Agency agreement

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Agency agreement

If your agency agreement is not drafted properly the agent can find that it is not entitled to anticipated commissions. The principal can find that the agent does a poor job. Using agents to sell products or services looks as if it offers a low cost entry into new markets, but this will only work if you have a good agency agreement behind you. 

Agency agreement negotiation

We work with agents, distributors, and the principals. Our expertise is the knowledge of the law of agency and what works and does not work in business. We backup our knowledge with practical and commercial advice.

The usual benefit of an agency agreement is that the principal, who created the product or service, gains access to new markets without employing additional local sales staff.

The basics of an agency agreement

The common features of a principal and agent relationship include:

  • The principal retains control over the agent’s transactions;
  • The agent usually earns commission by selling the principal’s products; and
  • The principal, not the agent, bears the commercial risk and direct responsibility for transactions with customers.

Good faith – implied into any agency agreement

An overriding requirement of the agency agreement is that the principal and agent act dutifully and in good faith. Without care and attention, it is easy to fall foul of this requirement.

Provision of information under the agency agreement

The principal should provide the agent with documentation that meets certain standards. Principals should take care, as agents have a right to know where sales are likely to drop. This is often sensitive information and it requires protection to prevent misuse. It can be difficult for principals to predict what information to reveal if obligations are not set out and negotiated as part of the agency agreement.

Terminating the agency agreement

We provide solutions for agents or principals to recover their position. The issues usually revolve around:

  • Notice periods;
  • Return of stock; and
  • Post-termination restrictions.

Effects of termination

Common scenarios we cover include:

  • Return of information: is the agent required to return all information to the principal, whether confidential or not?
  • Competition: is the agent precluded from working for a competing principal following termination?
  • Duties: is the agent is entitled to perform duties on behalf of the principal for a specified time following termination?
  • Collection of monies: who collects in the debts following termination of the agency agreement.

Dispute resolution

We will consider how to stop a dispute from erupting that could result in business disruption and expensive court cases. Typical solutions we will often suggest to avoid disputes are ensuring that the agency agreement has an escalation procedure and referral to an independent mediator. Mediation is an attractive method of alternative dispute resolution. Mediation is used where the overriding objective is to preserve and maintain the business relationship.

Final arbitration under an agency agreement

In some cases the mediator can be made the final arbitrator which rules out the possibility of court action altogether.

Representation for the agent

If acting for the agent, we will consider whether the agency agreement protects the agent from risks. Typical risk can include the following:

Exclusivity under the agency agreement

Is the agency agreement exclusive to the agent? This consideration is to stop the principal from using an alternative agent whether in the same country or elsewhere. This can held protect the agent’s value in the agreement.

Payment terms

Does the agency agreement include payment terms and strict deadlines for payment? We review for any detriment to commission receipts from the principal.

Safeguarding the agent’s interests

We address risks before they become real problems. For example, as an agent, you might create business relationships with customers who place regular orders. The principal might believe the agent just services existing customers and doesn’t pursue new customers. So the principal might wish to fire the agent, sell direct to those customers, and perhaps invest in aggressive sales and marketing campaigns. Many problems can be avoided if the agency agreement has been planned out before signature.

Use of a call option under the agency agreement

It is not uncommon for an agent to be granted a call option under the agency agreement. A call option is an option for the agent to sell/market/distribute new goods produced or manufactured by the principal.

Right of first refusal

If the principal creates a similar product for sale in the agent’s territory, is the agent given a right of first refusal? A right of first refusal can be built into the agency agreement. There may be conditions for the agent to meet, e.g. meeting a sales target set by the principal. Alternatively, requirements can be attached to the call option, such as:

  1. The new goods have to be under the same brand as the existing goods;
  2. The new goods have to be in the same market as the existing goods; or
  3. The new goods have to perform the same function as the existing goods.

If these conditions are not met, then the agent has no right to exercise the call option, which can have an adverse affect on the agent’s business. We create bespoke call option provisions, tailored to needs and business requirements.

