BUSINESS LEGAL CORPORATE AND COMMERCIAL
The hidden perils of agency agreements06/04/2011
The appointment of commercial agents has conventionally been regarded by many businesses as an attractive and simple option. It offers businesses the opportunity of geographical market expansion whilst taking advantage of an agent’s local knowledge, goodwill and trade connections, at a relatively low cost. Since the introduction of the Commercial Agents Regulations 1993, it has become imperative for businesses to re-evaluate current and pending arrangements with agents to determine whether the Regulations will apply. If they do apply, an agent will receive important rights.
In practice the indication is that businesses have not stopped and taken stock of the potential ramifications the Regulations may have on their current trading patterns. In the past few years there has been a notable increase in agency claims as agents seek to assert their rights and businesses are left to mitigate damage. Kiran Virk, a solicitor in Tollers Corporate team comments on the key points businesses should be aware of when considering arrangements with agents.
The basics - will the Regulations apply to you?
The Regulations were introduced to implement the European Council Directive 1986 and as seems to be the increasing trend with European law, there is no black and white answer. If you appoint an agent in Great Britain the Regulations apply. This applies to all agency agreements, whether made orally or in writing including agreements made before 1994. However, if the agent is appointed in Europe or has dual presence in Great Britain and Europe then legal advice should be sought to determine whether the Regulations or the equivalent legislation in that European country will apply.
Businesses should note that the Regulations only apply to the supply of goods by a commercial agent. The Regulations do not govern the supply of services. A commercial agent is defined as a “self-employed intermediary who has continuing authority to negotiate and/or conclude a sale or purchase of goods on behalf of the principal”. Many have tried to circumvent the Regulations by restricting an agent’s authority to negotiate. This approach whilst inspired is certainly risky and one the English Courts have not been keen to entertain. The message from case law is plain - the Regulations are designed to protect agents and as such it shall apply to all agents who participate in introducing business.
Entering into muddy waters?
The Regulations afford a number of important rights to agents. If, as often is the case, there is no written agreement in place, the Regulations will apply. These include onerous obligations on the principal, minimum notice periods on termination, holding over periods and compensation payments on termination. Where businesses have been commercially apt and put in place a written agreement, some rights under the Regulations cannot be contracted out of, the most prominent being termination provisions.
An agent is entitled to compensation or an indemnity payment on termination. This applies where an agency agreement comes to end by effluxion of time and is not renewed, upon death, upon the principal giving the requisite termination notice and where an agent terminates the agreement on grounds of age, ill health or a reason attributable to the principal. A principal’s only means to terminate the arrangement and escape paying compensation is to show that the agent committed a serious breach, which can in itself be a hurdle. Furthermore, the Regulations are silent on how compensation is to be calculated. Case law dictates that it should be based on the value of goodwill in the agent’s business at the date of termination. This potentially includes transactions concluded after termination in which the agent played a role in.
The consequence is that businesses are faced with paying unforeseen costs, which if disputed, opens the door to lengthy and costly litigation. Businesses should look to protect themselves by having a comprehensive agency agreement which opts for either a compensation or indemnity payment. An indemnity may be a more favourable solution as it gives businesses some certainty as it can be capped at one year’s average remuneration over the preceding five years, but will not exclude the right for damages on breach.
Help at hand?
Tollers will be able to assist in advising business on the Regulations and the drafting of a suitable agency agreement best suited to their business needs. In addition, Tollers can advise of alternative channels businesses can use to market their goods to avoid the Regulations such as distribution agreements or fixed term employment contracts.
Despite the long term presence of the Regulations, the question arises whether businesses have taken stock of the ramifications the Regulations will have on their usual business. Over the past years there has been a surge of agent claims as agents looks to assert their rights and businesses look to mitigate damage to the business. We are finding that too businesses are acting too late.
For companies planning their routes into market, it has always been fundamental when considering agency arrangements to determine whether the Commercial Agents Regulations 1993 will apply. If they do, the agent will receive important benefits including rights to payments on termination. The result is a growing volume of litigation, as agents seek to assert these rights and principals seek to mitigate damage to their business. Kiran Virk, a solicitor in Tollers corporate department comments on the key points principals should consider before entering into an agency agreement.
The appointment of commercial agents can offer a number of advantages to a principal, including taking control of an agent’s local knowledge and established trade connections, as well as saving the cost of establishing its own selling operation. Vital to protect and mitigate future problems. Over the past years we have seen an increased number of commercial agents’ claims. Expensive litigation because need expert evidence with regard to compensation.
The starting point - will the Regulations apply to you?
Some principals are still unaware that the regulations apply to their contract. The regulations have retrospective effect so they also apply to contracts made before 1 January 1994, whether made orally or in writing and apply only to the activities of a commercial agent in the United Kingdom.
The Regulations define a commercial agent as a self employed intermediary who has continuing authority to negotiate a sale or purchase of goods on behalf the principal or to negotiate and conclude the sale or purchase of goods on behalf of that principal. Historically thought a way to circumvent the regulations was to restrict the agent’s ability to negotiate contracts. This is no longer the case as the courts have confirmed that the regulations apply to all agents that make introductions and play a significant role in introducing business. (wide ranging and apply to a lot of contracts that were thought to be previously exempt).
An agency agreement for a fixed term is converted into an agency agreement for an indefinite period if both parties continue to perform it.
The application of the Regulations is wide ranging – if you engage an agent to sell goods in Great Britain then the Regulations apply. The Regulations afford a number of important rights to agents, some of which can not be contracted out.
The Regulations provide important rights for commercial agents, some of which may not be contracted out of. The most notable right is for an agent to receive an indemnity or compensation on termination unless there is a written agreement saying otherwise. Such a right cannot be contracted out. These set out minimum notice periods, one month for every year the agent has been employed. An agent is also entitled to commission on transactions concluded after the agency is terminated provided the transaction is mainly attributable to his efforts and the contract was entered into within a reasonable period after the contract was terminated- this is one of the few areas that can be expressly excluded and it should be.
Compensation can be claimed in a wide variety of circumstances even if the agent has terminated the contract himself if this is justified on the grounds of age, infirmity or illness or retirement. Lonsdale v Howard & Hallam Limited (July 2007) makes a clear precedent that compensation is based on the value of goodwill in the agent’s business at the date of termination. At present there is no method for calculating compensation under the regulations but it does cap indemnity at one year’s commission by reference to the five preceding years. Often the indemnity will be the cheaper option for the principal and with a written agreement in place the principal could opt for payment on termination to be by way of indemnity. Indemnity will only be payable if the agent brought new customers or significant customers and the indemnity must be equitable. Other than that there is no escape for principals unless they can justify immediate termination on the grounds of a breach. Solutions, a principal can look to impose more commercial terms, have a robust contract setting out his duties so a breach can be clearly identified.
You need to ensure you have a well drafted agency agreement that outlines the key points below:
Appointment and authority
Geographically territory, exclusivity, customers.
Products and restrictions, restrictive covenants
Duties, commission and duration
Damages on termination – whether these are to be indemnity or compensation based and how they are to be calculated.
Alternatives to Agency Agreement?
The long term implications of the regulations are that principals are increasingly seeing to use other channels to market their goods. Businesses should consider whether alternative commercial structures are better suited than an agency agreement. These can include a fixed term employment contract as employees are not protected under the regulations or via a distribution agreement. Alternatively, we can assist in ensuring you have a tightly written contract which covers the indemnity and compensation payments so the regulations do not apply or giving the agent no power to negotiate or bind the principal, which will affect the application of the regulations.