Morgan Russell Solicitors

A Guide to Agency Agreements

This guide will consider the following:

  1. The Nature of Agency Agreements;
  2. Types of Agency Agreements;
  3. Tax Issues;
  4. The Law and Agency Agreements; and
  5. Common Terms in Agency Agreements.

1.    THE NATURE OF AGENCY AGREEMENTS

An agency occurs when one party (the agent) has authority from another party (the principal) to create a legal relationship between the principal and a third party.  The agent may enter into a direct contract with the buyer, or introduce the buyer to the principal.  The usual remuneration of the agent is commission.

By comparison in a distribution arrangement, a distributor takes title to goods supplied by the supplier and resells them either to a retailer, another wholesaler or the final consumer.  The distributor's profit is the difference between the price at which he has purchased and the price at which he has sold the goods less his expenses.  The distributor is essentially an independent contractor.  His actions do not create contractual relationships between the third party customer and the supplier.  The distinction between agency and distribution is important because different legal rules apply to each type of arrangement.

An agency arrangement is suitable for entering into a foreign market as it does not usually involve a large initial expenditure, it is relatively flexible, and perhaps most importantly, the appointment of a local agent means the principal acquires knowledge and understanding of the way business is done in that particular country.  Whereas the establishment of a subsidiary company will usually involve greater expense and is a less flexible way of entering into a foreign market.

2.    TYPES OF AGENCY AGREEMENTS

An agency arrangement may take either or both of the following forms:

Sole agent

The principal is prevented from appointing another agent in the agent's agreed territory.  However, the principal may obtain orders direct from the agent's territory, without paying the agent commission on those orders.

 

Exclusive agent

Only the agent will be able to sell the goods to the agreed territory or to the particular customers.  The principal cannot receive orders in that territory from such customers nor can he appoint another agent.

An agent commonly acts in either or both of the following two capacities: 

Sales Agents

A sales agent has the authority to conclude contracts on behalf of the
principal, although often limits will be imposed upon the value or quantity of the orders.  In this type of agency, the agent has greater control over his remuneration (usually commission) for his efforts.

 

Marketing Agents

A marketing agent has the authority to introduce business to his principal.  The principal is then left to decide whether he accepts that introduction or not.  This is a less satisfactory form of arrangement from the agent's point of view as the agent is only entitled to commission on concluded contracts.  However, after the principal has accepted the introduction and contracted, then the agent becomes entitled to the commission whether the principal performs the contract or not.

The restrictions imposed by the Commercial Agency (Council Directive) Regulations 1993 (the "Agency Regulations") (see below) apply to self-employed commercial agents only. A commercial agent is another term for a sales agent. The Agency Regulations do not apply to marketing agents.

3.    TAX ISSUES

In an agency arrangement where a principal appoints an agent to operate in another country, there is a risk that such appointment will constitute the creation of a "permanent establishment".  In such cases the principal will be liable to taxation at the rates applicable in that local country on all of the profit generated through that permanent establishment.  This risk is reduced where there is a double tax agreement between the two countries based on the OECD model treaty. 

By contrast in a distribution arrangement, where the supplier appoints a distributor who buys and sells on his own account, there is little risk of the supplier being taxed by being decreed to have set up a permanent establishment in the distributor's territory.  The supplier will thus be taxed on the profits of his trade and the distributor is taxed at his home tax rates.

4.    THE LAW AND AGENCY AGREEMENTS

This section of the guide will consider the following:

4.1       Agency Laws;

4.2       Competition Laws; and

4.3       Practical Points for Agents and Principals in the EU.

4.1          AGENCY LAWS

Applicable law where the agent is based in an EU country

It is open to the parties to expressly agree upon a choice of law in the agreement.  Provided the chosen law is one of an EU Member State, that choice will usually be valid as between EU principals and agents.

Insofar as no express choice of law is made, the activities of agents in Great Britain are regulated by the Agency Regulations, (see paragraph 4.1.2 below).  In the other EU Member States, the law of that country applies the European Commercial Agents Directive 1986 (the "EC Directive") to contracts entered into for agents to act in that State.

