A Guide to Agency Agreements Dixcart Legal - Lawyers for Business

8/17/2019 A Guide to Agency Agreements Dixcart Legal - Lawyers for Business

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A Guide to Agency Agreements

Published 07 April 2006

This guide will consider the following:

The Nature of Agency Agreements;!

Types of Agency Agreements;2!

Ta" #ssues;$!

The %aw and Agency Agreements; and&!

'ommon 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!

,y comparison in a distribution arrangement+ a distributor ta-es 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

e"penses! The distributor is essentially an independent contractor! /is actions do

not create contractual relationships between the third party customer and thesupplier! 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 mar-et as it does not

usually inole a large initial e"penditure+ it is relatiely fle"ible+ and perhaps most

importantly+ the appointment of a local agent means the principal ac1uires

-nowledge and understanding of the way business is done in that particular

country! hereas the establishment of a subsidiary company will usually inole

greater e"pense and is a less fle"ible way of entering into a foreign mar-et!

2. TYPES OF AGENCY AGREEMENTS

An agency arrangement may ta-e either or both of the following forms:

3ole agent The principal is preented from appointing another agent in

the agent.s agreed territory! /oweer+ the principal may

ide to Agency Agreements | Dixcart Legal - Lawyers for Business http://www.dixcartlegal.com/articles/!!"/!#/!$/a-guide-to-agen

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obtain orders direct from the agent.s territory+ without paying

the agent commission on those orders!

4"clusie

agent

5nly the agent will be able to sell the goods to the agreed

territory or to the particular customers! The principal cannot

receie 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:

3ales

Agents

A sales agent has the authority to conclude contracts on

behalf of the

principal+ although often limits will be imposed upon the

alue or 1uantity of the orders! #n this type of agency+ the

agent has greater control oer his remuneration )usually

commission* for his efforts!

ar-eting

Agents

A mar-eting 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

iew as the agent is only entitled to commission on

concluded contracts! /oweer+ 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 'ommercial Agency )'ouncil irectie*

8egulations 99$ )the Agency 8egulations* )see below* apply to selfemployed

commercial agents only! A commercial agent is another term for a sales agent!

The Agency 8egulations do not apply to mar-eting agents!


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3. TAX ISSUES

#n an agency arrangement where a principal appoints an agent to operate in

another country+ there is a ris- that such appointment will constitute the creation of

a permanent establishment! #n such cases the principal will be liable to ta"ation

at the rates applicable in that local country on all of the profit generated through

that permanent establishment! This ris- is reduced where there is a double ta"

agreement between the two countries based on the 54' model treaty!

,y contrast in a distribution arrangement+ where the supplier appoints a distributor

who buys and sells on his own account+ there is little ris- of the supplier being

ta"ed by being decreed to hae set up a permanent establishment in the

distributor.s territory! The supplier will thus be ta"ed on the profits of his trade and

the distributor is ta"ed at his home ta" rates!

4. THE LAW AND AGENCY AGREEMENTS

This section of the guide will consider the following:

&! Agency %aws;

&!2 'ompetition %aws; and

&!$ Practical Points for Agents and Principals in the 4

4.1 AGENCY LAWS

Applical! la" "#!$! %#! a&!'% i( a(!) i' a' EU c*+'%$,

#t is open to the parties to e"pressly agree upon a choice of law in the agreement!

Proided the chosen law is one of an 4< ember 3tate+ that choice will usually be

alid as between 4< principals and agents!

#nsofar as no e"press choice of law is made+ the actiities of agents in =reat ,ritain

are regulated by the Agency 8egulations+ )see paragraph &!!2 below*! #n the

other 4< ember 3tates+ the law of that country applies the 4uropean'ommercial Agents irectie 9>6 )the 4' irectie* to contracts entered into

for agents to act in that 3tate!

Applical! la" "#!$! %#! a&!'% i( a(!) i' a '*'-EU c*+'%$,

3imilarly+ the parties may e"pressly agree upon a choice of law in the agreement!

here an agency agreement is goerned by 4nglish law in respect of an agency

to be carried out in a non4< country+ it will be made sub?ect to the 4nglish


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common law principles )see paragraph &!! below*! The Agency 8egulations will

not apply unless the parties specifically incorporate them into the agreement!

P*i'% %* N*%!

#rrespectie of whether there is an e"press choice of law or not+ the mandatory

laws of any country connected with the agreement may oerride the principle

goerning law of the contract! @or e"ample+ the appointment of an agent in #taly

will be inalid if the agent has not registered itself with the local commercial

8egistry!

Therefore+ it is particularly important to ta-e detailed local adice when entering

into an agreement with parties in an oerseas country! i"cart %egal is able to

obtain such adice on your behalf through its international connections with

lawyers around the world!

