Agency agreement – written or unwritten?

Does an agency agreement have to be in writing, and should an agent actually want one? This page brings together four contributions from specialist agency-law solicitors, published as columns on Agentbase. They approach the question from different angles: the legal position and what the Regulations impose either way, the practical pros and cons for the agent, a checklist of clauses to seek and to avoid, and how it all feeds through to what an agent is paid when the agency ends.

Agency agreement: written or unwritten?

A current overview of the legal position: whether an agreement has to be in writing, what the Regulations impose either way, and where written terms help or hurt.

By Stephen Sidkin, Fox Williams LLP. Published March 2024.

Introduction

Agency agreements can be written or unwritten. There is no requirement under English law that an agency agreement must be in writing. This lack of requirement is consistent with the position of most agreements under English law: formality is rarely a requirement.

But given this flexibility why have a written agency agreement? The answer is that a written agreement can provide a great degree of certainty.

In this respect the key word is “can”. This is because:

• where the Commercial Agents Regulations apply, certain obligations are automatically imposed on both principal and agent. Further in respect of many of these obligations, contracting out is prohibited by the Regulations.
• Whether or not the Regulations apply to the agency agreement, certainty can evaporate when faced with the general language used or provisions which are poorly drafted in the written agency agreement.

The Commercial Agents Regulations

The Regulations impose on each of the principal and agent an obligation to act dutifully and in good faith towards each other. The Regulations provide specific “examples” of these obligations. As such, for example, the agent is required to comply with the reasonable instructions of the principal. Meanwhile the principal has an obligation to inform the agent within a reasonable time of the principal’s acceptance or rejection of an order obtained by the agent for the principal.

However, somewhat surprisingly, what is meant by the reciprocal obligation to act dutifully and in good faith and the specific examples which are given in the Regulations as well as the corresponding provisions in the EU Agents Directive (which the Regulations implemented into English law) is, in turn, somewhat uncertain. This is because of the few court judgments which have interpreted these provisions.

The flip side of the lack of court judgments is that the opportunity arises for principal and agent to agree in the agency agreement provisions which build on these general obligations.

Nor do matters rest there. Recently there have been some “innovative” judgments given both by the European court as well as appeal courts in a number of EU member states in the interpretation to be given to the provisions in the Directive as to the principal’s obligation to pay commission and as to how the compensation payable to the agent on termination of the agency agreement is to be calculated.

Agency agreements generally

Generally imprecise language can be costly.

Take, for example, an obligation to pay commission on goods sold. Expressed in such straightforward language in a situation where the buyer of the goods has not paid the principal for the purchase price, can the principal legitimately refuse to pay commission to the agent? Interestingly where the agency agreement is subject to the Regulations the position is that commission can be withheld if the principal is not responsible for the non-payment by the buyer. So in a situation where the buyer refuses to pay for goods delivered late, the principal will still be required to pay commission to the commercial agent.

Further the situation can become awkward for either or both of principal and agent. For the principal to impose its agency agreement on the agent, provisions which are considered to be unreasonable as they allow the principal to avoid performing its contractual obligations will be unenforceable.

Sometimes an agent will act for a principal which offers goods which compete with some of the goods of another principal also represented by the same agent. A claim by the agent that the second principal was aware of the situation at the time of engaging the agent is most unlikely to prevent the first principal from being able to claim that the agency agreement has been seriously breached by the agent. To prevent this situation from occurring, the onus is on the agent to obtain the prior informed consent of both principals to the agent acting for each of them.

Nor is the situation ameliorated by one principal putting onto the market a new product which was not offered for sale by that principal at the time when the agent was appointed or even when the agent took on another principal.

In brief, if the agent is to choose which product or which principal the agent is to promote at any point in time, both principals must agree to the agent having the right to choose. A claim by the agent that it knows which products better suit different customers is an unsustainable position for the agent to take.

And what of variations?

