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A Guide to Agency Agreements


Published 07 April 2006

This guide will consider the following:


1. The Nature of Agency Agreements;
2. Types of Agency Agreements;
3. Tax Issues;
4. The Law and Agency Agreements; and
5. Common 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.
By comparison in a distribution arrangement, a distributor takes 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
expenses. The distributor is essentially an independent contractor. His actions do
not create contractual relationships between the third party customer and the
supplier. 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 market as it does not
usually involve a large initial expenditure, it is relatively flexible, and perhaps most
importantly, the appointment of a local agent means the principal acquires
knowledge and understanding of the way business is done in that particular
country. Whereas the establishment of a subsidiary company will usually involve
greater expense and is a less flexible way of entering into a foreign market.
2.

TYPES OF AGENCY AGREEMENTS

An agency arrangement may take either or both of the following forms:


Sole agent

The principal is prevented from appointing another agent in


the agent's agreed territory. However, the principal may

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obtain orders direct from the agent's territory, without paying


the agent commission on those orders.

Exclusive
agent

Only the agent will be able to sell the goods to the agreed
territory or to the particular customers. The principal cannot
receive 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:


Sales
Agents

A sales agent has the authority to conclude contracts on


behalf of the
principal, although often limits will be imposed upon the
value or quantity of the orders. In this type of agency, the
agent has greater control over his remuneration (usually
commission) for his efforts.

Marketing
Agents

A marketing 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
view as the agent is only entitled to commission on
concluded contracts. However, 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 Commercial Agency (Council Directive)


Regulations 1993 (the "Agency Regulations") (see below) apply to self-employed
commercial agents only. A commercial agent is another term for a sales agent.
The Agency Regulations do not apply to marketing agents.

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3.

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TAX ISSUES

In an agency arrangement where a principal appoints an agent to operate in


another country, there is a risk that such appointment will constitute the creation of
a "permanent establishment". In such cases the principal will be liable to taxation
at the rates applicable in that local country on all of the profit generated through
that permanent establishment. This risk is reduced where there is a double tax
agreement between the two countries based on the OECD model treaty.
By contrast in a distribution arrangement, where the supplier appoints a distributor
who buys and sells on his own account, there is little risk of the supplier being
taxed by being decreed to have set up a permanent establishment in the
distributor's territory. The supplier will thus be taxed on the profits of his trade and
the distributor is taxed at his home tax rates.
4.

THE LAW AND AGENCY AGREEMENTS

This section of the guide will consider the following:

4.1

4.1

Agency Laws;

4.2

Competition Laws; and

4.3

Practical Points for Agents and Principals in the EU.


AGENCY LAWS

Applicable law where the agent is based in an EU country


It is open to the parties to expressly agree upon a choice of law in the agreement.
Provided the chosen law is one of an EU Member State, that choice will usually be
valid as between EU principals and agents.
Insofar as no express choice of law is made, the activities of agents in Great Britain
are regulated by the Agency Regulations, (see paragraph 4.1.2 below). In the
other EU Member States, the law of that country applies the European
Commercial Agents Directive 1986 (the "EC Directive") to contracts entered into
for agents to act in that State.
Applicable law where the agent is based in a non-EU country
Similarly, the parties may expressly agree upon a choice of law in the agreement.
Where an agency agreement is governed by English law in respect of an agency
to be carried out in a non-EU country, it will be made subject to the English

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common law principles (see paragraph 4.1.1 below). The Agency Regulations will
not apply unless the parties specifically incorporate them into the agreement.
Point to Note
Irrespective of whether there is an express choice of law or not, the mandatory
laws of any country connected with the agreement may override the principle
governing law of the contract. For example, the appointment of an agent in Italy
will be invalid if the agent has not registered itself with the local commercial
Registry.
Therefore, it is particularly important to take detailed local advice when entering
into an agreement with parties in an overseas country. Dixcart Legal is able to
obtain such advice on your behalf through its international connections with
lawyers around the world.
4.1.1

English Law

Historically, the concept of agency evolved in English law over the last few hundred
years and has been refined by the courts. It is based upon consent and authority.
The principal consents to the agent acting on his behalf and gives 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 required to act in good faith in the interests
of the principal. The principal in turn must act dutifully and in good faith towards
the agent.
The following points should be borne in mind when the English common law,
rather than the Agency Regulations apply:
Notice for
termination

Under English common law, the amount of notice required


to terminate an agreement of indefinite term can be
difficult to resolve unless it is specified in a written
agreement.

