Agency and Commercial Agents Regulations

BUSINESS INFORMATION SERVICES

This guide was written on behalf of Invest NI by Cleaver Fulton Rankin Solicitors
1 What is an Agent?

An agent is a person instructed by another person or company to enter into legal relationships with third parties, usually customers, on the instructing partys behalf. The person or company giving the instruction is called the principal. For example, ABC Limited (the principal) appoints Joe (the agent) to sell wine to customers on the companys behalf. Provided Joe acts within the terms of his agency agreement, the company will be directly responsible to customers to whom Joe sells the products. The customer will have no legal relationship with Joe, as he is merely acting on behalf of the company. Joe would usually be paid by commission.
2 How does an Agent differ from a Distributor?
If ABC Limited had appointed Joe as a distributor, the company sells the products to Joe, and Joe sells the products on to his own customers. Joe, and not the company, would be directly responsible to the customers to whom he sold the products. Joe is not acting on behalf of the company, therefore there would be a legal relationship between the company and Joe, and a separate legal relationship between Joe and the customers. The customers would have no legal relationship with the company. The advantages and disadvantages of using agents rather than distributors are as follows: 3.1 Advantages The principal has greater control over the terms of sale and marketing. The principal can have greater control over the choice of customers and retains their relationship with them. Commission paid to an agent is generally lower than the margin earned by a distributor. Agency agreements may be cheaper to terminate if the Commercial Agents Regulations do not apply (see below). 3.2 Disadvantages The agent has a right to lump sum payments on termination of the agreement, regardless of his own breach of contract. A principal can be regarded as trading in a territory if he has an agent there, which raises tax issues. An agency agreement is more expensive to terminate if the Regulations do apply. The principal bears the financial risk (though this may be an advantage in some situations).

3 Advantages & Disadvantages of Using Agents

A principal may wish to appoint an agent or distributor for many reasons, including: Taking advantage of the agent or distributors local knowledge and established trade connections. Saving the cost of establishing his own selling operation.

FOR FURTHER INFORMATION: CONTACT KATHY McCONVILLE, BUSINESS INFORMATION SERVICES T: 028 9069 8127 E: kathy.mcconville@investni.com

Agency And Commercial Agents Regulations contd.

4 Different Types of Agency
4.1 Sales The agent can sell the principals goods and has authority to negotiate and enter into contracts on the principals behalf. 4.2 Marketing The agent has authority to market the principals goods and can search for new business, but cannot enter into a contract of sale acting on the principals behalf. 4.3 Del Credere The agent guarantees the contractual performance of a customer in exchange for increased commission. 4.4 Hybrid agreement Often a mixture of agency and distributorships are used. the agent is a partner lawfully authorised to
enter into commitments binding on other partners,
since he is not a commercial agent. However,
partnerships may be commercial agents;
commercial agency is secondary to the agents
usual business;
the parties have agreed that the agency
contract is to be governed by the law of
another Member State;
no activity is to be performed by the agent within
any country in the European Economic Area (EEA).
They do NOT apply where: the arrangement is in substance (not necessarily
in name) a distributorship;
the agreement is solely for the supply of services (e.g. travel agent); the agent is an officer of a company; the agent is unpaid;

5 Commercial Agents Regulations (Summary)

The Regulations implemented the EC Directive on Commercial Agents (Council Directive 86/653) and came into force on 13th January 1994. 5.1 The Commercial Agents (Council Directive) Regulations (Northern Ireland) 1993 The agent: has a right to a written agreement; is entitled to reasonable commission in the absence of a fee or percentage agreed in advance; has a right to compensation or an indemnity on termination. 5.2 The Commercial Agents (Council Directive) (Amendment) Regulations (Northern Ireland) 1999. If the parties agree in advance that the agency agreement should be governed by the law of a particular Member State, the law of that Member State will apply. 5.3 When do the Regulations apply? The Regulations apply to all oral or written agreements concerning agents employed on permanent or probationary terms. The agreement must have existed on 13th January 1994 or have been created after that date. They apply to commercial agents who: market goods; are self-employed or operate as limited
companies or partnerships; and
are principally concerned with agency.

6 Key Provisions of an Agency Agreement

This section explores the key provisions you would expect to find in a commercial agents agreement. 6.1 Appointment and Authority This clause sets out the appointment of agent by the principal for the sale of goods in a particular territory. It is important that the agreement outlines carefully what the agent has authority to do, and especially that it specifies whether they are a sales or a marketing agent (as explained above). 6.2 Customers, Territory and Exclusivity Generally an agency agreement will set out a geographic territory e.g. Northern Ireland, Scotland, in which the agent should operate or it will specify that the agent is only allowed to do business with a particular type of customer. An agent can have exclusive, non-exclusive or sole rights to that territory: Exclusive rights prohibit the principal from
selling in the agents territory and from
employing other agents or distributors there.
The principal can retain particular rights, e.g. to
make direct contracts with specific customers in
the territory.
Sole rights prohibit the principal from
appointing a different agent or distributor to
the territory. However they do not ban the
principal from looking for contracts in the
territory.
Non-exclusive rights allow the principal to
employ other agents or to look for new sales in
the territory themselves.
The agency agreement must define what rights the agent is to have.

