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Inside Issue
03
Renegotiating the
Agency Agreement
Renegotiating the Agency Agreement
In this article, solicitor Adam Maher
comments on when and in what
circumstances it is possible for a
principal to vary an agency agreement.
In these difficult economic times, some agents, faced with
falling sales across Europe, are being met with
attempts by principals to renegotiate the terms of the
agency agreement. In most cases such attempts will seek
to reduce the amount of commission paid to agents on a
sale or to alter or reduce the boundaries of the territory
within which an agent may operate, thus allowing the
principal to make direct sales in lucrative areas.
Agents should be careful not to buckle too early to
pressure from a principal and should remember the
extensive protection afforded to them under the
Commercial Agents (Council Directive) Regulations 1993
(“the Regulations”). Some of those rights afforded under
the Regulations will apply irrespective of whether the
Regulations are referred to in the agreement, or even if
they are expressly said not to apply to the agreement.
The Regulations apply to an agent (be it a company,
partnership or individual) who is 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” (regulation 2(1)).The European case of
Centrosteel Srl –v- Adipol GmbH has clarified that the
Regulations will apply even if the there is no written
contract in place and an agreement has only been reached
orally.
Variation of remuneration rates
It would be very rare for parties not to have agreed with
some precision the basis of the calculation of an agent’s
remuneration, the transactions to which it applies and the
mechanics of making remuneration payments. Usually an
agent will be paid by way of a percentage commission on
a transaction.
In the vast majority of cases, once agreement has been
reached a principal will be unable to unilaterally vary
commission payment structures and any attempt to do so
could be viewed as a serious breach of the agreement, in
some cases allowing the agent to terminate the agreement
and claim a compensation payment as provided for under
the Regulations.
However, if a principal has negotiated a carefully drafted
contract allowing the principal to vary commission
structures in certain restricted circumstances, it is
possible that a court may allow the principal to
unilaterally vary those vital terms.
When the agreement may be varied
The case law relating to these unusual circumstances is
not very developed and suggests that a principal can only
exercise such a power to unilaterally vary the agreement if
he pays due regard to the position of the commercial
agent. The few cases to date have all decided that the
principal acted unreasonably in exercising its unilateral
power to vary the commission structure and therefore
acted in breach of the agency agreement.
Given the lack of guiding case law, the question of whether
a principal may exercise a right to vary commission
structures is difficult to determine but may become more
relevant in current economic conditions. Academics have
examined this question and it has been suggested that a
principal has to consider the position of, and act in the
interests of both parties. If the contract gives the principal
the power to vary commission structures, and if, whilst
taking proper account of the interests of the agent, there are
valid reasons for the principal to vary the arrangement, he
may have the right and may not be in breach of contract.
It is also suggested that if there is a downturn in the
market, varying the agreement to achieve a share between
principal and commercial agent of the consequences of
that downturn would seem fair and reasonable in the
circumstances.
Variation to agent’s territory
Situations can therefore be envisaged where, in a more
competitive marketplace, as a result of a global recession,
major reductions in the sale price of a principal’s goods or
significantly reduced levels of sales could potentially be
reason enough for a principal to unilaterally amend the
commission structure if that right is provided for in the
agreement and as long as the principal acts reasonably
and gives due regard to the interests of the agent.
In such cases, any attempt to unilaterally vary the territory
will be almost certainly be seen as a fundamental breach
of the contract allowing the agent to terminate and claim
the compensation as provided by the Regulations.
Where a request is made by a principal to an agent to vary
or reduce the commission structure where no right exists
for the principal to unilaterally vary the same under the
terms of the agreement, no variation can take place
without the express consent of the agent. As stated
earlier if the principal proceeds to unilaterally vary
payment terms, this action could be seen as a serious
breach of the agreement allowing the agent to terminate
and claim compensation.
When an Agent may want to agree a variation
With principals in almost every sector facing a significant
decline in sales, inevitably some will not survive the
downturn and may become insolvent. In such
circumstances it is clearly in the interests of the agent to be
pragmatic and to assist the principal where possible even
if it means sharing the pain temporarily. Clearly, there is
little point rejecting variations outright if the principal is put
out of business. Although the termination of an agency
(through insolvency of the principal or otherwise) would
ordinarily provide for the agent to claim a significant
compensation payment from the principal, if the principal
is in the process of being wound up, the agent is unlikely
to recover its full compensation, if anything at all.
In such desperate cases agents should consider a
temporary variation of the contract to lower commission
rates to assist the principal for a, say, 12 month period
only. After such time it may be agreed that the
commission will revert to the prior rates (or perhaps even
a higher rate to compensate the agent when the good times
eventually return). Although the agent will suffer for those
12 months, if the loss of a significant contract is saved by
taking a temporary hit the agent may find himself well
placed for the inevitable recovery of the economy. When
the dust settles, an agent’s willingness to help in the tough
times will generate goodwill with the principal who in turn
may look to repay the favour should new opportunities
arise in better market conditions.
Similar principles apply to the unilateral variation of an
agent’s territory as to the variation of commission
structures as set out above. Plainly if the agreement does
not provide the principal with a right to vary the territory of
an agent a principal is unable to vary without the express
consent of an agent.
If an agreement gives the principal the right to vary the
territory allocated to the agent, again such variation has to
be done reasonably with due consideration given to the
agent. Given this requirement it is difficult to envisage
circumstances where a unilateral reduction in an agent’s
territory would pass this test.
Certainly, if the territory has been reduced merely to allow
a principal to deal directly with end customers, this will not
be acceptable. Any attempt to cut out the agent in this way
will fall foul of the Regulations and will enable an agent to
terminate the agreement and claim compensation. Such
behaviour could also be seen to a breach of the principal’s
requirement to show good faith to the agent.
It remains to be seen whether a unilateral reduction in
territory could ever be justified by, say, poor sales by the
agent in the area to be withdrawn with the intention that
a replacement agent be used who may have more local
knowledge of the market. However, even in these
circumstances it would be difficult to say that the
principal was giving any due consideration to the agent.
It appears that in nearly all circumstances where the
principal has a right provided by an agreement to vary the
territory of an agent, any attempt to invoke that right is
likely to be unsuccessful. Such attempts should be
strenuously resisted unless there is a good commercial
reason not to do so.
What should you do now?
Neil Myerson Solicitors can offer commercial agents and
principals a complete legal service at competitive rates.
Our expert lawyers can advise at the outset of an agency
relationship and negotiate the contract and are also on
hand to assist when disputes arise.
For further information please contact Adam Maher on
0161 941 4000.
Neil Myerson Solicitors
The Cottages Regent Road
Altrincham Cheshire WA14 1RX
T
F
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(0161) 941 4000
(0161) 941 4411
[email protected]
www.neil-myerson.co.uk