and a duty not to negotiate with the principal’s rivals.
A non-disclosure obligation (or a confidentiality obligation) that survives the termination of an agency agreement is standard because the purpose of that obligation is to restrict the agent’s ability to disclose confidential information. Typically, in an agency context, the purpose of the duty is to restrict the agent’s ability to disclose confidential information about the principal’s business. The purpose of such a provision is to protect important confidential information that the principal does not want disclosed. So, sometimes, the duty not to disclose confidential information will be limited temporally—not surviving indefinitely—but if the duty is to protect confidential information, it is very likely to survive after termination of the agency agreement.
A fiduciary duty that survives termination is very common. Just like a fiduciary duty that continues through the life of the contract, a fiduciary duty that survives termination of an agency agreement is going to restrict the agent’s ability to engage in conduct that would be adverse to the principal. The rationale for a continuing fiduciary duty is that since the agent has special knowledge about the principal’s business, the principal is entitled to protect itself from the agent taking advantage of that special knowledge.
An accounting obligation is a type of fiduciary duty. In the insurance sales context, the agent is frequently obligated to service the insurance policies that he sells, such as collecting premiums and distributing dividends. It would not make sense for an accounting duty to end when the agency agreement ends because those duties—collecting premiums and distributing dividends—for the policies that were sold while the agreement was in existence would still need to be performed for the insurer.
A duty not to negotiate with a competitor or with a potentially competing company at the same time that the agent is negotiating with the principal is a non-competition type of contractual duty that is very common in agency agreements. Again, the reason for this is that the agent has special knowledge about the principal’s business and the principal is entitled to protect itself from the agent taking advantage of that special knowledge.
On the other hand, a competing business obligation—a covenant not to compete—will normally end with termination of an agency agreement. This is because a person should be free to conduct his or her own business and make a living once an agency relationship terminates.
Thus, although the details are very specific to each individual contract and the relevant law, these are some of the common agency duties that survive termination of an agency agreement.
Surviving Agency Duties: Negotiating for Survival
Survival clauses are typically the subject of negotiations between the parties to an agency agreement. Parties are free to negotiate the scope and duration of any obligations they wish to survive the termination of the agreement. The critical point is that the parties must clearly record those essential terms as the contract language dictates what survives. In such cases, the extent of the continuing duties is often clarified through amendments to the pre-existing agreement.
Amendments generally contain a survival clause which reads as: Any amendments to the Agency Agreement will survive the termination of the Agency Agreement.
Agreements which require further amendments need to specifically identify which obligations or provisions survived the termination of the agency – otherwise, grey areas remain and the parties need to litigate over the proper interpretation of the agreement .
In such case, it is essential for the parties to clearly identify the obligations and provisions in the agreement which have the effect of surviving termination. In any case, the parties should define the precise scope of the obligations set out in the survival clause to avoid disputes over the rights flowing from the same. Survival clauses can be drafted with a number of points in mind. Examples include: Without the benefit of clear contract language which defines the area for the parties’ obligations to survive, the entire purpose of having a survival clause becomes invalidated and parties need to spend time, money and effort trying to enforce their post-termination rights. A poorly drafted survival clause may even provide the basis for continued liability after an agreement has been terminated.
It is important for all parties to a contractual relationship to ensure that they are satisfied with the clear and unambiguously-phrased provisions in the agreement before signing.
Practical Considerations for Agents and Businesses
Beyond theoretical certainty, what do agents and brokers need to know about surviving duties, and how might these duties affect their everyday work? In this section, we discuss some of the practical implications for agents and businesses. First, of course, is the reality that agency duties do survive termination to some extent; and, depending on the agency type and business involved, the extent of those duties may vary. Because there is no set timeframe or scope for continuing obligations, performance issues are bound to arise. Therefore, the resulting litigation will often turn on the specific facts in each case to determine whether the agency has succeeded or failed its duties.
To comply with the duties that endure post-termination, an agent must ensure that he or she is performing the necessary tasks for as long as required. Depending on a variety of circumstances, a broker may have to continue keeping his/her lines of communication open with former client(s). A few things that are ill-advised, but all too common, are: HHGNA v. Houghton, 751 So.2d 724, 729 (Ala. 1999) (emphasis added). Therefore, to comply with all obligations and avoid accusations that will delay payment, an agent, if possible, should first obtain new authority from his or her client before terminating the client relationship.
On the business side, strict adherence to the very lengthy list of tasks that must be performed by a principal after the termination of an agency relationship would be a sensible (if not foolhardy) endeavor. However, an employer can take various steps to minimize risk and avoid further litigation. Specifically, an employer should regularly explicitly and clearly memorialize its termination of agencies, and also ensure that its professional liability and D&O policies expressly cover the continuing duties of agents to avoid ambiguous living documents. An employer must review each potentially applicable law and agree upon a set of agency practices that comply with all potentially applicable agency termination statutes and regulations. In the event that it must permit an agency to continue to solicit further business on a limited basis (and this will likely be the case frequently), the employer should consider extending the employment of its agents for a period of time (despite the principal-agent relationship ending internally) through a separate contract that outlines the scope of the relationship.
One final word of caution that applies to both agents and business. Many states expressly provide a statute of limitations for post-termination agency duties. For example, Section 79A-508(5) of Alabama’s Code states:
If a right or claim under this article is not brought within two years after termination of the agency relationship, the right or claim is extinguished and the agent and the principal each is barred from any recovery of damages for breach of any of the duties specified in subsection (a) of Section 79A-508.
Because even the best agency contracts do not explicitly include every scenario that might present itself, and the statutory and common law duties are quite broad and potentially endless, even a small omission could result in litigation. As such, Principals should carefully ensure that they take steps to close all agency matters before termination and agents should be cognizant that certain duties may last for some time after termination.
Conclusion
If you have an agency, a salesperson, a broker or any other person that is selling your goods and services under an agreement, be sure to determine just how long that person must take care of you after termination of the agreement. Here are the key points from this article:
- Agencies, brokers and many salespeople typically have duties extend beyond the end of the contract out of which they arise. These duties will survive the termination of the contract.
- Your failure to know if a duty is continuing or not can lead to an unexpected liability .
- A duty that is surviving after termination of a contract can be a very valuable tool to ensure that the agreement is followed by the other party, even after its termination.
- Make sure to exactly specify the duties of your representatives and those that survive termination.
- If you are the representative, be sure to understand what you cannot do after the agreement is over (and get paid properly for your efforts if you can demonstrate the benefit you provided).