Agency and Commercial Agents Regulations contd.

7 Products
Generally a schedule outlines the goods and services that the principal is offering. The products should be set out in a list which can be altered, especially when a new product is launched or an old one withdrawn. A principal should be able to alter the list when he wants, but the agent may be allowed to have an input into this decision. The description of the product should clarify whether any extra parts or consumables are included, e.g. if batteries are included. There are other more specific duties that are often imposed on an agent, for example that he must: Account to the principal for all property and
money under his control, and disclose all
material facts to the principal.
Create and continue an efficient sales team. Notify to the principal of and adhere to all
local laws.
Obtain all required licences and consents for
the products in the territory.
Make it known to whoever he deals with that
he is the agent of the principal to the extent
permitted under the agreement.
Be aware of competing products in its territory
and is required to inform the principal of market
developments.
Not delegate his authority to someone else.

8 Restrictions
The principal can place limitations on the agent who will generally agree not to look for contracts outside of his geographical territory. It is likely that the agent will agree not to be interested in the production of rival goods in the territory.

11 Principals Duties 9 Duration

The agreement must outline the duration of the appointment. The duration of the agreement governs the length of notice needed to terminate it. There are three typical duration periods: A fixed term which provides for termination on notice at the end of the term. A fixed term needing positive extension. To pay back all expenses. An undetermined term which can be terminated on notice from the start. Where the Commercial Agents (Council Directive) Regulations 1993 apply then certain procedures must be followed. If the agreement is for an indefinite period of time then either party can terminate it on notice. The agreement must state whether the notice is to run out at the end of a calendar month or not. The Regulations impose certain notice periods: one month for the first year, two months for the second year and three months for three years and all following years. If performance of a fixed term agreement continues after its determined expiration then the Regulations enforce the same notice periods as set out above. To indemnify the agent against all liabilities
arising from the performance of authorised
acts on behalf of the principal.
The following duties are imposed by the 1993 Regulations: To give the agent important information about
the market, the territory and the products that
the agent must sell.
To inform the agent of any expected fall
in demand for the goods in his territory.
To tell the agent of his intention to either refuse
or accept a commercial transaction that the
agent has negotiated.
The following are additional duties commonly imposed by the Agency Agreement: To perform contracts set up between third
parties and the principal.
To carry out adequate and thorough checks
on the products.
To provide advertising literature,
examples of products and a price list.
To repay the agent any expenses he has incurred. In general a principal will retain the right to change the product range or the prices that will be charged as and when he chooses. It is likely that the principal will retain the freedom to look at the agents books. The relationship between the principal and the agent is a fiduciary one meaning it is built on trust so the principal must act dutifully and in good faith towards the agent. The following duties are imposed on the principal by common law: To give proper and fair payment (unless it was
conditional on a future event that did not occur).

10 Agents Duties
Both the common law and the 1993 Regulations impose duties on the agent. The agreement should outline the agents duties in detail. The agent must diligently and faithfully serve the principal and must work in his interests. The agent must also use his best endeavours to negotiate and conclude transactions. The agreement will impose the duty to make efforts to market and promote the products in the designated territory to current and prospective customers.

Agency And Commercial Agents Regulations contd.

12 Samples, Stock and Spares
The agreement should include a clause relating to the provision of samples of products, stock and spare parts. This clause should set out whether the principal will provide these items and should determine who is their owner (normally the principal retains ownership). The agreement should state who is responsible for covering the cost of transport and storage of the samples, stock and spares. The agreement should decide whether the stock should be returned on termination of the agreement. The order of the third party reached the principal or the agent before the agency contract was terminated. Commission becomes due when one of the following occurs: The principal has executed (completed)
the transaction.
The principal should according to his agreement with a third party have executed the transaction. A third party has executed the transaction.

15 Accounting Information 13 Sale of Products

The agent must follow the terms and conditions under which he is authorised to act for the principal. He is obliged to make the customer aware of those conditions and must not act outside of those boundaries except with the principals prior consent. In a marketing agency the duty of the agent is limited to alerting the customer to the terms and conditions that are imposed over it. A specific clause will be required to prohibit the agent from entering into any contracts on the principals behalf. The agreement should include provisions that deal with the auditing of statements of sales and commission payable. It is essential that the principal provides the agent with a statement of the commission due and the methods used when calculating the amounts. The agent should be given access to all information and records available to the principal needed to assess the commission due. There is no obligation imposed on the agent to keep such information confidential but a good agreement should include a confidentiality clause.