Tailoring the agency agreement for the particular agent

What we do is take the time to understand the background and the reasons for the agency setup. We then tailor our advice accordingly. This can help minimise costs in the event that there is a dispute. Likewise, if a dispute does arise, we know how to get the parties back on track.

Representation for principals

Where we act for the principal, we ensure that we protect the value in the principal’s business. Common terms to include in the agency agreement when acting for the principal often include:

The agent’s obligations

The agent concludes transactions on behalf of his principal. The agent should comply with documented instructions, such as pricing, and the range of goods/services sold and supported. We will look to see that the agency agreement includes the following key restrictions:

  • The agent or distributor must not actively solicit sales outside the agreed geographic area or with defined customers;
  • The agent or distributor must not act as an agent for other defined third parties, e.g. competitors; and/or
  • The agent or distributor must not manufacture or supply goods or services competing with those covered by the agency agreement.

Brand protection

The protection of your business’s brand and intellectual property will be important. We can review arrangements to make sure you have the best protection of intellectual property in place to stop abuse.

Implied protection for agents

In most countries there are some laws to protect agents. Every country has different rules and regulations. For both the principal and the agent, getting caught by these protections is expensive, and potentially diminishes your business’s valuation.

Typical areas we watch for on behalf of principals include:

Protections in an agency agreement imported by local law or common law can include:

  • Notice periods for termination of the agency relationship; and
  • Compensation payable following termination.

The protections for agents against principals can apply even if you have not specifically included them in your agency agreement. They are implied and will take effect. You need to know what terms are implied, and what impact they can have on the relationship.

Our network of 800 lawyers across 70 jurisdictions enables us to protect principals and agents using local knowledge, undercutting the costs of a traditional international law firm.

Catering for expansion of the business

Some companies, who expect to grow rapidly but lack capital, employ the following strategy. In their early days, they set up agents around the world. Some years later, when they have acquired sufficient financial resources, they acquire successful agents operating in markets with good potential.

If this is your strategy, a put option entitling the principal to acquire the agency business should be considered.

Put option incorporated in an agency agreement

We can work on the structure of a put option to be included into the agency agreement. Matters we consider usually include:

  • Timing – when can the principal exercise the put option;
  • Pricing – how will the agency business be valued. Often referral to an independent specialist can avoid disputes;
  • Payment – financing arrangements require pre-planning and the agency put option needs to be flexible enough to cope.

Breach of an agency agreement

The UK has in force regulations that entitle a commercial agent to compensation on termination of an agency agreement. Broadly, the commercial agent is compensated for the damage he suffers as a result of the termination of his relations with his principal.

Damages

Situations where damages arise can occur when:

  • The termination deprives the commercial agent of the remuneration which proper performance would have entitled the agent to, e.g. fixed remuneration over a specified term under the agency agreement; or
  • The agent is prohibited from claiming the costs and expenses incurred under the agency agreement, e.g. marketing costs incurred to the date of termination.

Calculating the damages due on termination of the agency agreement

The compensation is often the value that a hypothetical purchaser would have paid for the agency at the date of termination. Various factors assist in arriving at this hypothetical value, including:

  • The price/earnings ratios from similar businesses at the date of termination, together with the appropriate multipliers.
  • Discounts for lack of market, or an overly competitive market.
  • Discounts for the size of the agent’s business.

We do advise on levels of compensation payable to resolve disputes following termination.

Track record in advising on agency agreements

We support UK businesses and businesses entering the UK market, sell, or distribute under an agency agreement. We draft and review agency agreements. We also bring and defend claims relating to breach of an agency agreement or early termination. Recent instructions include:

  • Drafting an agency agreement for an Italian retailer’s UK agents. Our advice also ensured the appropriate intellectual property registrations were filed.
  • Fee structures and compliance requirements for a UK estate agent running multiple agency outlets.
  • Advising a wholesale book distributor whose key client sought to terminate the agency relationship early, leaving our client with surplus stock.
  • Reviewing an agency agreement for a celebrity management business.
  • Developing an appropriate structure for a TV production agent dealing with resale.
  • Implementing a distribution network in the UK for a foreign manufacturer operating in the EU.