Applicable law where the agent is based in a non-EU country

Similarly, the parties may expressly agree upon a choice of law in the agreement. Where an agency agreement is governed by English law in respect of an agency to be carried out in a non-EU country, it will be made subject to the English common law principles (see paragraph 4.1.1 below).  The Agency Regulations will not apply unless the parties specifically incorporate them into the agreement.

Point to Note

Irrespective of whether there is an express choice of law or not, the mandatory laws of any country connected with the agreement may override the principle governing law of the contract.  For example, the appointment of an agent in Italy will be invalid if the agent has not registered itself with the local commercial Registry.

Therefore, it is particularly important to take detailed local advice when entering into an agreement with parties in an overseas country.  Morgan Russell is able to obtain such advice on your behalf through its international connections with lawyers around the world.

4.1.1    English Law

Historically, the concept of agency evolved in English law over the last few hundred years and has been refined by the courts.  It is based upon consent and authority.  The principal consents to the agent acting on his behalf and gives authority to the agency to affect the legal relationship between the principal and the third party (normally the customer).  The principal becomes liable to the third party as a result of the actions of the agent.  The relationship is described as a fiduciary relationship – one of trust.  The agent is therefore required to act in good faith in the interests of the principal.  The principal in turn must act dutifully and in good faith towards the agent.

The following points should be borne in mind when the English common law, rather than the Agency Regulations apply:

Notice for termination

Under English common law, the amount of notice required to terminate an agreement of indefinite term can be difficult to resolve unless it is specified in a written agreement.

 

Termination for breach

Under English common law, a breach of contract will depend upon the circumstances and/or any written agreement.  On breach of contract by one party the other has the right to sue for compensation and may also have the right to treat the contact as repudiated and so cancel it.  If the contract is frustrated, both parties may be released from their obligations under it.  There is no obligation for the principal to pay any compensation on termination of the agency agreement by the principal to the agent under English common law if the contract is terminated in accordance with its terms. 

4.1.2      EU Law

On 1 January 1994, the Agency Regulations came into force to implement the EC Directive.  The Directive was an attempt by the EU to harmonise the laws of the Member States relating to self-employed commercial agents.  This brought about substantial changes to English agency law.  The most important change that resulted from the EC Directive was the right of the agent to claim compensation on termination of the agreement. This was completely new to English law, but reflected the practice of most of continental Europe.  The terms of the Agency Regulations are implied in to all commercial agency agreements within the EEA, ie the EU and Iceland, Liechtenstein and Norway, both written and oral, formal and informal.

Who do the Agency Regulations apply to?

The Agency Regulations apply to self-employed sales agents.

The Agency Regulations do not apply to:

  • Marketing agents.
  • Agents for the supply of services.
  • Unpaid agents and agents on commodity exchanges.
  • Agency agreements regulating the activities of principals and agents
    outside the EEA.

The provisions of the Agency Regulations

The Agency Regulations introduced a number of detailed provisions, which automatically apply to all agency contracts within its scope, regardless of their terms.  There are also several optional provisions, which the parties may agree to include.  The effect of the Agency Regulations are that agency agreements within the EEA are more regulated, and the parties have less freedom to negotiate their terms than previously.  The most significant areas of regulation are the payment of commission and a sum on termination.  These, together with the other main articles of the Agency Regulations, are considered below:

The Duties of the Agent

Article 3 provides that the duties of the agent are:

  • a general duty to look after his principal's interest; 
  • to act "dutifully and in good faith"; 
  • a positive duty to make proper efforts to negotiate such business as his principal has entrusted to him; and  
  • to communicate all necessary information to his principal and to comply with his reasonable instructions.

 N.B. Article 3 is mandatory and cannot be excluded.

 

The Duties of the Principal

Article 4 provides that the duties of the principal are:

  • to provide the agent with the necessary  documentation and information for the performance of the agency contract; 
  • to notify the agent as soon as it is anticipated that the volume of business will be significantly lower than the agent could normally have expected; and  
  • to inform the agent of his acceptance, refusal and any non-execution of the business the agent has arranged. 

