Key Considerations
Commercial Agency Regulations
LONDON BRISTOL EXETER TAUNTON PLYMOUTH TIVERTON
Commercial Agency Regulations Ashfords LLP. 2016
Businesses often use commercial agents to perform sales and marketing services
on behalf of the business, on occasion agents may also be authorised to enter into
contracts.
The agency approach is popular when targeting new markets (or sometimes when
engaging a new business strategy). An agent may be used to exploit a geographical
area where the agent has specialist knowledge of the market.
THE AGENCY REGULATIONS
Agents enjoy substantial legal protections set out in the Commercial Agents (Council
Directive) Regulations (the "Agency Regulations"), which were introduced in 1993.
The terms of the regulations are implied into all commercial agency agreements, both
written and oral, or formal and informal.
The Agency Regulations were introduced as an EU Directive, with the purpose of
bringing the UK into line with other EU member states, and strengthening the position
of commercial agents, so as to ensure they are not disadvantaged by the relationship.
APPLICATION OF THE AGENCY REGULATIONS
The following points outline how the Agency Regulations are applied.
•
The Agency Regulations are goods-focused and do not apply to agents selling services.
•
The Agency Regulations apply to agents who are self-employed intermediaries and
authorised to negotiate (and in some cases conclude) the sale or purchase of goods on
behalf of another (the "principal"). This includes corporate entities acting as agents.
•
Agency Regulations do not apply to:
•
Unpaid commercial agents
•
Agents whose activity as commercial agents are to be considered secondary
•
Commodity exchangers
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An officer or association of a principal acting as an agent for that company
•
Insolvency practitioners
•
Partners acting on behalf of partnerships
•
UK Crown Agents for Overseas Governments and Administrations.
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•
The default position is that the laws of the country in which the agent carries out
their activities apply to the agency relationship. The Agency Regulations apply to all
agents who undertake their activities in Great Britain unless their agency agreement
explicitly states otherwise. When appointing agents in other EU member states,
principals should seek advice from local lawyers as there are differences between
how EU member states have implemented the directive.
CONSIDERATIONS FOR PRINCIPALS
These are some common considerations under the Agency Regulations, for businesses
acting as a principal.
Regulation 4: General Duties of Principals
The principal must:
•
Act dutifully and in good faith towards the agent (i.e. fair and open dealing).
•
Provide the agent with documents required in relation to the goods concerned.
•
Obtain, for the agent, the information needed for the performance of the agency
agreement, and notify the agent if the likely sales volumes will be significantly lower
than expected.
•
Ensure that it informs the agent of the refusal or non-execution of any transaction
that the agent has procured from customers.
The principal cannot contract out of their obligations under Regulation 4.
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Regulation 17: Compensation (or indemnity) upon termination.
•
This Regulation is unusual, as it provides the agent with entitlement to
compensation or to opt for an indemnity payment (but only if the indemnity
payment is included in the agency agreement) upon termination of the agency
agreement.
•
Under the Agency Regulations, the compensation alternative is the default.
•
Calculation for any such compensation under Regulation 17 is not provided in the
Agency Regulations but the sums that an agent may recover from a principal could
be significant (there is no cap on compensation).
•
The amount compensated, as determined by the courts, usually depends on the
following factors:
•
The loss of value to the agent as determined by reference to potential future
income stream, as a result of the termination.
•
Assessment of the value of the agency, as at the date of the termination.
•
The courts have been known to award compensation for more than a year's
income stream that an agent might have generated had the termination not
occurred.
•
This entitlement does not apply where the agent has committed a fundamental
breach of the agency agreement or has terminated the agreement itself (Regulation
18).
Restraint of Trade Post-termination
Principals should ensure that any post-termination restraint of trade that it wishes to
place on an agents is:
•
Agreed in writing
•
Related to a particular geographical area, group of customers and goods (and
not unreasonably wide)
•
For a period of no more than two years from termination
•
Compliant with general competition law and restraint of trade principles
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Remuneration and Commission
The Agency Regulations provide input as to how commission should be calculated
and paid to agents (Regulations 7-12). As an outline, the following points should be
considered:
•
If the agency agreement is silent, an agent should receive the customary
amount paid to agents marketing the same type of goods in the same
geographical area. If there is no customary amount then the agent is entitled
to "reasonable remuneration taking into account all aspects of the transaction"
(Regulation 6(1)).
•
The Agency Regulations set a longstop payment date for commissions to be
paid (on the last day of the month following the quarter in which it became
due (quarters running from the commencement of the agency agreement,
(Regulation 10(3))).
•
Please note that the principals obligation to pay commission is in addition
to the agents entitlement to compensation or indemnity payment under
Regulation 17.
DUTIES OWED BY AGENTS
Agents also have duties to the principal under the Agency Regulations. (Regulation 3)
An agent must:
•
Look after the interests of the principal and to act dutifully and in good faith
(i.e. fair and open dealing).
•
Make proper efforts to negotiate and where possible conclude the transactions
he is instructed to take proper care of.
•
Communicate to the principal all the necessary information about the agency
relationship with is available.
•
Comply with reasonable instructions given by his principal.
•
The agent's duties under Regulation 3 cannot be contracted out
(Regulation 5(1)).
Many of the agent duties outlined above were already in existence prior to the Agency
Regulations, so it is arguable that principals' positions are not greatly improved by the
Regulations.
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CONTRACTING CONSIDERATIONS
The first and foremost consideration in any agent-principal relationship is the agency
agreement between the parties. After this, the impact of any applicable Agency
Regulations can be properly determined. Principals should take into account important
points such as jurisdiction of laws, commission, potential compensation and any
particular duties arising from the circumstances of the relationship.
Agency Regulations have been introduced to strengthen the position of agents, so
principals must be careful to draw up a written contract which outlines the exact details
of the agreement to avoid lengthy disputes arising, especially when the contract is
terminated.
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PRACTICAL CONSIDERATIONS
Advantages and Disadvantages of employing a Commercial Agent:
Businesses should be reasonably well acquainted with any agent they contract with.
Duties are imposed on both parties to an agency relationship, so best practice dictates
establishing a foundation of mutual trust.
There are a number of advantages and disadvantages to utilising a commercial
agent arrangement:
Advantages
•
Market intelligence and expertise
•
Targeted and precise customer communication
•
Flexibility in delivery of product lines
•
Results-based payment is an option
•
Delegation of responsibility for marketing.
Disadvantages
•
Direct control is reduced; principal may feel as though the Agent could
conduct operations differently
•
Conflict between promotion of the principal's products and competing
products
•
Over-reliance; leading to the principal's market knowledge and customer
awareness decreasing
•
Possibility of good-will compensation to be made to the Agent upon
termination of the contract.
Businesses should conduct all necessary checks to ensure that the agent has the
requisite skills, expertise and resources (often business contacts are important) to
satisfy the principal's needs. It is also important that any agency relationship is closely
monitored during its term.
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Commercial Agency Regulations Ashfords LLP. 2016