14 Commission
It is necessary that the level of commission is determined by the agreement. Usually the level is set at a percentage of the net invoice price of the products that the agent has sold on the principals behalf. Alternatively it can be a percentage of the amount of cash received by the principal that sales have generated. An agreement can make provision for a sliding scale of commission to be introduced and for there to be a fixed minimum amount set. If no level of commission is agreed upon then the Regulations set out that an agency should receive an amount that is normally paid to agents in the same geographical territory or, if no such custom exists, a reasonable amount. The agent is entitled to commission on transactions concluded in the period covered by the agreement if it was concluded: As a result of the agents action; or With a third party previously acquired as a customer by the agent for a transaction of the same kind. The agent is entitled to compensation on transactions concluded after the agency arrangement has terminated if: The transaction is mainly attributable to the agents efforts during the agreement and was entered into within a reasonable period after the termination; or

16 Intellectual Property
If the principal has intellectual property he wishes to protect (e.g. trademarks, logo, patent) then adequate protection should be arranged. If the principal is exporting goods to a foreign country it may be wise to register his intellectual property in that country. It may also be prudent to include a provision in the agreement that requires the agent to inform the principal of infringements on its intellectual property rights or on the intellectual property rights of a third party within the area. Generally the agent will be prohibited from acting in a manner inconsistent with the principals intellectual property rights and from doing any act that may invalidate these rights. The agreement should regulate the use by the agent of the principals intellectual property rights, such as a requirement of consent. An example of this would be the use by the agent of the principals trademarks on stationery. The agreement should prevent the agent from registering any intellectual property rights over the principals goods.

17 Confidentiality
The agreement must contain confidentiality clauses, however if the information is especially sensitive then more detailed individual contracts may also be required from the agents employees.

Agency And Commercial Agents Regulations contd.

18 Termination
Minimum notice periods are enforced by the 1993 Regulations and are discussed above. To protect commercial agents the Regulations have introduced rights to compensation for the agent when the agreement is terminated. These are to be paid whether or not the principal is in breach of contract for terminating the agreement. The Regulations also state when an agent is able to recover the indemnity on discontinuance of the agreement. The necessary conditions include: The creation of a new customer base by the
agent or contribution to a large increase in the
principals business with current customers.
The principal must benefit from the customer
base that the agent has created for it.
Indemnity payments are equitable in all the
circumstances and especially in respect of
the commission lost by the agent on the
principals business.

19 Compensation: Principles and Calculation

The Regulations state that the agent must be compensated for any damage suffered due to the termination of the relationship between it and its principal, in particular circumstances. For example where the commercial agent does not receive commission which it would have received if the agreement were followed, yet the principal receives significant benefits owing to the agents work. Another example is where an agent has paid the costs for the execution of the agency agreement, following the advice of the principal and has failed to be reimbursed. The Regulations do not specify how the compensation is to be calculated or if there is a maximum limit that can be imposed on the amount of compensation received. However some limited guidance is provided and attention should be paid to the following factors: The levels of commission paid over a defined period in the past. The costs that the agency would have had to pay so as to be eligible to receive commission in the future (deducted). The duration of the agreement if it had not been terminated. The effect of any other conditions that the agent and principal were aware of at the time of termination which might influence the relationship in the future (e.g. expansion). The financial state of the principal. The conduct of the agent.

21 Time Limit
If a year has passed from the date of termination of the agreement and the agent has not informed the principal of its intention to follow up a claim then the indemnity becomes time barred and cannot be relied on.

22 Restrictive Covenants
There is no requirement for restrictive covenants to exist however it would be wise to include them in the agreement. An example of a restrictive covenant would be a restriction that is placed on the kind of goods being sold or the class of customers that the agency can sell to. The covenants cannot last for more than two years from termination, they must be concluded in writing and relate to the geographical area of the agents usual customers, and they must be reasonable from the point of view of both parties.

23 Assignment
It is likely that the principal will wish to retain the right to assign, i.e. to transfer the agreement to another person or company, but will wish to ensure that the agreement cannot be assigned by the agent.

24 Written Statements of Terms

The United Kingdom government decided that it was not necessary for all agency agreements that fell within the terms set out in the Regulations to be in writing. Instead they decided to give either party the right to a signed document from the other party that lays down the terms of the agency agreement. This will include later variations and is impossible to be contracted out of. There is no obligation that for the terms of the agreement to be enforceable that they must be in writing. It would be prudent however to formally write the terms for evidential purposes.

20 Indemnity: Principles and Calculation

If an indemnity is to apply instead of a compensation clause the agency agreement must make this clear. Here indemnity means a way to calculate how much the agent must be paid on termination of the agreement. The 1993 Regulations set the maximum amount for the indemnity as the value of a years commission.

This guide is provided to give an overview of the principal areas when considering Agency and Commercial Agents Regulations. Detailed legal advice should always be sought.
FOR FURTHER INFORMATION: CONTACT KATHY McCONVILLE, BUSINESS INFORMATION SERVICES E: kathy.mcconville@investni.com T: 028 9069 8127