N.B. This would require the principal to keep the agent informed of any omissions on his part in completing a transaction.

N.B. Article 4 is mandatory and cannot be excluded.

 

Remuneration

Articles 6-12 provides that an agent's remuneration shall:

  • be reasonable and not less than any local minimum remuneration (Article 6); 
  • be paid for the agent's concluded transactions AND transactions concluded with third parties who the agent has previously acquired as a customer (Article 7.1);
  • be paid in relation to all transactions in the agent's entrusted or exclusive designated area or with the agent's entrusted or exclusive designated group of customers whether negotiated by him or not (Article 7.2).  

N.B. This is an improvement on the previous English common law position;

  • be paid on transactions concluded after the agency contract has ended if they resulted mainly from the agent's efforts during the agreement (Article 8); 
  • be paid by apportionment between incoming and outgoing agents when it is "equitable because of the circumstances" (Article 9); 
  • become due when the principal or the third party has or should have executed the transaction (Article 10); 
  • not be paid only if the contract will not go ahead for circumstances for which the principal is not to blame (Article 11).  

N.B. Thus if a customer delays payment the principal will still be liable to pay the commission although if the customer fails to pay it all, the agent shall be obliged to refund any commission paid;

  • be specified in a statement provided by the principal who shall also make all necessary information and books available for the purposes of checking (Article 12);

 N.B. Articles 6, 10, 11 and 12 are mandatory.  Articles 7, 8 and 9 are optional.

 

The creation of agency agreements

Articles 13 and 14 provided for the creation of agency agreements, and entitle each party to receive a signed contract.  They also provide that after any fixed period, the contract will become indefinite if the parties continue to perform it.

 

Notice for termination

Article 15 provides that the minimum periods of notice to terminate agency contracts of indefinite term are: one month in the first year, two months in the second year and three months in the third and subsequent years.  If the parties do not agree otherwise, the notice must expire at the end of a calendar month.  (Article 15 (5))

 

National breach of contract

The Agency Regulations do not affect existing English laws relating to immediate termination where one party fails to carry out its obligations (Article 16).

 

Non-competition clauses

Article 20 provides that a non-competition clause cannot be valid for more than two years after termination of an agency contract.  Such a clause must be concluded in writing, and relate to the territory or group of customers allocated to the agent and to the kind of goods covered by the contract. 

N.B. The EC competition laws impose a shorter period of one year after termination of the agreement in order to avoid infringement of its provisions.

Compensation and indemnity payments

(a)      Compensation or indemnity?

Under the Directive, Member States must legislate for an agent to receive either a lump sum indemnity (Article 17(2)) or compensation for damage on termination of the contract (Article 17(3).   This was a new concept to some Members States' laws including Great Britain. The Agency Regulations applied to the UK, however, give parties the option to decide whether they want compensation or an indemnity payment to be made on termination of the agency agreement.  If no provision is made, compensation will apply.  On termination of an agreement the principal  must give the appropriate notice period for termination in addition to any payment for compensation or indemnity.

Under the law of all other EEA countries except France and Ireland payments arise.  In France, indemnity payments arise.  Ireland has not implemented Article 17 and therefore agents do not have either a right to compensation or an indemnity.  Under the Irish common law, an agent may have a claim for compensation. 

(b)      Compensation payment

The directive gives two examples of where compensation may arise:

  • Deprivation of any commission which proper performance of the agency contract would have earned, and
  • Substantial benefit (in terms of goodwill) to the principal or un-recovered expenses incurred by the agent on the principal's encouragement. 

The Agency Regulations do not set out how compensation is to be calculated. 

The court has recently held that on termination of an agency agreement the commercial agent is entitled to compensation assessed on the basis of any damage actually suffered as a result of the termination (ie the loss of the agency business), rather than the right to receive a payment which is fair and reasonable. This is a move away from the two years’ commission approach.

A compensation payment will be due notwithstanding the agent giving notice if the termination is justified:

  • by circumstances attributable to the principal; or
  • on grounds of age, infirmity or illness of the commercial agent in
    consequences of which he cannot reasonably be required to continue his activities.

