IMPORTANT ISSUES TO CONSIDER WHEN DISCUSSING AN AGENCY CONTRACT

The really important elements of an agency contract will depend on what is important to the individual principal and agent. We have included below what we have found to be the clauses which generally require the most discussion or which can cause the greatest difficulty if they are not clear and the agency relationship encounters problems.

We should note that these issues apply where the agent carries out their activities within the UK – different considerations may apply in other countries.

A common complaint that we have heard from agents recently is why agency contracts have to be so long, in some case 20 – 30 pages or more. Generally, they don’t have to be. One of the risks of a lengthy and complex agency contract is that neither party understands or follows it. This is when the real problems can begin!

When you read this article you will probably think that a lot of this is common sense and you would be right! A good agency contract will deal with important points clearly and concisely so that both parties know where they stand and what is required of them.

1. What products of the principal is the agent authorised to deal with?

This is obvious isn’t it? In some cases the contract might just need to specify that the agent is authorised to deal with all the principal’s products.

In other cases, the parties might need to think about some or all of the following:

• What about new products or product ranges that may be introduced by the principal in the future? Is the agent automatically authorised to deal with these, or might the principal and / or the agent want to decide what to do at the appropriate point in time?
• What about removing products from the list (e.g. if the principal wishes to discontinue certain products or product ranges)?

The agency contract should include a clear definition of “Products” and flexible drafting may be needed to cover the above points.

2. What geographical territory is the agent going to cover?

Another obvious point, but it is important to clearly describe the allocated territory so there is no misunderstanding. This can be even more important if the agency contract prevents the agent from placing orders or dealing with enquiries from customers based outside their allocated territory. The agent’s right to be paid commission on sales is also likely to be limited to sales to customers within their allocated territory.

The parties might also need to consider how best to deal with “national accounts”, which might have their headquarters in one agent’s allocated territory and various retail outlets spread across various other territories. The principal might decide to treat such customers as house accounts (i.e. they are dealt with internally by the principal, not by agents). If they do not, it needs to be clear to the various agents what they are permitted to do with such customers within their territory and when they are entitled to commission. This can be a tricky issue.

3. What can the principal do in the agent’s allocated territory?

This question can sometimes lead to heated discussions between the parties. The agent will invariably want an exclusive right to generate sales within their allocated territory, but the principal might want to retain some rights to make direct sales within the territory without involving the agent (e.g. to existing customers or national accounts) or reserve the ability to allow third parties to also seek sales within the allocated territory.

There are a few different options here:

While the terms “exclusive”, “sole” and “non-exclusive” are used widely in agency contracts, there is actually no universally accepted definition for them. It is therefore very important to set out clearly in the agency contract the extent of the rights granted to the agent within the allocated territory and what, if anything, the principal is permitted to do.

4. What is the extent of the agent’s role with customers?

You might hear references to “sales agent” and “marketing agent”, but what do they actually mean?

A sales agent will usually be authorised by the agency contract to promote, market, negotiate and enter into contracts on the principal’s behalf, but only on terms and conditions specified by the principal. A sales agent will not be a party to the sale contract – that will be between the principal and the customer. However, a sales agent may be authorised to commit the principal to a sales contract with the customer.

In contrast, a marketing agent will be authorised to promote and market the principal’s products and solicit orders for them. They will not have authority to enter into a contract of sale with the customer on behalf of the principal (the principal will do that itself, directly with the customer).

While these two phrases are generally understood in the industry, we would not recommend that the agency contract simply states that the agent is to carry out the duties of a sales agent or a marketing agent. The extent of the agent’s authority to act on behalf of the principal needs to be set out in sufficient detail in the agency contract so that it is clear what the agent is permitted to do and what they are not.

5. The agent’s obligations under the agency contract

The parties should think carefully about how much detail is needed to set out the agent’s obligations in the agency contract. I have seen some very long clauses on this subject and you do sometimes wonder how many of the provisions are actually relevant to the specific agent.

