Out-Law Guide | 23 Aug 2011 | 12:56 pm | 5 min. read
Currently window installers tender to house builders for the award of window installation contracts. The tender is based on installing the products of a specific manufacturer, and will include a mark-up to cover installation services and administrative costs. The manufacturer will supply the installer with the products and invoice the installer for the supply. The installer will invoice the house builder for the installation services and the product price.
This setup effectively puts the installer in the middle of these payment streams and forces the installer to take a financial hit if the house builder's payments are delayed. An agency agreement can be a way of avoiding this situation, and giving the manufacturer more control over installation contracts and payment.
Note that unless carefully drafted, agency arrangements could fall within the scope of the Commercial Agents (Council Directive) Regulations, giving the installer extra rights over the manufacturer than it would otherwise have. If this is the case the installer will be entitled to the protections given to it by the Regulations, particularly in relation to termination payments. You cannot contract out of these provisions. See our Out-Law Guide to Commercial Agents for more information.
Possible contractual structure
If the manufacturer and installer enter into an agency agreement, the installer would tender on behalf of the manufacturer for installation contracts with specified house builders. The manufacturer will be bound by the commitments made on its behalf by the installer in the tenders. The manufacturer may choose to pay the installer a commission or administration fee for any new business created in this way.
The manufacturer and the house builder can then enter into a direct supply and installation contract. The manufacturer will take a 'performance' risk under this contract, meaning that if the installer defaults for any reason the manufacturer will be liable for any such default.
The manufacturer and the installer will then enter into a separate subcontract for the installation services to be provided to the house builder. The terms of this subcontract should effectively mirror the manufacturer's obligations to the house builder under the contract above.
The subcontract will include payment terms which state that the installer would receive the installation fee.
Would the installer be considered a 'commercial agent'?
The definition of a 'commercial agent' for the purposes of the Regulations is a "self employed intermediary who has continuing authority to negotiate the sale or purchase of goods on behalf of another person... or to negotiate and complete the sale and purchase of goods on behalf of and in the name of [that person]." An agent who supplies services rather than goods is therefore not deemed to be a commercial agent under the Regulations.
To avoid the application of the Regulations, the contracts should be structured so that the installer can only provide tendering process services, such as the administration and management of the tender process. However, the courts have shown an increasing willingness to treat 'services' as goods, for example in the case of agents selling electricity and gas supplied. There is a risk that the tendering 'services' could be regarded as procuring sales for the manufacturer, and therefore caught by the Regulations.
The parties cannot agree at the outset to contract out of the Regulations. However, including wording in the agency agreement to state that the parties do not consider they apply may minimise the risk of any later claim by the installer for a termination payment by indicating the intention and understanding of both parties.
Are there any exceptions to the Regulations?
Regardless of the way the agency agreement is structured, there remains a risk that the Regulations could apply and the installer be considered a 'commercial agent'. However, there are a number of exclusions to the definition within the Regulations. Of most relevance in this case is where the agents' activities are considered to be 'secondary' to their other activities.
Criteria that are indicative, although not conclusive, that an agent's activities may be 'secondary' are:
Another exception to the definition of 'commercial agent' is where the agent does not have 'continuing authority'. An agent who is only authorised to conclude a single transaction on behalf of the principal is not generally thought to have continuing authority for the purposes of the regulations.
What are the risks for the manufacturer if the Regulations apply?
The biggest risk for the manufacturer if the installers are considered 'commercial agents' for the purposes of the Regulations is that payments could become due from the manufacturer to the installer on termination of the agency relationship. This payment can be calculated on either a 'compensation' or an 'indemnity' basis. Unfortunately it is difficult to work out which will provide the cheapest option at the start of the agreement, as it depends on the performance of the installer. If no calculation method is specified then the payment will be calculated on a compensation basis.
Compensation payment: where parties opt for this route the payment is calculated by reference to the value of the agency on the date of termination - that is, the price a hypothetical purchaser would be willing to pay for the agency at that time on the basis that it would continue. In some circumstances this may be only a small payment where the agency is terminated because the principal is going out of business or the market is in serious decline, but otherwise this could be a significant sum of money.
Indemnity payment: this is calculated on the basis of what value the agent has added to the principal's business, rather than the value of the agency itself. Under current law a payment calculated on this basis is capped at one year's gross commission averaged over the last five years or the life of the agency relationship, if shorter. However this is calculated with reference to total commission, not just that from new or increased business. If the installer has performed exceptionally this could still be a large sum, but the degree of measurability makes this a potentially more attractive option.
Exceptions: the installer's right to compensation or indemnity will arise whenever an agency agreement protected by the Regulations comes to an end unless:
Will the risk of a termination payment last indefinitely? No - the installer's claim for a termination payment will become time-barred if it does not notify the manufacturer that it intends to pursue a claim within a year of termination.