Agency agreement in a nutshell
Sometimes businesses will want to hire commercial agents to promote a product or a service and potentially bring in new customers. When signing a commercial agency agreement, it is important that you understand your rights and duties as well as the rights and duties of your commercial agent. To assist you, we have prepared a brief outlining what can be expected of the relationship between you and your commercial agent.
WHO IS A COMMERCIAL AGENT?
The Commercial Agents (Council Directive) Regulations 1993 ('the Regulations') describe a commercial agent “as a self-employed intermediary who has continuing authority to negotiate the sale or purchase of goods on behalf of their principal or to negotiate and conclude such transactions on behalf of and in the name of that principal”.
It should be noted here that the ‘continuing authority’ may differ depending on the contents of the commercial agency agreement; there are usually two different types of commercial agents:
-a commercial agent with the authority to conclude sales on behalf of its principal; and
-a marketing or introduction agent with no authority to conclude sales on behalf of its principal.
HOW LONG DOES AN AGENCY AGREEMENT LAST?
Regarding the duration of the agency agreement, the parties have a few options: - they can agree on a fixed-term contract; - they can agree that the agency agreement will last for an indefinite term but may be terminated with notice. In such a case, either party has the right to terminate the agreement by providing sufficient notice (as per the Regulations); or
- they can agree on a fixed-term contract with the option to extend the contract by agreement of both parties.
As per the Regulations, the minimum notice period is one month for the first year, two months for two years and so on.
KEY RIGHTS AND DUTIES OF A COMMERCIAL AGENT
The Regulations require both parties to abide by some obligations. The agent’s rights and duties as per the Regulations are as follows:
- acting in accordance with the principal’s directions;
- communicating all essential information to the principal;
- working in good faith and have the principal’s best interests in mind;
- making appropriate efforts to negotiate and conclude transactions;
- acting within the boundaries of the authority given to them by the principal and do not delegate the task; and
- not accepting any bribes.
MAIN RIGHTS AND DUTIES OF THE PRINCIPAL
The principal must also follow certain rules as per the Regulations: acting in good faith with the agent; - providing the agent with all necessary documents and disclosing to the agent any information necessary for the purposes of carrying out the contract; - informing the agent if they decide to drop or refuse a transaction facilitated by the agent; - informing the agent if they decide or foresee a decrease in the number of transactions; and - paying for the agent’s expenses and providing remuneration/commission.
WHY USE A COMMERCIAL AGENT?
Whether or not you should hire a commercial agent depends on your business goals as well as the nature of the product you are offering. If you are selling a popular product/service, then there is little use in hiring a commercial agent. However, a commercial agent can be of help when exploring new markets for your product. Commercial agents have local knowledge and experience that can help you break into overseas markets, which can be a difficult task without the appropriate contacts and specialist information. Hence, they can help you expand your business operations. Furthermore, hiring commercial agents is a cost- effective way of displaying your product/service in a variety of markets. They have lower overhead costs when compared to sales executives as you do not have to pay them a salary or provide benefits such as a car, office space etc.
REMUNERATION AND COMMISSION
If the parties have agreed that the agent will be rewarded with a commission, then the agency agreement should clearly state the amount of the commission to be awarded to the agent. If the agency agreement does not outline the commission payable to the agent, then the Regulations require that the agent be paid the customary amount. This amount will be calculated based on what is customarily paid to agents working on the same type of goods/services and in the same area. However, if a customary amount cannot be calculated, then the Regulations suggest that the agent be given reasonable remuneration after considering all particulars of the transaction concluded.
The Regulations further advise on when commission is payable to the agent:
- where a transaction is concluded between the principal and a third party because of the agent’s efforts;
- where a transaction is concluded between the principal and a third party, and that third party was introduced as a customer by the agent.
- where a third party is a customer from a specific geographical area to which the agent has secured exclusive rights under the agreement.
TERMINATING AN AGENCY AGREEMENT
Common reasons for terminating a commercial agency include unsatisfactory performance on the whole or part of the contract by the agent, refusal by the agent to perform the contract at all, or breach by the agent of some other provision of the contract. When terminating an agency agreement, certain points must be taken into consideration: - is there any compensation payable due to the termination? Case law indicates that to calculate payable compensation, one must look at the value of the agency that has been lost due to termination.
- is there any outstanding commission? - is there a payable ‘pipeline’ commission? (A ‘pipeline’ commission is paid for orders that were at a certain stage in the transaction process). Indeed difficulties often arise when agents who have had their agencies terminated seek an indemnity. It is therefore crucial to draft a compliant termination clause, providing express provision for termination in certain specified circumstances, the steps that should be followed in order to effect termination and the consequences of termination.
Please do not hesitate to contact us should you wish to hire a commercial agent in the UK.