(c)   Indemnity payments

The Agency Regulations list three conditions for entitlement to an indemnity payment:

  • a contribution by the agent to the principal's goodwill by either:
    • a significant increase to business with existing customers; or
    • the introduction of new customers,
  • substantial continuing benefits to the principal; and
  • that it is equitable in all circumstances and in view of the commission the agent has lost.

The method of calculating such a payment is to take the average annual remuneration calculated over the preceding 5 years (or shorter period if the agent has not been engaged for 5 years), and is subject to a maximum of one year's remuneration.

An indemnity payment will still be due:

  • if the principal is in breach of the agreement;
  • where the agreement has been frustrated;
  • where the principal gives notice terminating a fixed term contract i.e. a break clause;
  • when a fixed term contract comes to an end by effluxion of time.

The grant of an indemnity does not prevent the agent claiming compensation.

(d)   Indemnity and compensation payment exceptions

An indemnity or compensatory payment is not payable where the agent:           

  • is guilty of repudiatory breach; or
  • has given contractual notice; or
  • has assigned the benefits and obligations of the contract to a third party with the principal's consent.

It is however payable where the agency contract is terminated as a result of the commercial agent's illness or death.

(e)   Time limits for claims

If the agent intends to pursue his entitlement to indemnity or compensation for damages, he must notify the principal of this intention within one year following termination of the agency contract.

4.2          COMPETITION LAWS

4.2.1      UK Competition Law

The Competition Act 1998 (the "Act") which came into force in March 2000, introduced a new regulatory regime within the UK.  The Act prohibits the same agreements as the provisions of the EC competition laws namely, agreements which have an effect on trade within the UK or which have as their object or effect, the prevention, restriction or distortion of competition within the UK.

Agency agreements are generally exempt from the provisions of the Act as they fall within the 'vertical agreement' exclusion, i.e. agreements between businesses operating at different levels of the chain, such as the principal and agent. However, agency agreements cannot benefit from this exclusion if they contain provisions, which directly or indirectly fix prices, impose minimum or resale prices or share markets.

Notwithstanding if an agreement benefits from a European Commission block exemption (see paragraph 4.2.2 below), it will automatically be exempt form the provisions of the Act.  Therefore you should seek to ensure that your agreement benefits from the European Commission's block exemption in order to avoid the burden of scrutinising a large number of agreements for compliance with the Act.

4.2.2      European Competition Law

The basic EU prohibitions on anti-competitive practices are contained in Articles 81 and 82 of the Treaty of Rome:

  • Articles 81(1) prohibits agreements or concerted practices between undertakings which may affect trade between Member States and which have as their objective or effect the prevention, restriction or distortion of competition within the Common Market.
  • Article 82 prohibits the abuse by one or more undertakings of a dominant position within the Common Market or a substantial part of it insofar as it may effect trade between Member States.

Agency agreements are prima facie anti-competitive and infringe Article 81(1).  However, on 1 June 2000, new Commission Regulations were brought into force on the application of Article 81 to categories of vertical agreements and concerted practices (the "BER").  The BER gives exemption from Article 81(1) to a wide range of "vertical agreements" including agency agreements.  In order to benefit from the exemption of Article 81(1).

(1) Non-Competitive Parties

The parties must not be competitors or if they are competing parties, the agent must have a total annual turnover not exceeding EUR 100 million.

 

(2) Market Share

Having satisfied the "competitor" requirement, the next point to consider is the market share of the relevant party.  Generally, the market share held by the supplier must not exceed 30% of the relevant market on which it sells the contract goods or services.  If the agency agreement contains "exclusive supply obligations", the market share held by the agent must not exceed 30%. "Exclusive supply obligations" are defined as any direct or indirect obligation causing the principal to sell the goods or services only to one buyer inside the Community for a specific use or for resale.

 

(3) Non-Compete Obligations

  • The non-compete obligations must not exceed 5 years; and
  • The non-compete obligations cannot continue for more than one year after termination of the agreement.

