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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.
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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.
Marketing
Agents
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TAX ISSUES
4.1
4.1
Agency Laws;
4.2
4.3
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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
Termination
for breach
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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
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Remuneration
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The creation of
agency
agreements
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Notice for
termination
National breach
of
contract
Non-competition
clauses
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Indemnity payments
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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
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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
(3) Non-Compete
Obligations
POINTS TO NOTE
(1)
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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
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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
Re-negotiate contracts
Redraft and/or renegotiate existing agency agreements to take into account the
commercial effect of the changes in agency law.
5.
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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Interpretation
Appointment of agent
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Intellectual property
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Financial Provisions
Confidentiality
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
Consequences of termination
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Nature of agreement
This clause sets out the parties' choice of governing law and any arbitration
provisions.
5.15
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.
Email us
If you have an enquiry about our services, people or seminars please email us at
advice@dixcartlegal.com
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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).
2015 Dixcart
Legal. All rights
reserved.
Dixcart Legal is the trading name of Dixcart Legal Limited. Registered in England and Wales with
Company Number: 08415391. Registered Office: Hillbrow House, Hillbrow Road, Esher, Surrey,
KT10 9NW. VAT Registration Number: GB 720 6860 44. Dixcart Legal Limited is authorised and
regulated by the Solicitors Regulation Authority (No. 612167).
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