The regulations define a commercial agent as “a self-employed intermediary with continuing authority to negotiate the sale or purchase of goods on behalf of their principal, or to negotiate and complete such transactions on behalf of and in the name of that principal.” When determining whether your proposed agent qualifies as a commercial agent, a number of distinct elements of this definition must be taken into consideration. Be mindful that if there is any ambiguity or difference between how the contract is written and how it operates in practise, courts will typically interpret the provisions in favour of the agent. In this article, What Is Commercial Agency?, we take a look at the process and mechanism involved.
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Common law of agency
The term “agency” encompasses a vast array of business relationships.
Before legally binding agreements are reached, it is crucial that such a description not be taken at face value, and the true nature of any such relationship should be thoroughly examined. In the event of a dispute, the courts will place little significance on the labelling of a contract, instead focusing on the relationship between the parties and what that relationship implies.
When an agency relationship is established, your company, as the “principal”, will have certain rights and responsibilities of which you must be aware. There will also be protections for the agent, such as those enshrined in the Commercial Agents Regulations of 1993, which apply in the United Kingdom. It is essential that your lawyer evaluates any agency relationship at the outset to determine whether these regulations apply.
In the event that the Commercial Agents Regulations are found to apply, various terms, including provisions governing the agent’s compensation and your ability to terminate the relationship, will be implied into your contract.
The regulations also impose duties on agents, including the requirement that they act in good faith and watch out for your best interests.
It is essential to note that the Commercial Agents Regulations only apply to a limited number of agent types and primarily target independent intermediaries. The common law of agency pertains to a much broader field, and additional counsel will be necessary prior to the formation of such a relationship.
Clearly, this type of business relationship is intricate, and the terms of any agreement should be negotiated and documented by a lawyer prior to the agent beginning work for your company.
Is an agent protected under the act?
In the majority of cases, it is clear that an agent is protected by the Commercial Agents Regulations as a commercial agent. In other circumstances, the distinction is less clear, particularly if the agent is selling products that may not be considered goods, or a combination of goods and services.
There are occasionally jurisdictional issues that require careful consideration in agency contracts. This could happen if an agent conducts agency activities outside the United Kingdom or if the parties choose a law other than English law to govern the agency agreement.
Mandatory rights and obligations
Both the agent and the principal are subject to obligations and have certain mandatory rights.
The principal must:
- Act with diligence and good faith
- Provide documentation for the products in question
- Notify the agent if the quantity of products will be less than anticipated
- Inform the agent of the status of any transactions that have been secured
- The agent must protect the principal’s interests
- Act with diligence and good faith
- Make a commensurate effort to negotiate and, when necessary, conclude transactions
- Share all pertinent information with the principal
- Comply with the principal’s reasonable instructions
How is payment governed?
Generally, pay is governed by the terms of an agency agreement; however, the Regulations impose default provisions for the calculation of remuneration in the absence of an express agreement.
What are the benefits of agency?
A distributor is essentially a reseller. An agency relationship may be preferable to that of distributor or reseller. The advantages include:
Greater influence. If the supplier desires greater control over its product sales terms.
Pricing issues. Competition laws of the United Kingdom, the European Union, and the overwhelming majority of nations prohibit the imposition of resale price maintenance on distributors. However, the principal can legitimately (and almost always) retain the right to establish its own prices when selling through an agent.
Capacity to choose clients. This may be relevant if the supplier wishes to restrict the agent’s business relationships. Most jurisdictions limit the extent to which a supplier may restrict its distributors’ freedom of choice of customers, whereas it is fundamental to agency that the principal retain the freedom to choose with whom it conducts business and with whom it wishes the agent to conduct business. In general, distribution presents more competition law issues than agency.
More engagement with consumers. Where direct supplier-to-customer contact is required (e.g., when custom design work or highly specialised after-sales service can only be provided effectively by the product’s manufacturer or supplier).
Enhanced marketing supervision. Where strict control over marketing methods is required (for example, when brand image is a key factor). However, many distribution agreements include precise instructions on how to manage the distributorship (especially with regard to branding presentation) as schedules, booklets, or website pages incorporated by reference into the contract, so that to the consumer, the distributor may appear to be part of the manufacturer’s group. In order to maintain marketing and service control, it is also common for manufacturers to designate personnel to distributors.
Financial risk. The provider may wish to retain the financial risk associated with stock (normally, consignment stock remains the principal’s property while held by an agent). If the supplier is unable to find a distributor to whom it can transmit this risk, it might be forced to settle for an agent.
Better margins. The commission paid to an agent is typically lower than the profit margin garnered by a distributor (due to the distributor’s greater financial risk). In practical terms, agency will likely be less expensive than distribution for the supplier. In instances where the Regulations do not apply, the supplier may be able to terminate an agency relationship at a lower cost than a distributorship if things do not work out. Where the Regulations apply, the opposite is presumably true.
Drawbacks of agency
The following are among the disadvantages of an agency relationship:
Upon termination, the right to severance pay or indemnification. In a number of countries, including the United Kingdom (under the Regulations), agents have the right to lump-sum payments upon termination of agency agreements, regardless of any contract breach by the agent. This is not the case for British distribution companies. In other countries, especially those of the Gulf Cooperation Council, distributors and agents are frequently protected by legal compensation rights.
There are tax consequences. If a principal has an agent in a territory, it may be considered to be conducting business there, whereas the appointment of a distributor should not raise this issue. It may be relevant whether the agent is a sales or marketing agent, maintains inventory, and has a permanent distribution depot. Regarding the applicable local laws and double taxation arrangements, it will be necessary in each instance to consult an expert.
Compensating the agent upon expiry or termination
Indemnity and compensation are the two methods for compensating an agent upon the expiration or termination of an agency as stipulated by the Regulations.
Indemnity or compensation is payable regardless of compliance with notice requirements. However, they are only payable if the principal continues to profit from the business generated by the commercial agent. A sum may be stipulated in the agency agreement, but it is unlikely to serve as a deterrent against subsequent claims.
An indemnity represents a portion of the goodwill earned by the agent throughout the duration of the agency. Regarding indemnities, the Regulations are extremely prescriptive and impose a limit of one year’s compensation, calculated based on the average annual compensation over the preceding five years.
However, an indemnity is only payable when expressly stipulated in the agency agreement. This option is frequently chosen by principals because it provides greater certainty and a limitation on the amount payable. It may make more sense from a business perspective than compensation.
If there is no agency agreement in writing or if the agreement is silent on the subject, the agent is entitled to compensation.
The compensation is based on the market value of the agency. In other words, standard business valuation principles are applicable to the agency’s valuation at the time of expiration or termination. Relevant evaluative factors could include a declining commission stream or a contracting market for the products.
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It is important for you to be well informed about the issues and possible implications of commercial agency regulations. Expert legal support is crucial in terms of ensuring a positive outcome to your agreement.
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Disclaimer: This article provides general information only and does not constitute legal advice on any individual circumstances.
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