Agency agreements

Agency agreements

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Contents

Types of agency agreement

If you use an agent to market your goods, you should state in your agency agreement what the agent has authority to do. You could appoint a marketing agent, who would just have authority to find customers and introduce them to you. You could also give the marketing agent authority to negotiate the terms of the sale. However, a marketing agent doesn't have authority to conclude the sale between you, i.e. the 'principal', and the customer.

Alternatively, you can appoint an agent with authority to conclude the sale on your behalf. This type of agent would be a sales agent. The sale agreement will be between you and your customer, and the agent won't be a party to it.

How far does competition law affect an agency agreement?

Usually an agent is viewed by the competition authorities as an arm of the principal, and not as a separate business undertaking. Competition laws that ban anti-competitive agreements apply to agreements between separate business undertakings. They won't generally apply to agency agreements. However, if the agent bears a significant amount of business risk, they may be seen as a separate undertaking. Competition law could then apply to the agency agreement. See Competition law for more details on anti-competitive agreements.

Statutory restrictions on drafting agency agreements

The Commercial Agents (Council Directive) Regulations 1993 set out rights and obligations of both the principal and agent that are implied into agency agreements. They give the agent important rights to payments during and at the end of the agency contract.

The regulations are intended to protect agents. Therefore, you generally can't include clauses in your agreement that take away or reduce the rights that the regulations give your agent.

Do the Commercial Agents Regulations apply?

For the regulations to apply, the agent must:

  • Operate in England, Scotland or Wales
  • Be a self-employed person, partnership or company (not your employee)
  • Have your continuing authority – not just authority for a one-off transaction
  • Market your goods or services as their primary business activity and not be part-time; or
  • Have your authority to negotiate and conclude, or to negotiate contracts for the buying and selling of goods.

The regulations don't cover a marketing agent who only has the authority to find customers and who doesn't negotiate on your behalf. There are also some other persons excluded from being commercial agents under the regulations.

There are similar regulations in Northern Ireland and other parts of the EU that apply to agents operating there.

Provisions in the agency agreement

Recital and interpretation

Recitals are clauses that explain the background to agreements. For example, in an agency agreement, the parties might state in the recitals section that the agent isn't acting as an independent trader and isn't accepting any financial risk in the transaction so that competition laws won't apply.

Agency agreements customarily have a list of definitions in an interpretation section. There would be a comprehensive definition of the products that the agent is marketing on the principal's behalf. If there's a long list of products, these may be set out in a schedule. The products would then be defined as those in the schedule.

The place where the agent is going to market the goods (the 'territory') can also be defined in the interpretations section. Defining where the goods will be marketed is usually straightforward, but it should be stated as precisely as possible.

Appointing an agent

In this clause, you'll hire (or 'appoint') the agent. You should state whether they'll be the only agent you appoint to sell the product in that territory, and whether you'll be selling the products there as well.

Usually an agent will want protection from all competition and be an 'exclusive agent'. This means that you won't sell the product in the territory yourself, or appoint any other agents to do so. While this arrangement may incentivise the exclusive agent, you should consider what to do if they don't make enough sales.

You should appoint the agent as a 'sole agent' if you don't want to appoint any other agents, but want to reserve the right to sell the product in the territory yourself.

If you want to appoint more than one agent in the territory, you should state that they're neither 'sole agents' nor 'exclusive agents'.

In addition to using the words 'exclusive' or 'sole' agents, for clarity's sake, it's best to spell out in the agreement whether you'll sell in the territory yourself and whether you can appoint other agents to market the products in the territory itself (and in what circumstances).

The agent's rights and duties

It's necessary to have an appropriate amount of control over your agent's activities. A clause about the agent's general duties would cover anything to do with promoting and marketing the products.

As well as a general duties clause, it can sometimes be necessary to include a clause with specific duties of the agent, for example to:

  • Get licences or permits for the sale of the products in the territory or to comply with local legislation
  • Keep proper records and give information to the principal, e.g. in respect of sales to and feedback from customers
  • Keep certain information confidential to protect your intellectual property rights, and to prevent the agent from getting any interest in those rights
  • Keep a stock of your business's products in a state that it won't be counted as part of their assets and can't be claimed by the agent's creditors if the agent becomes insolvent.

These duties can be tailored specifically to fit the arrangements with your agent.

The principal's rights and duties

These are often less onerous than the agent's duties. However, you must act dutifully and in good faith in your relations with your commercial agent. In the agreement, your duties can include:

  • Paying commission to your agent
  • Providing after-sales service for the products
  • Giving your agent advertising and promotional materials
  • Giving your agent any information that might help them to market the goods
  • Complying with all relevant laws relating to the make-up, packaging and labelling of the goods
  • Indemnifying the agent against any liability that the agent incurs as a result of being held out as your agent. (This means promising to pay the agent back for any money the agent becomes legally obliged to pay to someone while the agent is carrying out their duties.)