A number of obligations will automatically apply as a result of common law and (where applicable) the Commercial Agents (Council Directive) Regulations 1993 (“the Regulations”). Those obligations will apply whether or not they are set out in a written agency contract. These automatic (implied) obligations include obligations to look after the interests of the principal, to act dutifully and in good faith and to comply with reasonable lawful instructions given by the principal. Many agency contracts do specifically include these automatic obligations. This is a sensible approach because the contract makes clear to the parties what is expected of the agent. Unless they seek legal advice, how many principals or agents would realise that these automatic obligations apply even if they’re not included in the agency contract?

There are various other obligations that could be included within the agency contract. The length of the list of obligations often depends on the bargaining power between the parties and how much control the principal wants to exert over the agent. We would recommend that the parties think about the following:

• What are the agent’s reporting obligations to the principal going to be?
• Is the agent needed to provide support at trade fairs or exhibitions?

• How are advertising responsibilities (e.g. product samples, marketing materials etc) to be divided between the agent and the principal?
• Will the agent have a role in issuing invoices to customers, chasing payment or dealing with complaints?

6. Should the agency contract include a minimum sales target for the agent?

This can be another topic of heated debate between the agent and principal, especially if failure to meet a sales target enables the principal to terminate the agency contract for breach by the agent.

Many agency contracts function perfectly well without sales targets but, equally, in other contracts such targets play an important and effective role.

If sales targets are to be included in an agency contract, the parties will need to think carefully about the mechanism by which those targets are set. Fairness is key here.

The principal might require absolute discretion to set whatever targets they see fit. Such an approach is likely to set alarm bells ringing with an agent about the risk of the principal setting sales targets at levels that would be impossible for the agent to reach. This approach is sometimes used by principals as a mechanism to get rid of an agent they no longer want to retain, not necessarily because the agent’s performance is poor but often because the principal feels they are paying the agent too much.

There might be a reasonable middle ground available, which involves the principal and agent discussing and agreeing reasonable sales targets before the start of each sales year. From the principal’s perspective, there might be concern about what happens if the agent refuses to agree any sales targets (again, this is not unheard of). Provisions could be included to protect against this, for example setting the sales targets at 5% more than the previous year’s sales targets if agreement cannot be reached by a certain deadline.

A key component of minimum sales targets is what happens if they are not met. In many agency contracts, a failure to meet minimum sales targets would entitle the principal to terminate the agency contract. However, even where the agency contract contains such a provision, care must be exercised by the principal because, although the failure enables the principal to terminate the agency contract, the principal could still be liable to pay compensation or indemnity under the Regulations. The Regulations state that the principal can only avoid having to pay compensation or indemnity upon termination of the agency contract where it has terminated the agency contract because of default attributable to the agent which would justify immediate termination by reason of the agent’s failure to carry out their obligations.  In other words, for a principal to escape having to make a termination payment, the agent’s failings must be so serious that the Court, looking at the nature and consequences of the breach, decides that the principal was justified in terminating with immediate effect.

But there could be any number of valid reasons why minimum sales targets have not been met. It might have been due to a general deterioration in the market, or orders being cancelled by customers because the principal did not make deliveries on time, or because the products have gained a poor reputation in the market place or because a competing product has entered the market.  The circumstances that have arisen during the COVID-19 pandemic highlight a number of further examples, such as national lockdowns and entire industries and sectors having to close down or significantly reduce their activities at short notice. None of these reasons could be classified as “default attributable to the agent”.

In such circumstances, it seems likely that the agent would still have a good claim for compensation or indemnity notwithstanding that the agency contract was terminated because minimum sales targets were not reached. This does not necessarily prevent minimum sales targets from being included in the agency contract in the first place. The risk is around whether the principal actually uses its termination rights if those targets are not met.

7. The principal’s obligations to the agent

Similar considerations apply here as to the agent’s obligations above. Again, certain obligations will apply automatically through the operation of common law and the Regulations, whether or not they are set out in the agency contract. These automatic (implied) obligations include obligations to act dutifully and in good faith and to provide the agent with necessary information and documents. Again, many agency contracts will specifically set out these obligations to make clear to the parties what is expected of the principal.

Beyond this, the parties will need to think about what other obligations the principal might be needed to perform. There is obviously an obligation to pay the agent (which we deal with in the next section) and it would be helpful to set out any support that the principal is required to provide the agent in terms of providing samples, advertising materials, display stands etc.