The parties to a written agreement can be expected to focus on the provisions they consider most important to their respective roles. Unsurprisingly this is no different in respect of an agency agreement. However, most written agreements used in business will have a raft of different provisions tucked away towards the end of the agreement, after what are often considered to be the key substantive provisions of the agreement. These tailed provisions are usually given the dismissive, generic name of “boilerplate” as if they are not worthy of consideration.

But care is needed, particularly if the agency agreement contains a “no oral modification” clause. The general position following a judgment of the UK’s Supreme Court is that a no oral modification clause means just that: a variation of the agency agreement must be in writing. The fact that principal and agent orally agreed to vary the written agency agreement is irrelevant. The fact that by the actions towards each other, the conduct of principal and agent indicated a change to the written terms of the agency agreement is equally irrelevant.

And finally

Both principal and agent should be careful for what they wish. In the absence of there being a written agency agreement, both principal and agent can require from the other a signed written document setting out the terms of the agency agreement. Whilst this provision in the Regulations is little known, it can be used by either principal or agent to its advantage by forcing the other party to the agency agreement to set out what are the terms of the agreement and in turn being required to demonstrate how those terms were agreed.

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Is it a good idea for an agent to have a written agreement?

An agent’s eye view of why a written agreement can cut both ways, with a practical checklist for handling a contract a principal puts in front of you.

By David Bentley, Bentley and Co. Solicitors. Published August 2011.

As it is difficult to envisage any situation where a genuine agreement reached between two or more parties shouldn’t be properly recorded in writing, it can therefore be said that the same holds good and just as applicable in a principal and commercial agent scenario.

The recent case of Barnett Fashion Agency Limited and Nigel Hall Menswear Limited reinforces that as being correct, and (more than that, and crucially, this April 2011 decision of the High Court) sets out (amongst other things) the great importance of ensuring that all and any agreed changes to whoever are the parties to the commercial agency relationship must be effectively achieved and recorded, (again) in writing. Following on from the above, and as most agents will be aware, many commercial agency contracts in practice take the form of a simple letter of appointment, and whereas that generally has a different appearance to a more formal contractual document, that does not then mean that letters of appointment aren’t of themselves binding on the relevant parties or, in many instances, adequate. There are in fact many considerations as regards this issue of commercial agency written agreements, and primary amongst those is being aware that (a) a lack of any written agreement (formal or otherwise) does not (in this Country, at least) of itself prevent an agent from potentially being entitled, in appropriate circumstances, to bring a claim for compensation (- in fact, the majority of the many cases I have acted in over the years have been where the agent hasn’t had any formal written agreement), and that (b) what agents must very promptly do is to get any draft agreement which is presented to them by their principals legally reviewed, and to get appropriately detailed legal advice (from a specialist solicitor), in writing. In this, and the reason why, in practice, agents might otherwise be comparatively immeasurably better off not to enter into a formal written agreement at all with their principal, the fundamental point to be very aware of is that detailed written agreements drafted on behalf of principals may (validly) contain any number of provisions the effect of which may be extremely disadvantageous from the agent’s point of view, and which (for example) include:- Adding to the agent’s contractual obligations towards the principal, and making clear that in the event of the agent’s failure to achieve any of those additional obligations, the agent may then lose his rights to any form of compensation, on termination; varying the agent’s in principle rights on termination to an indemnity (as opposed to “compensation”); a clause excluding the agent’s rights on termination to receive “pipeline transaction” commission; clauses enabling the principal to make changes to any of the contractual arrangements, without having to obtain the agent’s further agreement to that; and/or (as just another example) the inclusion of a post termination “restrictive covenant”.

