Changing an Agency Contract

As time passes by, things change. This is as true in the context of an agency contract as it is for life in general. It is not unusual at all for changes to an agency contract to be needed to reflect ‘real life’ changes in circumstances or specific changes that a principal wants to put in place to exert more control over the agent.

These changes can cover any number of subjects, including:

• Changes to the products that the agent carries for the principal (e.g. the addition of new product lines introduced by the principal or the removal of discontinued products);
• Changes to the territory covered by the agent. This may involve a reduction in the agent’s territory, or it may be that the agent is to be given an expanded territory;
• Converting some customer accounts into house accounts (so that the principal, rather than the agent, deals with those customers);
• Adding new obligations to be carried out by the agent (e.g. in relation to reporting or record keeping);
• Setting annual sales targets;
• Making changes to the commission rate(s) payable to the agent (e.g. if there is an annual sales target in place, the agent might be encouraged to achieve that target with the addition of ‘bonus’ commission for sales made beyond the target level).

How should the agent and principal deal with such changes? Can the principal simply impose changes on the agent or do both parties have to agree to the changes before they can take effect?

The general position

Under English law, the general position is that any changes, or variations, to an existing agency contract (or any other type of contract) have to be agreed by all of the parties to that contract in order be legally effective.

OK, so that means the agent has to agree to the changes? It does, but things can get quite complicated when we consider whether the agent has “agreed” to the changes in practice, particularly where there is not a written agency contract in place.

Where there is a written agency contract

A well drafted written agency contract should include a clause which sets out the process to be followed if the parties want to make changes or variations to the agency contract. These clauses will usually specify that any changes to the agency contract will only be effective if they are set out in writing and signed by or on behalf of both parties. This gives certainty to the parties that only changes agreed in this way would be legally binding. If changes are made in any other way, such as verbally, those changes would not be effective.

However, the agency contract may also contain provisions which enable the principal to impose changes on the agent (usually in specific areas) without needing the agent’s further consent. In this scenario, the agent effectively gives advanced agreement to the changes by signing the agency contract which contains these provisions. This is something an agent will need to be particularly aware of when reviewing the draft agency contract before agreeing and signing it.

If the agency contract already permits the principal to make such changes without needing the agent’s consent, the variation clause mentioned above would not be needed.

Where there is no written contract

Where there is no written agency contract in place, it would still be necessary to show that the parties have agreed to change or vary the terms of the agency contract.

However, the circumstances in which this could take place are potentially wider and a Court would consider carefully what evidence there is to show that the parties agreed to change or vary the contractual terms. That evidence could be provided in a number of ways, including:

• In a written document which is signed by or on behalf of both parties (as above); or
• By an exchange of emails or other correspondence between the parties;
• Verbally; or
• Even by the conduct of the parties (e.g. the principal seeks to impose a change, the agent does not object to that change and continues over a period of time to perform their duties in accordance with that change).

The potential difficulty with non-written evidence is that there is scope for the parties to disagree about whether a change was agreed and the scope of that change. For example, the parties may have different recollections of what was discussed and agreed during a particular conversation and if there is no document produced at the time which confirms what was discussed and agreed, a Court could be left with the unenviable task of deciding which version of events it believes. This often comes down to which witness the Court finds to be more credible when giving evidence at trial, which creates a lot of uncertainty and can be very expensive for the parties to resolve. It is always preferable to have clarity on these things.

Some exceptions to these rules

However, there are some limited areas in which the terms of the agency contract are fixed by legislation and cannot be changed, irrespective of what the agency contract itself says. This occurs where the Commercial Agents (Council Directive) Regulations 1993 (“the Regulations”) apply to the agency contract. The Regulations make clear that the following rights and obligations cannot be overridden by the agency contract:

• The duties owed to the principal by the agent, as specified at Regulation 3 (which include obligations to act dutifully and in good faith and to look after the interests of the principal);
• The duties owed to the agent by the principal, as specified at Regulation 4 (which include also an obligation to act dutifully and in good faith);
• The provisions at Regulation 10 which specify the latest periods when commission (i) becomes due to the agent and (ii) must be paid to the agent;
• The circumstances in which the agent’s right to commission is extinguished (Regulation 11);
• The principal’s obligations to provide a statement of the commission due to the agent and to provide the information needed by the agent to enable them to calculate the commission to which they are entitled (Regulation 12); and
• The provisions in Regulations 17 and 18 which set out the agent’s right to indemnity or compensation upon termination of the agency contract.

There is also something of a grey area as to whether the agent’s rights to be paid commission under Regulation 7 of the Regulations can be excluded by the agreement of the parties (for example, where the parties agree that customer accounts can be converted to house accounts or the agent agrees to a territory reduction). There is a good argument that if the agent has acquired a new customer for the principal, under Regulation 7 they would still be entitled to commission on all sales to that customer even if that customer becomes a house account or is removed from the agent’s territory.

The grey area arises because it is not clear whether Regulation 7 can be overruled by the terms of the agency contract. Unlike the provisions outlined above, the Regulations do not explicitly state that the rights contained in Regulation 7 cannot be overruled by the terms of the agency contract.

Surprisingly, the Courts have not yet had to deal with this issue. The general consensus seems to be that Regulation 7 could be overruled in this way, but until we get a definitive view from the Courts there remains some uncertainty here.

Commercial reality

From a legal perspective, a principal cannot impose contractual changes on an agent without the agent’s agreement. Any attempt to do so would be ineffective.

However, from a practical and commercial perspective the agent might be left with little choice but to agree to the changes that the principal wants. Given the economic impact of the Covid-19 pandemic, a principal might be faced with the unenviable situation of having to reduce costs in order to keep their business alive and having to terminate the agency contract if costs cannot be reduced. Alternatively, a principal may simply decide that they want to spend less on their agents. The agent would face the difficult choice of effectively agreeing to a pay cut or losing their agency (albeit that they would be entitled to compensation or indemnity). In that situation, the agent’s only realistic option might be to get the best deal they can and minimise the reduction in their earnings.