Member Article

Agency and Commercial Agents

Are you an agent or are you considering becoming one? Does your business use agents or are you thinking about doing so? Perhaps you are in an agency relationship, or you are unsure whether or not an agency relationship exists? If so, this summary explains the legal concepts and commercial considerations you should be aware of.

Introduction

An agent acts as an intermediary between a business, known as the principal, and the principal’s customers.

Various types of agents exist, some common examples being sales agents and marketing agents. However, a party does not need to be referred to as an agent, in writing or otherwise, to be one. This is because the courts have the power to imply an agency relationship where an express agency agreement does not exist.

Agency agreements themselves have a wide scope; at one extreme an agreement may grant a sole agent exclusive rights to a particular product whilst at the other, an agent may be restricted to acting for a sole principle without exclusivity.

Further, an agreement purporting to create an agency relationship will not necessarily have that effect – the nature of the relationship is equally important as the terms used to describe it.

The common law position

The common law focuses on the duties of agents and principals, many of which, including seemingly important fiduciary duties, the parties can agree to vary or contract out of. This reflects a historical concern with protecting the principal against the agent. The introduction of The Commercial Agents (Council Directive) Regulations 1993 (“the Regulations”) saw a reverse in the approach. Under the Regulations the emphasis has shifted to enhancing the position of commercial agents in relation to their principals.

The Commercial Agents (Council Directive) Regulations 1993

The Regulations define a commercial agent as a “self-employed intermediary who has continuing authority to negotiate the sale or purchase of goods on behalf of another person (the “principal”), or to negotiate and conclude the sale or purchase of goods on behalf of and in the name of that principal…”

The definition therefore covers individuals, partnerships or companies authorised to conduct more than a single transaction on behalf of a principal. However, the subject matter of the transactions must be goods and not services, which are excluded by the Regulations. Further, although ‘negotiation’ has been given a wide interpretation by the courts, where an agent has more than authority to negotiate he must have authority to contract in the principal’s name (not his own name) in order to be covered by the Regulations. This means that an agent acting for an undisclosed principal cannot be a commercial agent under the Regulations.

Rights and obligations

The Regulations significantly extend both commercial agents and principals’ legal rights and obligations. The parties cannot contract out of the majority of these rights and obligations, specifically the following:

• the right of either party, on request, to a signed document from the other party setting out the terms of the agency agreement;
• the agent’s duties to look after the principal’s interests and act dutifully and in good faith – these are principally the agent’s duties at common law;
• the principal’s duties to act dutifully and in good faith towards the agent – these are absent at common law;
• the agent’s right to commission on transactions introduced during the agency contract unless the transaction was not completed and the principal is not to blame;
• the principal’s obligation to pay the agent’s commission on or before the last day of the month following the quarter in which it became due and the agent’s right to receive all information necessary to check the amount of commission due;
• both parties’ entitlement to minimum periods of notice of termination of the agency agreement.

The Regulations also contain various rights and obligations which may be varied or excluded by agreement. In addition, there are specific provisions for payments on termination of a commercial agency.

Termination of a commercial agency

In general, if the principal correctly serves notice terminating the agency contract, the agent is entitled to continue to receive commission up until the date of termination of the contract. Where incorrect notice of termination is given the agent may be entitled to damages for breach of contract.

In addition, the agent may be entitled to commission on transactions entered into after termination where they were entered into within a reasonable period following termination and were mainly attributable to the efforts of the agent.

Finally, the agent may also be entitled to “compensation” after termination of the agency contract (or an “indemnity” depending on the terms of the contract) in recognition of the business and goodwill the agent has created for the principal.

Although compensation is the default entitlement, the parties may expressly choose the indemnity alternative. Where they do not, or the agency agreement is silent, compensation will apply.

There is no minimum period of service which must have elapsed before the entitlement to compensation (or the indemnity alternative) arises. However, the agent must submit a claim for compensation (or payment of the indemnity alternative) within one year of the termination of the agency contract. Also, in certain circumstances an agent may lose the entitlement.

Compensation is calculated on the basis of the value of the agent’s business (or the part of this being terminated) on termination of the agency contract. The House of Lords’ judgment in the case of Lonsdale v Howard & Hallam Limited (2007) suggests this will be the price the agent could have reasonably expected to receive had he sold the business at the time with the agency continuing.

The indemnity alternative is calculated based on how much the agent should be due for the notional buy-out of his interest in the jointly-owned goodwill. The calculation is capped at one year’s commission based on the agent’s average annual commission over the five years prior to termination (or the life of the agency if shorter). The amount payable may be less depending on the extent to which the agent has introduced new customers or increased the principal’s business with existing customers, alongside other equitable considerations.

Commercial considerations

It is important to understand the Regulations and address the issues which may arise before entering into an agency relationship. A well-drafted agency agreement is advisable to protect your interests whichever side of the relationship you are on.

At Short Richardson & Forth LLP we have considerable experience in representing clients on either side of agency relationships. Recent authorities indicate that the law on agency will continue to develop; consequently obtaining comprehensive and reliable advice should not be overlooked. Failing to protect your position may result in you or your business paying out or foregoing significant compensation.

This was posted in Bdaily's Members' News section by Paul Clark .