As I say, there are innumerable considerations in respect to this issue of written agency agreements, and, as a brief check list of just some of those further important points to bear in mind, I would highlight the following, as examples:-

• An agent is not obliged to have to sign a written agreement which is presented to him part way through the period of the agency, unless the draft contract is an accurate reflection of terms and conditions already agreed or otherwise sets out new terms which he is now prepared to accept. In this, principals will quite frequently only belatedly become aware of the sorts of provisions which could be to their significant advantage to be included in an agency contract, and will then attempt to bamboozle the agent with threats that the agency will be terminated if the agent does not accept those new terms. Whereas the principal may always (on appropriate notice) terminate the agency relationship if that is its choice, the point however is that the agent wouldn’t lose whatever rights he might otherwise have had as a result of such a termination, merely on account of the fact that he refused to sign a written agreement which was not an accurate reflection of terms agreed.
• Again, if a contract is presented to an agent after he has already been acting on behalf of the principal, the agent should promptly [i.e.:- as his first course of action] send a written communication back to the principal, making clear (amongst other things) that he (the agent) should not and does not intend that he be deemed to have somehow agreed to any of the proposed changes (i.e.:- as set out in the draft agreement) unless and until he actually at any point in time signs and returns the relevant document.
• Certain provisions of the Commercial Agents Regulations may actually override what is otherwise contained as a provision in an agency agreement, and also vice versa, i.e.:- certain aspects of the Regulations are capable of being varied for the purposes of the agency, by provisions in a contract.
• Agents (and principals) should also bear in mind that whatever are the provisions of any written agency agreement, those are potentially capable of being varied by custom and practice. Finally, I would add a brief word about a couple of common misconceptions. Firstly, the misunderstanding that UK commercial agency law cannot be contracted out of if the agent is based in this Country: if (however) the principal is based in another EU Country and the agent agrees that the laws of that other EU Country are to govern the agency relationship, then that other European Country’s laws will generally apply instead, and even more reasons then as to why legal advice should be taken (as always) before the agency commences; secondly, some agents will seek to argue later on that they were “forced” into signing an agency agreement, and that it is therefore not binding on them, however, short of extreme circumstances (which I personally have never come across), that is not an argument which would likely succeed. The message is to always (without any exception) immediately take specialist legal advice in writing before you agree (or could be deemed to have agreed) to an agency agreement.

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Better off or worse off? A checklist of clauses to seek and to avoid

A practical checklist of the clauses that work in an agent’s favour and the clauses to steer clear of, and why a written agreement is usually still worth having.

By David Bentley, Bentley Agency Law Limited. Published July 2018.

Overwhelmingly, and generally speaking, agents are in a much better position in having a written agreement with their principal – however, as to whether agents are in a better or worse position by entering into a particular written agreement with any principal will obviously depend on what are the actual proposed terms of the relevant document. In other words, if the proposed terms are to the overwhelming disadvantage of the agent then (obviously) it would to the agent’s corresponding disadvantage to have a written agreement in that instance in agreeing to those particular terms.

On the other hand, if the terms proposed are neutral, or otherwise to the agent’s advantage, then, and similarly obviously, it would then be to the agent’s advantage to agree to those acceptable terms, in order to secure the benefit of having a contract in writing. Everything therefore depends on what are the actual terms proposed, but the best advice (and to reiterate) is always to have a written agreement, but incorporating terms which are not materially to the agent’s disadvantage.

Remember also that parties to an unsigned contract may (in certain circumstances) be bound nevertheless by certain or all of its terms, depending on what was said/written and how the parties conducted themselves towards each other following the presentation of the draft agreement.

What are examples of good things to record in a written agency agreement?