Other issues to consider might include placing obligations on the principal to honour sales contracts made on their behalf by the agent and, where orders cannot be completed, explaining to the agent the reasons for this.

8. What will the agent be paid under the agency contract?

In many cases this will simply involve payment of an agreed rate of commission on completed sales to customers. However, in some instances the parties might agree that the agent is to be paid a fixed retainer per month. This might be appropriate where the principal and / or the products are completely new to the UK market and it might take the agent some time to build up the customer base. In those circumstances, paying a monthly retainer would help the agent to cover their initial expenses while they are building up the business. This type of arrangement could be for a fixed period (e.g. 3 or 6 months) or could be payable until sales volumes reach certain specified levels. Any degree of flexibility can be built in.

Similarly, the parties might consider whether the agent is to be reimbursed by the principal for certain types of expenses they incur in performing their agency obligations. It would be very unusual for the principal to reimburse all expenses, but some principals might be willing to reimburse certain categories of expenses (such as fuel or accommodation expenses) subject to an overall cap each month. The parties might also consider whether the agent should be reimbursed travel / accommodation expenses for attending trade shows and exhibitions.

Where commission is to be paid to the agent, the parties will need to think carefully about what types of sale would attract commission payments. Is commission payable only for sales that the agent has been directly involved with or is it payable on all sales made by the principal within the allocated territory, irrespective of whether the agent actually had any involvement with the order? For example, in exchange for the agent agreeing to the principal making direct sales to certain customers or categories of customer within the allocated territory, the principal may agree to pay the agent a reduced commission rate in respect of sales to those customers.

In many cases the issue of what sales trigger the right to commission is quite straightforward and can be agreed easily by the parties. However, in some cases this can prove to be a complex issue which requires significant negotiation between the parties.

The rate of commission payable will also need to be considered. Is this to be a flat rate applicable across all sales, or will the commission rate vary across different products or depending on the volume of sales achieved during the year? It is not unusual for commission rates to gradually reduce as sales volumes increase, but the level of reduction might need to be negotiated by the principal and agent.

It is also important to specify clearly what “price” commission will be calculated against. This will usually be the price actually charged by the principal to the customer, net of VAT or any other sales tax. The agency contract might also specify that the “price” should exclude any discounts or rebates that are applied or transport or haulage costs.

The agency contract might also specify when commission becomes due to the agent (e.g. when goods are delivered to the customer, when the customer is invoiced or, most often, when the customer pays the principal) and the process to be followed leading up to payment. In many cases, this will involve the principal providing the agent with a monthly statement showing the sales on which commission is payable and the principal’s calculation of commission on those sales. When the agent has checked and verified that information, the agent will then invoice the principal so that payment can be made.

9. Non-compete clauses?

Some agency contracts will include clauses which prevent the agent (during the period of their agency) from acting for other principals who have products which compete with the products covered by the agency contract.

Even where the agency contract does not contain such clauses if an agent takes on an agency for a third party whose products compete with those of the principal that agent is very likely to be in breach of the obligation under the Regulations to look after the interests of the principal.  The Courts have indicated that acting for such a third party (during the period of the agency) without the express consent of the principal is likely to justify immediate termination of the agency contract by the principal, meaning that the agent would lose the right to claim compensation or indemnity.

The position is quite clear during the period of the agency, but some agency contracts also seek to restrict the agent’s ability to be involved with or sell competing products after the agency contract has been terminated or has expired. This can be a trickier issue and such clauses would have to be very carefully worded in order to be enforceable. By way of example, where the Regulations apply the maximum permitted period for such a clause would be 2 years after termination of the agency contract. Even then, common law restrictions on restraint of trade clauses might make a 2-year period unenforceable depending on the circumstances of the particular case.

The Regulations also specify that a restraint of trade clause would only be valid if it relates to the territory allocated to the agent under the agency contract or the group of customers within that territory and to the kind of goods covered by the agency contract. Basically, the restriction has to be narrow and quite specific. If these requirements are not met, the restraint of clause trade would not be effective or enforceable.

It should also be noted that the existence of a restraint of trade clause would be a relevant factor when calculating the value of a compensation claim (and would likely increase the value of such a claim). A principal would need to think very carefully about whether they need this protection after the agency contract ends and for how long.