Termination
for breach

Under English common law, a breach of contract will


depend upon the circumstances and/or any written
agreement. On breach of contract by one party the other
has the right to sue for compensation and may also have

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the right to treat the contact as repudiated and so cancel


it. If 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 English common law if the contract is
terminated in accordance with its terms.

4.1.2

EU Law

On 1 January 1994, the Agency Regulations came into force to implement the EC
Directive. The Directive was an attempt by the EU to harmonise the laws of the
Member States relating to self-employed commercial agents. This brought about
substantial changes to English agency law. The most important change that
resulted from the EC Directive was the right of the agent to claim compensation on
termination of the agreement. This was completely new to English law, but
reflected the practice of most of continental Europe. The terms of the Agency
Regulations are implied in to all commercial agency agreements within the EEA, ie
the EU and Iceland, Liechtenstein and Norway, both written and oral, formal and
informal.
Who do the Agency Regulations apply to?
The Agency Regulations apply to self-employed sales agents.
The Agency Regulations do not apply to:
Marketing agents.
Agents for the supply of services.
Unpaid agents and agents on commodity exchanges.
Agency agreements regulating the activities of principals and agents
outside the EEA.
The provisions of the Agency Regulations
The Agency Regulations introduced a number of detailed provisions, which
automatically apply to all agency contracts within its scope, regardless of their
terms. There are also several optional provisions, which the parties may agree to
include. The effect of the Agency Regulations are that agency agreements within
the EEA are more regulated, and the parties have less freedom to negotiate their
terms than previously. The most significant areas of regulation are the payment of

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commission and a sum on termination. These, together with the other main
articles of the Agency Regulations, are considered below:
The Duties of the
Agent

Article 3 provides that the duties of the agent are:


a general duty to look after his principal's interest;

to act "dutifully and in good faith";

a positive duty to make 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.

The Duties of the


Principal

Article 4 provides that the duties of the principal are:

to provide the agent with the necessary


documentation and information for the
performance of the agency contract;

to notify the agent as soon as it is anticipated that


the volume of business will be significantly lower
than the agent could normally have expected; and

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to inform the agent of his acceptance, refusal


and any non-execution 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.

Remuneration

Articles 6-12 provides 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 AND


transactions concluded with third parties who the
agent has previously acquired as a customer
(Article 7.1);

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


entrusted or exclusive designated area or with the
agent's entrusted or exclusive designated group of
customers whether negotiated by him or not (Article
7.2).

N.B. This is an improvement on the previous English


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 8);

be paid by apportionment between incoming and


outgoing agents when it is "equitable because of
the circumstances" (Article 9);

become due when the principal or the third party


has or should have executed the transaction (Article
10);

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


circumstances for which the principal is not to
blame (Article 11).

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 provided by the


principal who shall also make all necessary
information and books available for the purposes of
checking (Article 12);

N.B. Articles 6, 10, 11 and 12 are mandatory. Articles 7,


8 and 9 are optional.

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The creation of
agency
agreements

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Articles 13 and 14 provided for the creation of agency


agreements, and entitle each party to receive a signed
contract. They also provide that after any fixed period, the
contract will become indefinite if the parties continue to
perform it.

Notice for
termination

Article 15 provides 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 subsequent years. If the
parties do not agree otherwise, the notice must expire at
the end of a calendar month. (Article 15 (5))

National breach
of

The Agency Regulations do not affect existing English


laws relating to immediate termination where one party
fails to carry out its obligations (Article 16).

contract

Non-competition
clauses

Article 20 provides that a non-competition clause cannot


be valid for more than two years after termination of an
agency contract. Such a clause must be concluded in
writing, and relate to the territory or group of customers
allocated to the agent and to the kind of goods covered by
the contract.

N.B. The EC competition laws impose a shorter period of


one year after termination of the agreement in order to
avoid infringement of its provisions.

