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Explanatory Notes
Agency Agreement (favouring the principal)
This Agency Agreement contemplates that a manufacturer of goods in one country will appoint an agent in another territory on an exclusive basis for the sale of those goods. The Agreement is designed from the point of view of the manufacturer/Principal. Whereas a distributor buys for re-sale, purchasing from the Principal, the role of an agent is to sell on behalf of the Principal and on the Principal's terms and conditions of business. Great care needs to be taken before appointing an agent in another territory, not least since, whatever the Agreement may say, local law and/or custom may make it difficult for a Principal to terminate the appointment of an agent and appoint an alternative agent in the same territory. Because of the cross-border nature of the Agreement, the Principal should have the text checked by a lawyer in the territory even if the Principal wishes to use the law of his own country as the governing law of the Agreement. Within the European Union, there is a Council Directive which governs aspects of agency appointments and in the UK, this Directive was implemented by the Commercial Agents (Council Directive) Regulations 1993. This can be found online at http://www.opsi.gov.uk/si/si1993/Uksi_19933053_en_2.htm. There is also a free document on our website summarising the main provisions. Specific comments on our model form, by reference to clauses, are set out below: DATE AND PARTIES - see our separate note on Signing an Agreement. In the case of the parties, the official address of each of the parties should be inserted and where the Agent operates under a P.O. Box number, a physical address might also usefully be included. INTRODUCTION - this is brief and needs no comment. 1. DEFINITIONS This contains a number of defined terms that need to be considered by the parties in the light of their own particular arrangements. Products are to be listed in a Schedule. Especially when the relationship between the parties is a new one, the Principal will need to consider whether to list all his Products or only those which he considers are likely to sell most effectively in the Agent's Territory. It is sometimes possible for a Principal to appoint different agents for different products in the same territory. The Territory covered by the Agreement is defined by reference to a Schedule. The Territory may cover a complete country, part of a country or more than one country, but whichever the case, it is important to define it clearly. Do not, for example, refer to "any country in the Middle East", since there may be an argument as to whether certain countries are comprised in the Middle East. Especially when appointing an agent for the first time, it is important that the Territory is confined to the country - or the area within the country - where the Agent already has an established business base. Because most countries have their own agency laws, an agent based in one country may not be able to operate effectively in a neighbouring country and it could be better for the Principal to have separate agents in each country. 2. APPOINTMENT AND DURATION This confirms the appointment of the Agent on an exclusive basis - i.e. the Principal by appointing this Agent will not be able to appoint another Agent for the same products in the Territory. In 2.2 the Agreement contemplates a fixed Initial Period of [2] years and after that the Agreement will roll over unless terminated. Although 2.3 provides for termination at the end of the second or any subsequent year, in practice termination may not be as easy as the Agreement suggests and local legal advice should be obtained. 3. MAJOR TERMS OF APPOINTMENT This clause contains provision for agreed sales targets in 3.2. One purpose of such a clause is to give the Principal the right to terminate if the Agent turns out to be unsuccessful in achieving Minimum Sales Targets and such a provision might also be helpful in any proceedings brought by the Agent claiming wrongful termination. The Principal would in such circumstances be able to show that Minimum Sales Targets were agreed but were not met. In 3.3 the Principal reserves the right to make sales to certain customers who are named in the Agreement and it is open to the Principal to decide whether or not the Agent should receive Commission, and if so at what rates, on those sales - the second sentence is to be considered carefully here. Although the Principal will under 3.4 generally refer all enquiries in the Territory to the Agent, in some circumstances - e.g. sensitive government enquiries or one where the customer specifically informs the Principal he will not deal with the Agent, the Principal's rights to deal directly are reserved. The Agent is required to refer to the Principal enquiries received from outside the Territory and in 3.6 he must not make any sale where he knows the Products are likely to be delivered to another Territory. 4. AGENT'S GENERAL OBLIGATIONS This contains a number of self-explanatory provisions requiring the Agent to promote the sale of the Products, undertake an advertising campaign on a basis agreed with the Principal etc. In 4.1.8 there is an obligation on the Agent to report regularly on activities and this clause also deals with such matters as maintaining an adequate sales force, offices, warehouses and stocks of spares. Insurance cover is also dealt with in 4.1.11. 5. ORDERS AND SALES Since the Agent is selling on the Principal's behalf he is required in this clause to apply the Principal's list prices and not to offer any discount unless this has been cleared in advance. Also, in 5.3, sales must be made on the Principal's standard terms and conditions - the Agent does not have any right to vary those terms without getting prior clearance from the Principal. The Agent is required in 5.5 to pass orders directly to the Principal which will be confirmed by the Principal. Payment will be made directly by the Customer to the Principal, but if the Agent does receive payment, he is required in 5.6 to maintain a separate bank account for those payments. Commission is dealt with by reference to Schedule 5 and it is only due when the Principal has been paid in full. Clause 5.8 sets out 2 alternatives for the payment of commission. The first option, which may suit a Principal with a high volume of total sales, depends upon the Agent notifying the Principal of sales completed and thus commission claimed as due and provides for the Principal to confirm the claimed commission and to set out the basis upon which Commission was calculated. It does however mean that the Principal may have to arrange payment of commission within a relatively tight time-frame once Principal and Agent have agreed the amount due. Where the Agent carries on business outside the EU the time allowed for payment may be longer. The second option which may suit a Principal with a lower volume of sales places the onus on the Principal to advise the Agent of sales completed and commission due. Again where the Agent carries on business outside the EU the time allowed for payment may be longer. In both alternatives the Agent has a right to see excerpts from the Principal's books solely to allow him to verify the basis upon which the Principal has calculated commission.