10. Should the agency contract be for a fixed term or indefinite period?

This can be a point of fierce discussion between the principal and the agent. If a fixed term is to apply, the principal might want the initial period to be quite short to see how things go while the agent would obviously prefer the security of a longer period. It can take some time and effort to build a successful agency, particularly from a standing start.

Where the Regulations apply, making the agency last for a fixed term will not allow the principal to avoid compensation or indemnity when the agency expires. However, if the duration of the agency has been quite short the value of any compensation or indemnity claim is likely to be quite low.

If the parties continue to perform the agency beyond any initial fixed term then, notwithstanding what the agency contract might say, under the Regulations the agency contract would automatically be converted into an agency for an indefinite period. This means that when considering a compensation or indemnity claim following termination of the agency, a Court would look at the whole period of the agency and not just any fixed term specified in the agency contract.

In light of the above points (and the ability of either party to terminate the agency contract at any time by giving suitable notice), we would always recommend that the parties think carefully about whether a fixed term agency contract is actually needed.

11. Termination of the agency contract

The agency contract will need to set out the circumstances in which it can be terminated with immediate effect or by either party giving suitable notice. In either case, the terminating party would need to give written notice of termination to the other.

The agency contract should list the various events which would trigger termination with immediate effect. Usually these rights are reserved to the principal only, although the agent would still have a right under common law to terminate for sufficiently serious breaches by the principal. The triggers for termination that a principal would often seek here might include:

• Material breach by the agent of their obligations under the agency contract. What amounts to material breach will depend on the particular circumstances but essentially the breach would have to be serious enough to justify termination of the agency contract.
• Failure by the agent to meet minimum sales targets.
• Insolvency of the agent.

Either party can terminate the agency contract at any time for “convenience” (i.e. without having to give a reason for termination). If the Regulations apply, minimum periods of notice would apply (i.e. between 1 and 3 months’ notice depending on how long the agency contract has been in operation).

The reason for terminating the agency contract will be an important factor in determining whether the agent is able to claim compensation or indemnity from the principal following termination. If the principal terminates the agency contract for convenience, then compensation or indemnity would be payable to the agent. Principals therefore often seek to rely on some form of breach by the agent to justify termination with immediate effect. If the principal gets this right, they would not have to pay compensation or indemnity.

Generally, an agent would not be entitled to claim compensation or indemnity if they terminate the agency contract. The exceptions to this are where the agent is justified in terminating the agency as a result of circumstances attributable to the principal (i.e. serious breach by the principal) or the agent terminates due to age, infirmity or illness.

We have mentioned several times above that claims for compensation or indemnity could be made following termination of the agency contract. Which claim applies will depend on what, if anything, the agency contract says. Unless a written agency contract specifies that an indemnity is payable on termination of the agency contract, compensation would be the default position.

12. Is a force majeure clause needed?

This type of clause is particularly pertinent given the circumstances that have arisen during the COVID-19 pandemic. Basically, a force majeure clause excuses the parties for failing to perform their contractual obligations where that failure results from something which is beyond their reasonable control or has been caused by one of a list of specific events.

The parties should consider very carefully whether this clause is needed in the agency contract and, if it is, how wide that clause should be. For example, a clause which simply states that a party is not in breach of contract for failing to perform their obligations due to circumstances beyond their reasonable control could, in practice, be very wide and could lead to all sorts of arguments between the parties. At the other extreme, many contracts include a specific list of force majeure events which would excuse performance of contractual obligations although, until recently, many of those would probably not have included a pandemic!

As well as the circumstances in which the force majeure clause would apply, the parties would also need to consider whether the parties would be entitled to terminate the agency contract if the force majeure event continues for a certain period of time and what the consequences of termination would be in those circumstances.

13. Check which country’s law applies to the agency contract

This may seem an odd thing to have to pay attention to, but it is important to set out clearly in the agency contract which country’s laws will govern the contract (and also which country’s Courts have jurisdiction to resolve disputes). If you are based in one country, it could be very daunting to have to deal with a dispute about an agency contract in the Courts of another country. These points are likely to become increasingly important following Brexit, particularly if the principal is based in the EU.