Many businesses use an intermediary party to introduce new customers or even to conclude contracts with customers on their behalf. Agents can provide great additional value to a business as they may have a geographical presence which the business itself does not have, or the agent may have specialist knowledge of a particular market which the business would like to develop.
Why are agency agreements required?
To govern the relationship between the business (as the principal) and the agent, an agency agreement is required. This should set out what has been agreed between the parties and in particular, should set out limits on what the agent is authorised to do by the principal on their behalf. The terms of such agreements should be carefully thought out. If the agent is given too much authority, it may be able to bind the principal into obligations to an end customer which the principal itself would not have agreed to perform.
What is the difference between an agency agreement and a distribution agreement?
In an agency agreement, the agent negotiates with an end customer on behalf of the business and the contract is entered into directly between the principal and the end customer. In a distribution arrangement, the business sells the goods to the distributor and the distributor then sells the goods on to their end customer as a separate sales transaction. The end customer therefore has a direct contract with the distributor (and there is no contract between the business and the end customer). Distribution agreements should again set out what is expected of each of the business and the distributor.
What sort of elements should the agreements cover?
The agreement should set out whether the relationship between the parties is exclusive or non-exclusive. It should specify the terms of the agreement and how and when it may be terminated by the parties. Usually the agent or distributor will be limited to selling or negotiating contracts for the sale of certain goods or services in a limited territory only. The business will often need to reserve the right to offer for sale the goods or services themselves in other territories. As stated above, the extent of the powers of each party should be clearly set out. The business will usually require the agent or distributor to have reporting duties to them. Clauses may need to be included to prevent an agent or distributor undertaking acts which may compete with the business or which may damage the reputation of the business. The agreement must also clearly set out what payment is due from the business to the agent or distributor.
Additional considerations for commercial agency agreements
European law has aimed to regulate the law applying to commercial agents throughout Europe. The Commercial Agents Regulations 1993 incorporated the EU law into UK law and sets out certain rights for commercial agents. These include the right to have a written agreement to govern the relationship between the principal and agent. A commercial agent is also entitled to receive commission for their services and where no commission is set out in the agency agreement, they have a right to receive a ‘reasonable commission’. Minimum periods of notice to terminate the contract must be given by a principal and the length of time depends on the period of the relationship between the parties. Most importantly, the legislation gives commercial agents the right to receive payment on termination of the agency agreement on either a ‘compensation’ or ‘indemnity’ basis. Each entitles the commercial agent to payment calculated on a different basis. For the indemnity option to apply (which is usually preferable to a principal as it is capped) the agency agreement must expressly state this. The compensation option applies automatically if the indemnity option is not chosen. Care should be taken when drafting or negotiating an agency agreement to which the Commercial Agents Regulations 1993 apply otherwise termination of the agency arrangement may become very costly for a principal.
How can our lawyers help with agency or distribution agreements?
We can discuss the proposed relationship and if you require it, we can give advice on which arrangement (agency or distribution) may be more suitable. We will discuss with you the nature of the proposed relationship and draft or negotiate an agreement which sets out what is expected from each party and amongst other things, takes into account the factors mentioned above.
How long does an agreement take to draft?
We can usually provide a first draft of an agency or distribution agreement within 7 – 14 days.