4.1.1 E'&li(# La"

/istorically+ the concept of agency eoled in 4nglish law oer the last few hundred

years and has been refined by the courts! #t is based upon consent and authority!

The principal consents to the agent acting on his behalf and gies 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 re1uired to act in good faith in the interests

of the principal! The principal in turn must act dutifully and in good faith towardsthe agent!

The following points should be borne in mind when the 4nglish common law+

rather than the Agency 8egulations apply:

Notice for

termination


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the right to treat the contact as repudiated and so cancel

it! #f 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 4nglish common law if the contract is

terminated in accordance with its terms!

4.1.2 EU La"

5n Canuary 99&+ the Agency 8egulations came into force to implement the 4'

irectie! The irectie was an attempt by the 4< to harmonise the laws of the

ember 3tates relating to selfemployed commercial agents! This brought about

substantial changes to 4nglish agency law! The most important change that

resulted from the 4' irectie was the right of the agent to claim compensation ontermination of the agreement! This was completely new to 4nglish law+ but

reflected the practice of most of continental 4urope! The terms of the Agency

8egulations are implied in to all commercial agency agreements within the 44A+ ie

the 4< and #celand+ %iechtenstein and Norway+ both written and oral+ formal and

informal!

W#* )* %#! A&!'c, R!&+la%i*'( appl, %*

The Agency 8egulations apply to selfemployed sales agents!

The Agency 8egulations do not apply to:

ar-eting agents!

Agents for the supply of serices!


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commission and a sum on termination! These+ together with the other main

articles of the Agency 8egulations+ are considered below:

T#! D+%i!( *0 %#!

A&!'%

Article $ proides that the duties of the agent are:

a general duty to loo- after his principal.s interest;

to act dutifully and in good faith;

a positie duty to ma-e 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 !

T#! D+%i!( *0 %#!

P$i'cipal

Article & proides that the duties of the principal are:

to proide the agent with the necessary

documentation and information for theperformance of the agency contract;

to notify the agent as soon as it is anticipated that

the olume of business will be significantly lower

than the agent could normally hae e"pected; and


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to inform the agent of his acceptance+ refusal

and any none"ecution 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 !

R!+'!$a%i*' Articles 62 proides 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 ANtransactions concluded with third parties who the

agent has preiously ac1uired as a customer

)Article 7!*;

be paid in relation to all transactions in the agent.s

entrusted or e"clusie designated area or with the

agent.s entrusted or e"clusie designated group of customers whether negotiated by him or not )Article

7!2*!

N.B. This is an improement on the preious !nglish

common law position"


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be paid on transactions concluded after the agency

contract has ended if they resulted mainly from the

agent.s efforts during the agreement )Article >*;

be paid by apportionment between incoming and

outgoing agents when it is e1uitable because of

the circumstances )Article 9*;

become due when the principal or the third party

has or should hae e"ecuted the transaction )Article

0*;

not be paid only if the contract will not go ahead for

circumstances for which the principal is not to

blame )Article *!

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 proided by the

principal who shall also ma-e all necessary

information and boo-s aailable for the purposes of

chec-ing )Article 2*;

N.B. Articles $# % %% and %' are mandatory. Articles (#

) and * are optional.


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T#! c$!a%i*' *0

a&!'c,

a&$!!!'%(

Articles $ and & proided for the creation of agency

agreements+ and entitle each party to receie a signed

contract! They also proide that after any fi"ed period+ the

contract will become indefinite if the parties continue toperform it!

N*%ic! 0*$

%!$i'a%i*'

Article ( proides 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 subse1uent years! #f the

parties do not agree otherwise+ the notice must e"pire atthe end of a calendar month! )Article ( )(**

Na%i*'al $!ac#

*0

c*'%$ac%

The Agency 8egulations do not affect e"isting 4nglish

laws relating to immediate termination where one party

fails to carry out its obligations )Article 6*!

N*'-c*p!%i%i*'

cla+(!(

Article 20 proides that a noncompetition clause cannot

be alid for more than two years after termination of an

agency contract! 3uch a clause must be concluded in

writing+ and relate to the territory or group of customers

allocated to the agent and to the -ind of goods coered by

the contract!

N.B. The !+ competition laws impose a shorter period of

one year after termination of the agreement in order to

aoid infringement of its proisions.


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C*p!'(a%i*' a') i')!'i%, pa,!'%(

)a* 'ompensation or indemnityD


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on grounds of age+ infirmity or illness of the commercial agent in

conse1uences of which he cannot reasonably be re1uired to

continue his actiities!

