Appointing a commercial agent

An agent is a person authorised to act on behalf of another, called the 'principal', to create a legal relationship with a third party. Commercial agents enjoy substantial legal protections which are unlike those given to employees. These are set out in the Commercial Agents (Council Directive) Regulations, which were introduced in 1993 to bring the law of agency in the UK into line with other EU member states.

Note that if the agent is working in another member state, you may need to consider that country's equivalent legislation.

What is a commercial agent?

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 their principal or to negotiate and conclude such transactions on behalf of and in the name of that principal". There are a number of different elements of this definition which will need to be considered when deciding whether your proposed agent will be a commercial agent. Be aware that if there is any ambiguity or difference in how the contract is drafted and how it works in practice then the courts will usually construe the provisions in the agent's favour.

Self-employed: the use of the phrase 'self-employed intermediary' does not limit the scope of the Regulations to an individual - they will apply whether the agent is an individual, partnership or company. You will not be able to escape the Regulations simply because you have an agent who works through a limited company.

Not sale/purchase or services: it is important to note that a commercial agent is one who buys or sells goods on behalf of its principal. It will not capture an agent who is dealing with the provision of services. There have been various debates over what is regarded as the purchase or sale of goods, particularly in relation to computer software. Arguably the software will be in a tangible form on disk, therefore forming a product as opposed to a service. However if software is loaded directly onto a customer's server or downloaded from the internet, then it is a service.

Continuing authority: an agent who is authorised to conclude a single transaction on the principal's behalf is not generally thought to have 'continuing authority' for the purposes of the Regulations. However if it is negotiating any extension or variation to the terms of the contract it may then be regarded as having continuing authority even though the authority is only in relation to the one contract.

To negotiate: the Regulations are unclear as to what would be captured by the word 'negotiate'. There have been suggestions that this would not capture a pure marketing or referral agent who simply promotes the principal's products and refers any orders to the principal for negotiation and conclusion of the order; however this has largely been rejected by the courts. The current position is that a pure referral agent can be caught by the Regulations if its role is to develop and enhance the goodwill or reputation of the principal.

Contracting in own name: the courts have held that an agent who is entitled to contract in its own name as opposed to in the name of its principal will not be a commercial agent for the purposes of the Regulations.

Outside scope: certain categories of agent are excluded from the scope of the Regulations including officers of companies, associations, partners and any insolvency practitioner. They will also not apply to any commercial agent who is unpaid, agents operating on a commodity exchange or in commodity markets, brand agents and agents whose activities are considered to be secondary to their other activities.

Right to a written contract

Either party has the right to request a written document from the other party setting out the terms of the agency agreement. This right cannot be contracted out of.

However, there is no requirement to have a written contract from the outset. In order to enforce any restraint of trade clauses, restricting the agent's activities after the agreement has ended, these would have to be in writing.

Duration

In most cases, an agency agreement will:

• have a fixed term with provision for termination on notice after that point;
• be for an indefinite term but terminable on notice from the outset; or
• contain a fixed term which requires extension by agreement of the parties.

If the Regulations apply, an agency agreement entered into for an indefinite period can be terminated by either party on notice. This also applies where a fixed term contract is converted into an indefinite agreement.

Mandatory minimum notice periods are specified under the Regulations. These are one month for the first year, two months for the second year and three months for any third or subsequent years. You may agree longer notice periods than those specified by the Regulations but, if you do, the notice provisions imposed on the agent must be no longer than those to be given by the principal.

Duties of an agent

The Regulations impose mandatory obligations on both the agent and principal and sets out each party's duties. These may not be contracted out of but there is nothing to state that you cannot impose additional obligations on your agent if required.

The agent's duties under the Regulations are:

• to act in the best interests of the principal an act dutifully and in good faith;
• to make proper efforts to negotiate and, where appropriate, conclude transactions;
• to communicate to the principal all necessary information available to him;
• to comply with the reasonable instructions of the principal.

In practice these add little to an agent's duties under common law which include:

• to obey lawful instructions of the principal;
• to only act within the limits of authority;
• not to put himself in position where there is a conflict of interest;
• not to make a secret profit or accept bribes;
• not to delegate authority.