POINTS TO NOTE

(1)          TO WHOM DO THE COMMISSION REGULATIONS APPLY?

The Commission has issued Guidelines as to how to interpret and apply the new Commission Regulations in relation to agency agreements and Art 81(1).  The Guidelines state that the new Commission Regulation will apply:

To sales agency agreements where the agent bears some of the financial or commercial risk in relation to the activities for which it has been appointed agent by the principal.  The agent will be considered to bear a risk where, for example he has to:

  1. contribute to the costs related to the supply/purchase of goods or
    services including transport costs;
  2. make an investment in sales promotion such as a contribution to advertising budgets;
  3. keep its own stocks of products so that it cannot, for example, return unsold goods to the principal without charge;
  4. create and operate a sales and after-sales service or a warranty service;
  5. make market specific investment in equipment, premises or people;
  6. take responsibility to third parties for harm caused by the product sold (product liability); and
  7. take responsibility for customers' non-payment of goods.

An agency agreement may also fall within the scope of Article 81(1), even if the principal bears all the risks, where it facilitates collusion.  This may occur, for example, when a number of principals use the same agents while collectively excluding others from using these agents.  It may also arise when principals use agents to collude on marketing strategy or to exchange sensitive marketing information between the principals.

(2)          ANTI-COMPETITIVE OBJECTS

In any event, the Commission Regulations shall not exempt agreements which have certain anti-competitive objects.  These objects are drafted in general terms and appear largely to cover restrictions found in distribution agreements.  It remains to be seen whether the wording will be interpreted and strained to apply to agency agreements.

(3)          ANTI-COMPETITIVE RESTRICTIONS 

The following restrictions on an agent, most of which are characteristic of the principal/agent relationship, or the circumstances set out below, will generally not be considered to be anti-competitive: 

  • Limits on the agent's territory;
  • Limits on the customers to whom the agent may sell;
  • The price at which the agent must sell or purchase goods or services; and
  • Exclusive agency provisions during the term of the agreement.

Provisions restricting the agent from acting on behalf of competing principals during and after the term of the agreement concern inter-brand competition and may infringe Article 81(1) if they lead to foreclosure on the relevant market where the goods or services are sold or purchased. 

4.3          PRACTICAL POINTS FOR AGENTS AND PRINCIPALS IN THE EU 

As a result of the changes that have occurred in agency law in the EU, agents and principals should be taking certain practical steps;

4.3.1      Review contracts

Review all your current agency, representative and distributions agreements to ascertain whether they are actually agency agreements, and if so, consider:

  • whether they are governed by English law, the law of another country or the law of a country outside the EEA;
  • the terms of those agreements and the changes that have been brought about to those agreements if they are governed by the law of an EEA country whose law has been changed by the Directive; 
  • the cost of and/or benefit and consequences of termination of any existing agency agreements including the amount of any likely indemnity or damage payment that may be received and/or paid;
  • whether they are in breach of the Competition laws.

4.3.2      Re-negotiate contracts

Redraft and/or renegotiate existing agency agreements to take into account the commercial effect of the changes in agency law.

5.    COMMON TERMS IN AGENCY AGREEMENTS

N.B. Where the UK Agency Regulations apply to an agreement (where one party is based in the UK and the other is based in the EEA), the following provisions marked with ** cannot be excluded.

5.1          Parties

The clause sets out:

  • The identity of the parties,
  • The identity of any party giving a guarantee on the obligations of the distributor.

5.2          Interpretation

This clause sets out:

  • The Territory covered by the agreement.
  • The products which are the subject of the agreement.
  • If there are any trademarks involved.

5.3          Appointment of agent

The clause sets out:

  • The scope of the appointment i.e. whether the agency is exclusive/sole/non-exclusive.
  • The non-compete obligations on the Agent i.e. not to deal with competing products/not to actively market outside the Territory. 

N.B. There are certain conditions to be adhered to for the non-compete obligations to be valid where the agreement is subject to the Agency Regulations (see paragraph 4.1.2 above) and the EC Competition law Regulations (see paragraph 4.2.2 above).