6. PRINCIPAL'S GENERAL OBLIGATIONS For the Agency to operate successfully, the Principal needs to remain involved, supplying advertising material, technical data etc. as well as ensuring the price lists are kept up to date. In appropriate cases where training is necessary for the Agent's staff, 6.1.4 provides for the Principal to provide free training but the Agent is responsible for the employees' travel and accommodation costs. Sometimes the Principal may bear such costs or they will be shared on an agreed basis. The clause also obliges the Principal to confirm orders and make deliveries in accordance with those confirmations. 7. INTELLECTUAL PROPERTY It is always advisable for the Principal to try to protect his trade mark and registered name. The Agent is required to notify any infringement and prevented from registering any of the Principal's trade names or other intellectual property rights. 8. TERMINATION As already mentioned, termination may not be as easy in practice as this clause suggests and legal advice is needed. Under our clause, the Principal can terminate in the event of the Agent's breach of contract, insolvency or failure to meet the Minimum Sales Targets after an initial start-up period. In 8.1.4, we have also provided for termination if the ownership or management of the Agency changes: quite often an Agency relationship is a personal one and this is intended to protect the Principal in such circumstances. We have also provided in 8.2 for the Agent to terminate if the Principal becomes bankrupt or commits a material breach of the Agreement. 8.3 deals with the consequences of termination and, as will be seen, outstanding sales will be honoured and the Agent will receive Commission. 8.4 provides that the Agent will not be entitled to compensation or indemnity on termination or expiry unless the governing law permits it. Under EU legislation there is provision for the Principal to pay either compensatory damages or an indemnity to the Agent unless termination is due to a material default or insolvency of the Agent. It should be noted that this right to compensation/indemnity will also arise where the Agent terminates by reason of ill health/old age or by reason of the Principal's conduct. If the parties decide that compensation is payable on termination damages must be calculated by reference to commission foregone and any costs and expenses that the Agent is unable to write-down as a consequence of termination. Compensation is in theory unlimited. Where the parties opt for an indemnity the Agent's entitlement only arises first where he has either introduced new customers or has significantly increased the volume of business from existing customers and secondly is payable if it is "equitable". An indemnity is calculated by reference to annual commission earned in the previous 5 years (or where the Agency has existed for less than 5 years the annual average calculated since the Commencement Date). Both parties should seek advice as to whether compensation or an Indemnity best suits their particular circumstances before the Agreement is signed. And whether or not to include specific terms in the Agreement rather than have it drafted as in our form. It is worth noting however that an indemnity has the advantages of certainty and ease of calculation over compensation but still allows the Agent to bring legal proceedings to recover damages from the Principal. Under the law, claims for compensation or indemnity must be made within 12 months of termination. 9. NON-COMPETITION This is intended to restrict the Agent from competing with the Principal's business after the Agreement has been terminated. The period covered by this clause must not exceed 2 years. 10. GENERAL This contains a number of standard provisions designed to regulate the arrangements between the parties. In 10.1 the Agent is required to indemnify the Principal against any liability the Principal incurs as a result of some wrongful act of the Agent. It is not out of the question that the agent might require indemnity from the Principal insofar as any claims from customers is concerned in respect of defective Products. Local law may also require the Principal to provide such an indemnity. The Principal should always take legal advice before agreeing to provide an indemnity. The Agent is prevented from assigning or subcontracting any obligations or rights under the Agreement in 10.2 and 10.3. 10.4 deals with notices. In 10.7 we have suggested direct negotiation followed by mediation (if agreed) and, ultimately, arbitration in the event of disputes. For other standard clauses and for a more detailed discussion of dispute resolution, see the free documents on our website.
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