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Compensation and indemnity payments


(a) Compensation or indemnity?
Under the Directive, Member States must legislate for an agent to receive
either a lump sum indemnity (Article 17(2)) or compensation for damage on
termination of the contract (Article 17(3). This was a new concept to some
Members States' laws including Great Britain. The Agency Regulations applied
to the UK, however, give parties the option to decide whether they want
compensation or an indemnity payment to be made on termination of the
agency agreement. If no provision is made, compensation will apply. On
termination of an agreement the principal must give the appropriate notice
period for termination in addition to any payment for compensation or
indemnity
Under the law of all other EEA countries except France and Ireland payments
arise. In France, indemnity payments arise. Ireland has not implemented
Article 17 and therefore agents do not have either a right to compensation or
an indemnity. Under the Irish common law, an agent may have a claim for
compensation.
(b) Compensation payment
The directive gives two examples of where compensation may arise:
Deprivation of any commission which proper performance of the
agency contract would have earned, and
Substantial benefit (in terms of goodwill) to the principal or
un-recovered expenses incurred by the agent on the principal's encouragement.
The Agency Regulations do not set out how compensation is to be calculated.
The court has recently held that on termination of an agency agreement the
commercial agent is entitled to compensation assessed on the basis of any
damage actually suffered as a result of the termination (ie the loss of the
agency business), rather than the right to receive a payment which is fair and
reasonable. This is a move away from the two years commission approach.
A compensation payment will be due notwithstanding the agent giving notice
if the termination is justified:
by circumstances attributable to the principal; or

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


consequences of which he cannot reasonably be required to
continue his activities.
(c)

Indemnity payments

The Agency Regulations 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 existing customers; or
the introduction of new customers,
substantial continuing benefits to the principal; and
that it is equitable in all circumstances and in view of the commission
the agent has lost
The method of calculating such a payment is to take the average annual
remuneration calculated over the preceding 5 years (or shorter period if the
agent has not been engaged for 5 years), and is subject to a maximum of one
year's remuneration.
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 gives notice terminating a fixed term contract i.e. a
break clause;
when a fixed term contract comes to an end by effluxion of time.
The grant of an indemnity does not prevent the agent claiming compensation.
(d) Indemnity and compensation payment exceptions
An indemnity or compensatory payment is not payable where the agent:
is guilty of repudiatory breach; or
has given contractual notice; or
has assigned the benefits and obligations of the contract to a third party
with the principal's consent.
It is however 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


If the agent intends to pursue his entitlement to indemnity or compensation for
damages, he must notify the principal of this intention within one year
following termination of the agency contract.
4.1

COMPETITION LAWS

4.2.1

UK Competition Law

The Competition Act 1998 (the "Act") which came into force in March 2000,
introduced a new regulatory regime within the UK. The Act prohibits the same
agreements as the provisions of the EC competition laws namely, agreements
which have an effect on trade within the UK or which have as their object or effect,
the prevention, restriction or distortion of competition within the UK.
Agency agreements are generally exempt from the provisions of the Act as they fall
within the 'vertical agreement' exclusion, i.e. agreements between businesses
operating at different levels of the chain, such as the principal and agent. However,
agency agreements cannot benefit from this exclusion if they contain provisions,
which directly or indirectly fix prices, impose minimum or resale prices or share
markets.
Notwithstanding if an agreement benefits from a European Commission block
exemption (see paragraph 4.2.2 below), it will automatically be exempt form the
provisions of the Act. Therefore you should seek to ensure that your agreement
benefits from the European Commission's block exemption in order to avoid the
burden of scrutinising a large number of agreements for compliance with the Act.
4.2.2

European Competition Law

The basic EU prohibitions on anti-competitive practices are contained in Articles


81 and 82 of the Treaty of Rome:
Articles 81(1) prohibits agreements or concerted practices between
undertakings which may affect trade between Member States and which
have as their objective or effect the prevention, restriction or distortion of
competition within the Common Market.
Article 82 prohibits the abuse by one or more undertakings of a dominant
position within the Common Market or a substantial part of it insofar as it
may effect trade between Member States.
Agency agreements are prima facie anti-competitive and infringe Article 81(1).

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However, on 1 June 2000, new Commission Regulations were brought into force
on the application of Article 81 to categories of vertical agreements and concerted
practices (the "BER"). The BER gives exemption from Article 81(1) to a wide
range of "vertical agreements" including agency agreements. In order to benefit
from the exemption of Article 81(1).
(1)
Non-Competitive
Parties

The parties must not be competitors or if they are competing


parties, the agent must have a total annual turnover not
exceeding EUR 100 million.