5.4          The agent's duties

This clause sets out that the agent shall:

  • Act dutifully and in good faith towards the principal. **
  • Look after his principal's interest and make proper efforts to negotiate such business as his principal has entrusted to him.**
  • Promote sales.
  • Attend training sessions and exhibitions as required by the principal.
  • Refer to all enquiries from outside the Territory to the principal.
  • Obtain all necessary licences and permits required.
  • Comply with local laws.
  • Maintain a customer list and a potential customer list to provide to the principal on request.
  • Pass back to the principal all necessary information such as market information and provide reports and returns.**
  • Promptly notify the principal of any complaints.
  • Insure the Product.
  • Maintain sufficient qualified staff.
  • Market the Product using material authorised by the principal.
  • Indicate in dealings that the agent acts as agent for the principal.
  • Not bind the supplier to give credit.
  • Not give unauthorised warranties or representations.
  • Not modify the principal's packaging.  

5.5          Sale and stocks of the product

 This clause sets out:

  • That the Products are to be sold on the terms of the principal.
  • The sale prices of the Products.
  • The agent's minimum target to be attained.
  • The minimum level of stock to be held by the agent.
  • The principal is not obliged to accept any order.
  • The agent to carry out credit risk evaluation of customers.

5.6          Intellectual property

This clause sets out that the agent shall:

  • Not use the intellectual property rights of the principal without
    consent.
  • Notify the supplier of unauthorised third party use of the intellectual property rights and assist the infringement proceedings.
  • Cease to use the intellectual property rights on termination.

5.7          The principal's rights and duties

This clause sets out that the principal shall:

  • Amend range of Products on notice.
  • Provide the agent with the necessary documentation and
    information for the performance of the agency contract such as promotional literature and sample and notifying the agent of any changes to the Products or their packaging.**
  • Provide advice and assistance.
  • Supply stocks as agreed by the parties.
  • Honour contracts for sale arranged by the agent.
  • Deal with after sales enquiries.
  • Comply with packaging and manufacturing legal requirements.
  • Refer to the agent enquiries from within the Territory, where practicable.
  • Notify the agent as soon as it is anticipated that the volume of business will be significantly lower than the agent could normally have expected.**
  • Inform the agent of his acceptance, refusal and any non-execution of the business the agent has arranged.**

5.8          Financial Provisions

This clause sets out:

  • The basis of commission/remuneration.  N.B. There are certain provisions that are mandatory in this respect if the agreement is subject to the Agency Regulations (see paragraph 4.1.2 above).
  • The time, manner, currency and place of payment.
  • Withholding tax requirements.
  • That the agent shall keep accounts and records and allow the principal to inspect and audit.

5.9          Confidentiality

This clause sets out:

  • The obligation of confidentiality upon the agent in respect of know-how disclosed.
  • The obligations to continue after the termination of the agreement.

5.10       Force Majeure

This clause sets out that neither the principal nor the agent shall be liable for any failure to perform their obligations in the event of force Majeure.

5.11       Duration and termination

This clause sets out:

  • Any initial probation period.
  • The duration of the agreement.
  • The right to terminate by notice and the notice period.  N.B. there are minimum notice periods for agreements subject to the Agency Regulations (see paragraph 4.1.2 above).

5.12       Consequences of termination

This clause sets out:

  • The commission entitlements of the agent on termination.
  • The obligations of the agent on termination.
  • The rights and liabilities of the parties to survive termination.
  • The return of promotional literature, sample and any stock.
  • Indemnity or compensation under the Agency Regulations.

5.13       Nature of agreement

This clause sets out:

  • Whole agreement provision.
  • No joint venture or partnership.

5.14       Proper law and whether arbitration

This clause sets out the parties' choice of governing law and any arbitration provisions.

5.15       Notices and service

This clause sets out the address for service of notices.

 

Further Information

If you require any further information or assistance, please contact Paul Morgan or Debbie Turner on +44 (0)1372 461411.

The data contained within this document is for general information only. No responsibility can be accepted for inaccuracies. Readers are also advised that the law and practice may change from time to time. This document is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.
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