Principal's duties

The duties imposed on the principal by the Regulations are:

• to act dutifully and in good faith when dealing with the agent;
• to provide necessary documentation relating to the goods;
• to obtain for the agent all information necessary to perform the agency contract;
• to notify the agent of any anticipated drop in volume of transactions;
• to notify the agent of any refusal or non-execution of a transaction by the principal which the agent has procured.

The principal is also subject to common law duties to pay commission or remuneration, and to pay the agent's expenses and indemnify him against losses suffered during proper performance of the agreement.

Remuneration and commission

If the agent is to be remunerated by way of commission any agency agreement should clearly set out what commission is payable to the agent and when. There is a fall-back position set out in the Regulations, but you can agree alternative provisions with your agent.

If you do not specify what commission is payable then the Regulations will provide that the agent should receive the customary amount paid to agents working on the same type of goods in the same geographical area. Where there is no custom and practice, the Regulations state the commission payable to an agent is reasonable remuneration taking into account all aspects of the transaction.

The Regulations list three circumstances in which the agent is entitled to commission on a transaction. These are where the transaction between the principal and third party is concluded:

• as a result of the agent's action;
• with a third party whom the agent has previously acquired as a customer for transactions of the same kind; and
• with a customer belonging to any specific geographical area or group of customers to which the agent has been given an exclusive right under the agency agreement.

Commission post-termination: commission is payable on transactions concluded after the agency agreement is terminated if the transaction is:

• 'mainly attributable to' the agent's efforts during the agreement term and which were entered into 'within a reasonable period' after the agency contract has terminated; or
• where the customer's order reaches the agent or the principal before the agreement expires or is terminated, or where the order is only accepted after the agency agreement has terminated.

These regulations are not mandatory, so will not apply if there are express terms in the agency agreement relating to commission.

The only circumstance in which the agent's right to commission is extinguished is if the sale contract will not be executed due to a reason for which the principal is not to blame, and then only to the extent that the principal is not to blame. Any commission paid to an agent on such a transaction is refundable to the principal in such circumstances. This provision cannot be departed from to the detriment of the agent.

Commission shall be paid to the agent no later than the last day of the month following the quarter in which it became due. Unless otherwise agreed, the first 'quarter' shall run from the date of the agreement.

Restraint of trade

The Regulations set out the parameters for any restraint of trade clause to apply post-termination which you may wish to include in the agency agreement. This restriction must be concluded in writing and relate to the geographical area, goods and groups of customers covered by the agency agreement. The restriction can last for no more than two years post-termination.

Termination

When an agency agreement is terminated there are three potential areas of claim to consider:

• any outstanding commission if this hasn't been specifically excluded from the agreement;
• any 'pipeline' commission if this hasn't been specifically excluded from the agreement;
• any compensation payable as a result of the termination.

Compensation may be calculated on an indemnity basis or compensation basis. This is intended to reflect the value of the goodwill the agent has generated for the principal. If the agreement does not contain any provisions for how this payment is to be calculated, the payment will be calculated on a compensation basis.

Indemnity basis: for an agent to be entitled to an indemnity, it must have:

• brought in new customers; or
• increased volume from existing customers; and
• the principal must continue to derive substantial benefits from the business.

The payment of any indemnity must be equitable and is subject to a cap based on one year's average gross commission based on the five years before termination or the whole life of the agreement if shorter.

Compensation basis: unless otherwise specified, the agent will be entitled to compensation for the damage it suffers as a result of the termination of the agreement. Such damage will be deemed to occur when the termination takes place in circumstances which:

• deprive the agent of commission which it would have earned had the agreement continued; and/or
• have not enabled the agent to recover the costs it has incurred in connection with the performance of the agreement.

Current case law states that in order to establish the amount of compensation, you will need to look at the value of the agency that has been lost. This is often a difficult sum to quantify, especially in a market where agencies are not traded as businesses. One important thing to note is that there is no cap on the level of a compensatory payment. The agent may also be entitled to an additional amount in lieu of notice.

The only circumstances where an agent will be unable to claim a termination payment will be:

• where the principal has terminated the agreement due to a material breach of the agreement by the agent or due to exceptional circumstances;
• where the agent has terminated the agreement, unless this is due to the principal's breach or where the agent is unable to continue to perform his duties due to age or infirmity.