)c* #ndemnity payments

The Agency 8egulations 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 e"isting customers; or

the introduction of new customers+

substantial continuing benefits to the principal; and

that it is e1uitable in all circumstances and in iew of the commission

the agent has lost

The method of calculating such a payment is to ta-e the aerage annual

remuneration calculated oer the preceding ( years )or shorter period if the

agent has not been engaged for ( years*+ and is sub?ect to a ma"imum of *'!

,!a$( $!+'!$a%i*'.

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 gies notice terminating a fi"ed term contract i!e! a

brea- clause;

when a fi"ed term contract comes to an end by efflu"ion of time!

The grant of an indemnity does not preent the agent claiming compensation!

)d* #ndemnity and compensation payment e"ceptions

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

is guilty of repudiatory breach; or

has gien contractual notice; or

has assigned the benefits and obligations of the contract to a third party

with the principal.s consent!

#t is howeer payable where the agency contract is terminated as a result of the

commercial agent.s illness or death!


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)e* Time limits for claims

#f the agent intends to pursue his entitlement to indemnity or compensation for

damages+ he must notify the principal of this intention within *'! ,!a$

following termination of the agency contract!

4.1 COMPETITION LAWS

4.2.1 U C*p!%i%i*' La"

The 'ompetition Act 99> )the Act* which came into force in arch 2000+

introduced a new regulatory regime within the 2 prohibits the abuse by one or more underta-ings of a dominant

position within the 'ommon ar-et or a substantial part of it insofar as it

may effect trade between ember 3tates!

Agency agreements are prima facie anticompetitie and infringe Article >)*!


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/oweer+ on Cune 2000+ new 'ommission 8egulations were brought into force

on the application of Article > to categories of ertical agreements and concerted

practices )the ,48*! The ,48 gies e"emption from Article >)* to a wide

range of ertical agreements including agency agreements! #n order to benefit

from the e"emption of Article >)*!

)*Non'ompetitie

Parties

The parties must not be competitors or if they are competingparties+ the agent must hae a total annual turnoer not

e"ceeding 4


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The 'ommission has issued =uidelines as to how to interpret and apply the new

'ommission 8egulations in relation to agency agreements and Art >)*! The

=uidelines state that the new 'ommission 8egulation will apply:

To sales agency agreements where the agent bears some of the financial or

commercial ris- in relation to the actiities for which it has been appointed agent

by the principal! The agent will be considered to bear a ris- where+ for e"ample he

has to:

contribute to the costs related to the supplyBpurchase of goods or

serices including transport costs;

!

ma-e an inestment in sales promotion such as a contribution to

adertising budgets;

2!

-eep its own stoc-s of products so that it cannot+ for e"ample+ return unsold

goods to the principal without charge;

$!

create and operate a sales and aftersales serice or a warranty serice;&!

ma-e mar-et specific inestment in e1uipment+ premises or people;(!

ta-e responsibility to third parties for harm caused by the product sold

)product liability*; and

6!

ta-e responsibility for customers. nonpayment of goods!7!

An agency agreement may also fall within the scope of Article >)*+ een if the

principal bears all the ris-s+ where it facilitates collusion! This may occur+ for

e"ample+ when a number of principals use the same agents while collectiely

e"cluding others from using these agents! #t may also arise when principals use

agents to collude on mar-eting strategy or to e"change sensitie mar-eting

information between the principals!

25 ANT#'5P4T#T#I4 5,C4'T3

#n any eent+ the 'ommission 8egulations shall not e"empt agreements which

hae certain anticompetitie ob?ects! These ob?ects are drafted in general terms

and appear largely to coer restrictions found in distribution agreements! #t

remains to be seen whether the wording will be interpreted and strained to apply to

agency agreements!

35 ANT#'5P4T#T#I4 843T8#'T#5N3

The following restrictions on an agent+ most of which are characteristic of the

principalBagent relationship+ or the circumstances set out below+ will generally '*%

be considered to be anticompetitie:

%imits on the agent.s territory;


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%imits on the customers to whom the agent may sell;

The price at which the agent must sell or purchase goods or serices; and

4"clusie agency proisions during the term of the agreement!

Proisions restricting the agent from acting on behalf of competing principals

during and after the term of the agreement concern interbrand competition and

may infringe Article >)* if they lead to foreclosure on the releant mar-et where

the goods or serices are sold or purchased!

4.3 PRACTICAL POINTS FOR AGENTS AND PRINCIPALS IN THE EU

As a result of the changes that hae occurred in agency law in the 4


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The clause sets out:

The identity of the parties+

The identity of any party giing a guarantee on the obligations of the

distributor!

(!2 #nterpretation

This clause sets out:

The Territory coered by the agreement!

The products which are the sub?ect of the agreement!