Non exhaustive examples of advantageous points to include in a written agency agreement include:

• Date when the agency commenced
• The precise names of the parties so as to be able to accurately identify them
• The role expected of the agent (i.e.:- selling on behalf of the principal), and an acknowledgment that it is the role of a ‘commercial agent’
• The territory area to be covered by the agent (and whether that be by geographical reference or by reference to a named group)
• A description of the products to be sold by the agent
• A statement that the agency is exclusive to the agent (i.e. – that he or she will receive commission in respect to all sales)
• The rate(s) of commission to be paid to the agent
• The date by when commission has to be paid
• That any stipulated sales targets are targets that the agent will aim to achieve but not to be obligatory in sense of constituting a breach in event of any failure
• That any other agreed obligations on the part of the agent are obligations which the agent is clear are within his or her own control
• The notice period to be afforded by the parties to terminate
• No variations to any terms agreed unless both parties consent in writing

Keep in mind that certain provisions of the Commercial Agents (Council Directive) Regulations 1993 will anyway afford the agent certain protections (and otherwise supplement the terms of whatever may be agreed in writing), but that the above are examples of what terms to include in an actual written agreement.

Keep in mind also that there are many other examples of beneficial clauses which could be considered for inclusion in an agreement in writing, and that the above are just a few examples.

What, and on the other hand, are examples of things definitely not to agree (and which would not form part of the terms by dint of anything in the Commercial Agents Regulations)?

• That, without the agent’s prior consensus, the principal has the right to make any changes to the terms of the contract
• That any failure to achieve a sales target constitutes a breach of obligation on the part of the agent
• Obligations on the part of the agent which are not within his or her own control to achieve
• Any failure on the part of the agent to comply with any obligations to result in the agent’s loss of right to a compensatory payment on termination
• Any clause effectively excluding the agent’s prospective entitlement to post termination commission in the pipeline
• Post termination restrictive covenants

There are in fact many other examples of clauses which should never be included as part of an agreement (i.e.:- I have come across so many that the above list constitutes just a few examples, and not necessarily at all the most important). Remember also (and on the other side of the coin) that certain provisions of the Commercial Agents Regulations which are favourable to the agent may actually be specifically (but not always in an obvious way) excluded in a written agreement (i.e. – not all of the Regulations are mandatory and can thus be excluded by consensus between the parties, and hence the obvious need to seek legal advice before signing any agreement or, indeed, before communicating a position in respect to a draft which is presented, or otherwise before taking no action at all (which is never advisable)).

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Should agents have written contracts?

How the written-or-not question feeds through to compensation versus indemnity when an agency ends.

By Larry Coltman, Hill Hofstetter LLP. Published March 2009.

This is a question which is often asked by Principals and Agents. Some countries insist on written contracts whereas others, like the UK, do not require Agents to have written contracts to rely on the benefit of the Commercial Agents (Council Directive) Regulations 1993.

There are a number of remedies available to the parties under those Regulations in the event of disagreements or disputes. One of the major issues is what an agent should be entitled to if he is unlawfully terminated by a Principal.

In the absence of a written contract or a contract specifying an indemnity provision, the Agent would be entitled to claim compensation which is currently based upon a valuation of the agency carried out by an independent expert valuer. The indemnity provision which is preferred by Principals has to be included in a written contract for Principals to rely on it.

The net result is that a Principal would be obliged to pay, in the event of wrongful termination of the agency, an indemnity payment which is no more than the annual average commissions over the last 5 years of the agency. It is also subject to a number of deductibles including 8% for accelerated receipt, the Agent’s expenses and any customers and turnover the Agent inherited from the Principal at commencement.

This means it is unusual for an Agent to get anything like 100% of the annual average commissions over the last five years provided there is an indemnity clause in your written contract.

Conversely, under the compensation valuation system, the valuations can vary dramatically between one year and seven years in my experience depending upon the length of the agency, the success of the agent and a number of other factors. It is also based on net commissions but nevertheless the calculation of compensation is usually far more than an Agent would be entitled to with an indemnity provision in his contract.

For these reasons, Agents prefer to have no indemnity provision in their contract or no written contract. Principals usually insist on a written agency contract with an indemnity clause if they have taken legal advice before engaging an Agent.

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Contributors

Disclaimer: the contributions on this page are general guidance, not legal advice, and reflect the law as understood at the time each was written. Agentbase and the contributing firms accept no liability for any reliance placed on them. Please obtain legal advice before acting on anything set out here.