The agreement can also set out your rights, which include your right to change the products listed in the agreement.

Termination

Either of you may want to end the agreement in the following circumstances:

  • By providing notice
  • Breach of the agreement by the other party
  • Change in the voting or management 'control' of the agent if the agent is a company
  • If either of you gets into financial difficulties, like winding-up or making a voluntary arrangement.

Minimum notice periods

The regulations set out the following minimum notice periods that you must give to the agent if you end the agency:

  • 1 month for the first year of the contract
  • 2 months once the second year has started
  • 3 months once the third year has started, and for subsequent years.

If in your agency agreement you agree to give the agent a shorter notice period, the notice period in the regulations will override what your agency agreement says.

You can agree to give the agent a longer notice period than the minimum stated in the regulations, but this mustn't be shorter than the notice period that the agent must give you if they want to end the agreement.

The agreement should also deal with the effects of termination, such as:

  • The agent's duty of confidentiality
  • The agent's authority to negotiate on your behalf
  • What happens to your property, including stock that the agent holds.

Financial provisions

It's important to note that the regulations have provisions for paying the agent during the agency and on its termination. You must ensure that your agency agreement is consistent with the regulations, as they'll override any inconsistent provisions in your agreement.

Commission

Under the regulations, you must ensure that the agent has a right to commission on:

  • Transactions concluded during the agency agreement that they arranged, or with customers they acquired. If the agency is an exclusive one, the agent is entitled to commission on all sales in their territory during the agency term, whether or not they worked on the transactions.
  • Sales concluded within a reasonable time after the agency agreement has ended if these were largely due to their work. However, if you've appointed a new agent who has also worked to conclude the transaction, you may need to share the commission fairly between the old agent and the new agent.

Furthermore, if a sale that the agent worked on isn't concluded because the customer changes their mind, you won't have to pay the agent commission. However, you'll need to pay them commission on sales that aren't concluded due to your fault.

Most agency agreements deal expressly with matters such as how the commission is calculated and when it's paid. The agreements should also deal with who'll collect the payments from customers and how the agent is to get the commission. Further, you may wish to specify paying interest on any sums outstanding if either of you doesn't account to the other.

Payments on termination

The regulations state that you must give the agent a pay-off when the agreement ends. This payment must be made even if the agreement was for a fixed term that has come an end. It doesn't depend on any fault on your part.

If your agency agreement doesn't state that a pay-off should be given at the end of the agency, the regulations state that you must pay the agent a sum called 'compensation'. This sum represents the damage suffered by the agent as a result of the agency ending – they've effectively lost their livelihood. It's calculated based on the amount a new agent would pay to take over the agency, plus any expenses the agent incurred to carry out their agency work but hasn't recouped. There is no cap on the amount of compensation that could be awarded to the agent.

Instead of paying compensation, you could provide in your agency agreement to pay your agent an 'indemnity'. This is a sum that represents the continuing benefit you'll continue to enjoy from the customer base the agent built up for you during the agency.

The indemnity figure is capped by the regulations at a maximum of one year's commission. It's calculated on the average annual commission that the agent earned in the last 5 years of the agency (or the whole of the agency period if it's less than 5 years). As the indemnity is capped by the regulations, but compensation isn't, it's better to expressly state in the agreement that an indemnity, rather than compensation, will be paid on termination.

Note that the right to an indemnity payment has nothing to do with fault or a breach of the agreement. Therefore, if you've breached the agreement, you might have to pay damages to compensate the agent for this, in addition to the indemnity. You might also have to pay damages where the agent is paid compensation.

If, for example, the agency agreement provides that you can end it on 3 months' notice, and you end it without giving this notice, you'd be liable to pay damages to your agent to compensate them for their loss during the period when they should have had notice. This payment is in addition to the right to the indemnity or compensation pay-off provided under the regulations.

Loss of right to pay-off

The agent won't have a right to a pay-off if they:

  • Don't claim it from you within a year of the end of the agency
  • Have assigned, with your agreement, their rights and obligations to another agent
  • Have committed such a serious breach of the agency agreement that you were justified in ending the agreement
  • End the contract, for a reason other than your serious breach of the agency agreement, or the agent's age, illness or death.

Miscellaneous

An agency agreement will usually have standard provisions, referred to as 'boilerplate'. Typically, these include clauses on arbitration, the choice of law and jurisdiction governing the agreement, the nature of the agreement and other administrative issues. These also include clauses dealing with events that are outside anyone's control, otherwise known as 'force majeure'.