Most businesses (and particularly those that wish to trade nationally or internationally) use intermediaries in their dealings with the outside world. ‘Agents’ can provide businesses with, amongst other things, specialist knowledge of a particular market, commodity or area and an immediate presence for negotiating contracts in any geographical location. They can also be used to find and introduce customers to the business and to purchase goods or services on behalf of the business.
The purpose of an agency agreement is to set out the terms and conditions of the relationship between the business which wants to sell stuff (the Principal) and the intermediary who agrees to sell it on their behalf (the Agent). When a sale is made by the Agent, the law deems that a contract is formed between the Principal and the end customer.
What is the difference between an Agency Agreement and a Distribution Agreement?
A Distribution Agreement covers the situation in which a supplier sells goods to a distributor who then, as a separate transaction, sells the goods to his or her customer. There is no contract of sale between the supplier and the ultimate purchaser of the goods.
Key clauses in an Agency Agreement should include:
- A detailed breakdown of the duties and responsibilities of both parties
- The geographic region in which the Agent will operate
- Whether the Agent will have exclusive or non-exclusive rights
- The rate, method and timing of payments
- Any non-compete agreement
- Protection of trade secrets and confidential information
- Level of authority to make commitments on behalf on of each other
- The duration of the agreement, termination and how breaches of the agreement are handled
It is important that the Principal and Agent have clear written commercial terms agreed so that both parties know what to expect from their deal. Many relationships between suppliers (Principals) and Agents have gone wrong because they do not have this simple document in place. They have often relied on orally agreed terms or negotiations which have proved costly in terms of lost sales, commission and subsequent legal action to define and enforce the commercial terms. An agency agreement will make your relationship clear, giving both sides confidence in making the most of the opportunity.
European Directive and UK Commercial Agents Regulations 1993
Agency law is one of the areas where European legislation has had significant impact, and most of it is in favour of the Agent. An EC Directive was introduced to harmonise the law relating to commercial agents across Europe. In the UK, the EC Directive was implemented by the Commercial Agents Regulations 1993. They contain important provisions, which the Principal or Agent ignores at their peril, including:
- The right of the agent to have a written agreement
- The entitlement of the agent to a reasonable commission in the absence of any fee or percentage agreed in advance
- When commission is payable and on what transactions
- Minimum periods for notice of termination of indefinite agency agreements
- The right of the agent to either “compensation” or an “indemnity” on termination
The most important change which resulted from the Directive and the Regulations was the right of the agent to claim compensation or indemnity on termination of the agreement. Many Principals have been caught out here and many Agents have been unaware of their rights.
As a Principal it is important to structure your agency agreement to take into consideration the Commercial Agents Regulations 1993 or any dispute could be very costly in terms of compensation.
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