#f there are any trademar-s inoled!

(!$ Appointment of agent

The clause sets out:

The scope of the appointment i!e! whether the agency is e"clusieBsole

Bnone"clusie!

The noncompete obligations on the Agent i!e! not to deal with competing

productsBnot to actiely mar-et outside the Territory!

N!,! There are certain conditions to be adhered to for the noncompete obligations

to be alid where the agreement is sub?ect to the Agency 8egulations )see

paragraph &!!2 aboe* and the 4' 'ompetition law 8egulations )see paragraph

&!2!2 aboe*!

(!& The agent.s duties

This clause sets out that the agent shall:

Act dutifully and in good faith towards the principal! JJ

%oo- after his principal.s interest and ma-e proper efforts to negotiate such

business as his principal has entrusted to him!JJ

Promote sales! Attend training sessions and e"hibitions as re1uired by the principal!

8efer to all en1uiries from outside the Territory to the principal!

5btain all necessary licences and permits re1uired!

'omply with local laws!

aintain a customer list and a potential customer list to proide to the

principal on re1uest!

Pass bac- to the principal all necessary information such as mar-et

information and proide reports and returns!JJ


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Promptly notify the principal of any complaints!

#nsure the Product!

aintain sufficient 1ualified staff!

ar-et the Product using material authorised by the principal!

#ndicate in dealings that the agent acts as agent for the principal!

Not bind the supplier to gie credit!

Not gie unauthorised warranties or representations!Not modify the principal.s pac-aging!

(!( 3ale and stoc-s of the product


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 leel of stoc- to be held by the agent!The principal is not obliged to accept any order!

The agent to carry out credit ris- ealuation of customers!

(!6 #ntellectual 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!

'ease to use the intellectual property rights on termination!

(!7 The principal.s rights and duties

This clause sets out that the principal shall:

Amend range of Products on notice!

Proide the agent with the necessary documentation andinformation 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 pac-aging!JJ

Proide adice and assistance!

3upply stoc-s as agreed by the parties!

/onour contracts for sale arranged by the agent!

eal with after sales en1uiries!


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'omply with pac-aging and manufacturing legal re1uirements!

8efer to the agent en1uiries from within the Territory+ where practicable!

Notify the agent as soon as it is anticipated that the olume of business will

be significantly lower than the agent could normally hae e"pected!JJ

#nform the agent of his acceptance+ refusal and any none"ecution of the

business the agent has arranged!JJ

(!> @inancial Proisions


The basis of commissionBremuneration! N!,! There are certain proisions

that are mandatory in this respect if the agreement is sub?ect to the Agency

8egulations )see paragraph &!!2 aboe*!

The time+ manner+ currency and place of payment!

ithholding ta" re1uirements!

That the agent shall -eep accounts and records and allow the principal toinspect and audit!

(!9 'onfidentiality


The obligation of confidentiality upon the agent in respect of -nowhow

disclosed!

The obligations to continue after the termination of the agreement!

(!0 @orce a?eure

This clause sets out that neither the principal nor the agent shall be liable for any

failure to perform their obligations in the eent of force a?eure!

(! uration and termination


Any initial probation period!

The duration of the agreement!

The right to terminate by notice and the notice period! N!,! there are

minimum notice periods for agreements sub?ect to the Agency 8egulations

)see paragraph &!!2 aboe*!

(!2 'onse1uences of termination


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The commission entitlements of the agent on termination!

The obligations of the agent on termination!

The rights and liabilities of the parties to surie termination!

The return of promotional literature+ sample and any stoc-!

#ndemnity or compensation under the Agency 8egulations!

(!$ Nature of agreement


hole agreement proision!

No ?oint enture or partnership!

(!& Proper law and whether arbitration

This clause sets out the parties. choice of goerning law and any arbitration

proisions!

(!( Notices and serice

This clause sets out the address for serice of notices!

F+$%#!$ I'0*$a%i*'

#f you re1uire any further information or assistance+ please contact Paul organ or ebbie Turner on K&& )0*$72 &6&!

@iled under C*pa', C*!$cial+ C*!$cial A&$!!!'%(

The data contained within this document is for general information only! No

responsibility can be accepted for inaccuracies! 8eaders are also adised that the

law and practice may change from time to time! This document is proided for

information purposes only and does not constitute legal adice! Professional legal

adice should be obtained before ta-ing or refraining from any action as a result of the contents of this document!

Eail +(

#f you hae an en1uiry about our serices+ people or seminars please email us at

adiceLdi"cartlegal!com


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Call +(

Alternatiely+ to spea- with us directly call us on 744 851392 4:1411! %ines are open from

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A Guide to Agency Agreements Dixcart Legal - Lawyers for Business