(2) Market Share

Having satisfied the "competitor" requirement, the next point


to consider is the market share of the relevant party.
Generally, the market share held by the supplier must not
exceed 30% of the relevant market on which it sells the
contract goods or services. If the agency agreement
contains "exclusive supply obligations", the market share
held by the agent must not exceed 30%. "Exclusive supply
obligations" are defined as any direct or indirect obligation
causing the principal to sell the goods or services only to
one buyer inside the Community for a specific use or for
resale.

(3) Non-Compete
Obligations

The non-compete obligations must not exceed 5


years; and

The non-compete obligations cannot continue for


more than one year after termination of the
agreement.

POINTS TO NOTE
(1)

TO WHOM DO THE COMMISSION REGULATIONS APPLY?

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The Commission has issued Guidelines as to how to interpret and apply the new
Commission Regulations in relation to agency agreements and Art 81(1). The
Guidelines state that the new Commission Regulation will apply:
To sales agency agreements where the agent bears some of the financial or
commercial risk in relation to the activities for which it has been appointed agent
by the principal. The agent will be considered to bear a risk where, for example he
has to:
1. contribute to the costs related to the supply/purchase of goods or
services including transport costs;
2. make an investment in sales promotion such as a contribution to
advertising budgets;
3. keep its own stocks of products so that it cannot, for example, return unsold
goods to the principal without charge;
4. create and operate a sales and after-sales service or a warranty service;
5. make market specific investment in equipment, premises or people;
6. take responsibility to third parties for harm caused by the product sold
(product liability); and
7. take responsibility for customers' non-payment of goods.
An agency agreement may also fall within the scope of Article 81(1), even if the
principal bears all the risks, where it facilitates collusion. This may occur, for
example, when a number of principals use the same agents while collectively
excluding others from using these agents. It may also arise when principals use
agents to collude on marketing strategy or to exchange sensitive marketing
information between the principals.
(2)

ANTI-COMPETITIVE OBJECTS

In any event, the Commission Regulations shall not exempt agreements which
have certain anti-competitive objects. These objects are drafted in general terms
and appear largely to cover restrictions found in distribution agreements. It
remains to be seen whether the wording will be interpreted and strained to apply to
agency agreements.
(3)

ANTI-COMPETITIVE RESTRICTIONS

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


principal/agent relationship, or the circumstances set out below, will generally not
be considered to be anti-competitive:
Limits on the agent's territory;

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Limits on the customers to whom the agent may sell;


The price at which the agent must sell or purchase goods or services; and
Exclusive agency provisions during the term of the agreement.
Provisions restricting the agent from acting on behalf of competing principals
during and after the term of the agreement concern inter-brand competition and
may infringe Article 81(1) if they lead to foreclosure on the relevant market where
the goods or services are sold or purchased.
4.3

PRACTICAL POINTS FOR AGENTS AND PRINCIPALS IN THE EU

As a result of the changes that have occurred in agency law in the EU, agents and
principals should be taking certain practical steps;
4.3.1

Review contracts

Review all your current agency, representative and distributions agreements to


ascertain whether they are actually agency agreements, and if so, consider:
whether they are governed by English law, the law of another country
or the law of a country outside the EEA;
the terms of those agreements and the changes that have been brought
about to those agreements if they are governed by the law of an EEA
country whose law has been changed by the Directive;
the cost of and/or benefit and consequences of termination of any existing
agency agreements including the amount of any likely indemnity or damage
payment that may be received and/or paid;
whether they are in breach of the Competition laws.
4.3.2

Re-negotiate contracts

Redraft and/or renegotiate existing agency agreements to take into account the
commercial effect of the changes in agency law.
5.

COMMON TERMS IN AGENCY AGREEMENTS

N.B. Where the UK Agency Regulations apply to an agreement (where one party
is based in the UK and the other is based in the EEA), the following provisions
marked with ** cannot be excluded.
5.1

Parties

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The clause sets out:


The identity of the parties,
The identity of any party giving a guarantee on the obligations of the
distributor.
5.2

Interpretation

This clause sets out:


The Territory covered by the agreement.
The products which are the subject of the agreement.
If there are any trademarks involved.
5.3

Appointment of agent

The clause sets out:


The scope of the appointment i.e. whether the agency is exclusive/sole
/non-exclusive.
The non-compete obligations on the Agent i.e. not to deal with competing
products/not to actively market outside the Territory.
N.B. There are certain conditions to be adhered to for the non-compete obligations
to be valid where the agreement is subject to the Agency Regulations (see
paragraph 4.1.2 above) and the EC Competition law Regulations (see paragraph
4.2.2 above).
5.4

The agent's duties

This clause sets out that the agent shall:


Act dutifully and in good faith towards the principal. **
Look after his principal's interest and make proper efforts to negotiate such
business as his principal has entrusted to him.**
Promote sales.
Attend training sessions and exhibitions as required by the principal.
Refer to all enquiries from outside the Territory to the principal.
Obtain all necessary licences and permits required.
Comply with local laws.
Maintain a customer list and a potential customer list to provide to the
principal on request.
Pass back to the principal all necessary information such as market
information and provide reports and returns.**

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Promptly notify the principal of any complaints.


Insure the Product.
Maintain sufficient qualified staff.
Market the Product using material authorised by the principal.
Indicate in dealings that the agent acts as agent for the principal.
Not bind the supplier to give credit.
Not give unauthorised warranties or representations.
Not modify the principal's packaging.
5.5

Sale and stocks of the product

This clause sets out:


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 level of stock to be held by the agent.
The principal is not obliged to accept any order.
The agent to carry out credit risk evaluation of customers.
5.6

Intellectual 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.
Cease to use the intellectual property rights on termination.
5.7

The principal's rights and duties

This clause sets out that the principal shall:


Amend range of Products on notice.
Provide the agent with the necessary documentation and
information 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 packaging.**
Provide advice and assistance.
Supply stocks as agreed by the parties.
Honour contracts for sale arranged by the agent.
Deal with after sales enquiries.

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Comply with packaging and manufacturing legal requirements.


Refer to the agent enquiries from within the Territory, where practicable.
Notify the agent as soon as it is anticipated that the volume of business will
be significantly lower than the agent could normally have expected.**
Inform the agent of his acceptance, refusal and any non-execution of the
business the agent has arranged.**
5.8

Financial Provisions

This clause sets out:


The basis of commission/remuneration. N.B. There are certain provisions
that are mandatory in this respect if the agreement is subject to the Agency
Regulations (see paragraph 4.1.2 above).
The time, manner, currency and place of payment.
Withholding tax requirements.
That the agent shall keep accounts and records and allow the principal to
inspect and audit.
5.9

Confidentiality

This clause sets out:


The obligation of confidentiality upon the agent in respect of know-how
disclosed.
The obligations to continue after the termination of the agreement.
5.10

Force Majeure

This clause sets out that neither the principal nor the agent shall be liable for any
failure to perform their obligations in the event of force Majeure.
5.11

Duration and termination

This clause sets out:


Any initial probation period.
The duration of the agreement.
The right to terminate by notice and the notice period. N.B. there are
minimum notice periods for agreements subject to the Agency Regulations
(see paragraph 4.1.2 above).
5.12

Consequences of termination

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This clause sets out:


The commission entitlements of the agent on termination.
The obligations of the agent on termination.
The rights and liabilities of the parties to survive termination.
The return of promotional literature, sample and any stock.
Indemnity or compensation under the Agency Regulations.
5.13

Nature of agreement

This clause sets out:


Whole agreement provision.
No joint venture or partnership.
5.14

Proper law and whether arbitration

This clause sets out the parties' choice of governing law and any arbitration
provisions.
5.15

Notices and service

This clause sets out the address for service of notices.


Further Information
If you require any further information or assistance, please contact Paul Morgan or
Debbie Turner on +44 (0)1372 461411.
Filed under Company Commercial, Commercial Agreements

The data contained within this document is for general information only. No
responsibility can be accepted for inaccuracies. Readers are also advised that the
law and practice may change from time to time. This document is provided for
information purposes only and does not constitute legal advice. Professional legal
advice should be obtained before taking or refraining from any action as a result of
the contents of this document.

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If you have an enquiry about our services, people or seminars please email us at
advice@dixcartlegal.com

12/6/2015 4:03 AM

A Guide to Agency Agreements | Dixcart Legal - Lawyers for Business

http://www.dixcartlegal.com/articles/2006/04/07/a-guide-to-agency-agre...

Call us
Alternatively, to speak with us directly call us on +44 (0)1372 461411. Lines are open from
Monday to Friday 9am to 6pm (excluding UK bank holidays).

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Legal. All rights
reserved.
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