Making changes to a sales agency contract

Agency relationships rarely stay static. A principal may want to cut the territory, drop the commission rate, convert accounts to house accounts, add sales targets or reporting, or require the agent to change how they work. How much of this can a principal actually impose, and what protection does the agent have?

The contributions below, from specialist commercial agency solicitors, work through the general rules and the specific flashpoints. Each is reproduced in full and attributed to its author.

Making changes to a sales agency contract

The overview: when a principal can and cannot change the terms, with or without a written contract, and what happens to your commission.

It’s not unusual for a principal to want to make changes to their contractual relationship with a sales agent during the course of an agency. Subjects that can come up for discussion include:

• Conversion of customer accounts into house accounts (so that the principal, rather than the sales agent, deals with those customers);
• Reducing the territory covered by the sales agent;
• Reducing the commission rate payable to the sales agent on some or all of the customer accounts serviced by the sales agent;
• Setting annual sales targets;
• Increasing the sales agent’s reporting obligations.

Sometimes the principal seeks to impose such changes, rather than discussing and trying to agree them with the sales agent. Can they do that? Much will depend on the specific circumstances, in particular, whether there is a written contract in place and what that contract says.

The general position

The starting position is that, under the law of England and Wales, any changes, or variations, to an existing sales agency contract (or any other contract) have to be agreed by all of the parties to that contract in order to take effect. You might think that if the sales agent doesn’t agree to the changes proposed by the principal that would be the end of the matter, the principal can’t force the sales agent to agree the changes. That would be a correct legal interpretation in many cases, but there are some nuances and ‘exceptions’ to this general position.

Where there is a written contract

Written contracts often contain a clause which sets out the process to be followed in order to make changes or variations to the agency contract. Such clauses will usually specify that any changes to the contract will only be effective if they are set out in writing and signed on behalf of both parties. This is important and means that if sales agents and principals agree changes verbally, the verbal agreement would not be legally effective.

However, the original contract may itself contain provisions which enable the principal to impose specific changes on the agent without needing the agent’s consent. This is something that a commercial sales agent will need to be particularly aware of when reviewing the draft contract before agreeing and signing it. If the sales agency contract already permits the principal to make such changes without needing the agent’s consent, then the variation clause mentioned above would not apply.

Where the Commercial Agents (Council Directive) Regulations 1993 (“the Regulations”) apply to the agency contract, the situation can become more complicated where the principal seeks to remove customers or territory from the sales agent. Regulation 4 of the Regulations requires the principal to act dutifully and in good faith in their relations with the agent, while Regulation 7 of the Regulations provides that a commercial agent shall be entitled to commission on commercial transactions concluded during the period covered by the sales agency contract where the transaction has been concluded:

• as a result of the sales agent’s action; or
• with a third party whom the agent has previously acquired as a customer for transactions of the same kind.

There is something of a grey area as to whether the sales agent’s rights to be paid commission under Regulation 7 of the Regulations can be excluded by the agreement of the parties (for example, where the parties agree that customer accounts can be converted to house accounts or the agent agrees to a territory reduction). There is a good argument that if the agent has acquired a new customer for the principal, under Regulation 7 they would still be entitled to commission on all sales to that customer even if that customer becomes a house account or is removed from the agent’s territory.

The grey area arises because it is not clear whether Regulation 7 can be overruled by the terms of the commercial sales agency contract. A number of the Regulations explicitly state that they cannot be overruled by the terms of the sales agent contract, but there is no such statement in relation to Regulation 7. Surprisingly, the Courts have not yet had to deal with this issue. The general consensus seems to be that Regulation 7 could be overruled in this way, but until we get a definitive view from the Courts there remains some uncertainty here. In order to protect themselves when dealing with house account or territory reductions, it would be sensible for a commission-only sales agent to try to negotiate something with the principal that either confirms commission will continue to be paid for sales to those customers or gives the agent a payoff for losing those customers. That might be easier said than done in practice!

Where there is no written contract

Where there is no written agency contract in place, it would still be necessary to show that the parties have agreed to change or vary the terms of the agency contract. The circumstances in which this could take place are potentially wider and a Court would consider carefully what evidence there is to show that the parties agreed to change or vary the contractual terms. That evidence could be in writing and signed on behalf of both parties, or it could be produced in a number of other ways, including by email or other correspondence, verbally, or even by the conduct of the parties (e.g. the principal seeks to impose a change, the sales agent does not object to that change and continues over a period of time to perform their duties in accordance with that change).

Commercial reality

While the legal position might be that a principal cannot impose contractual changes on an agent, the practical and commercial realities of the situation might be very different, especially given the economic impact of the Covid-19 pandemic. A principal might be faced with the unenviable situation of having to reduce costs in order to keep their business alive and having to terminate the sales agent contract if costs cannot be reduced. In such a situation, you would hope that the principal and agent could work together to find a way forward, if they are unable to do so then disputes are likely to arise.

Kevin Manship, Solicitor
Peter Dovey and Co Solicitors, 8 Lincolns Inn Fields, London, WC2A 3BP
Email: kevinmanship@pdcosol.com
Telephone: 07778 010574

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How Far Can a Principal Vary an Agency Agreement?

The form a variation must take: why “no oral variation” clauses are valid, and how that protects agents (Rock Advertising v MWB).

Making and unmaking… what are the limits?

Frequently commercial agents find themselves having variations to the terms of their agency imposed upon them informally by their principal. Common variations are a reduction in the agent’s territory, a reduced rate of commission on some or all of the agent’s accounts, or more onerous reporting obligations. Agents often feel powerless to object to the imposition of the new terms.

Oral agreements can frequently give rise to misunderstandings between the parties, particularly when variations are involved. Questions arise as to what the parties actually intended, and the precise terms of the variation. This can lead to disputes, and may ultimately may lead to termination by the principal who considers the agent to be in repudiatory breach of the varied agency agreement. A lack of clarity surrounding a variation to the contract as an undesirable position for an agent.

Where an agent has a written agency contract it may contain a clause requiring any variation to the contract to be in writing. This is sometimes referred to as a “no oral variation clause”. Such clauses are common in written contracts but are often overlooked by the parties.

The reason for a principal not complying with the requirement to record the variation in writing may be two-fold. The principal may believe that just as the parties had the ability to agree to such a term when making the contract, they also had the ability to unmake it. In other instances, a principal who wishes to impose a variation to the detriment of the agent may simply choose to ignore the requirements of such a clause because of the difficulty in obtaining the agent’s agreement to the variation in writing. In both cases an agent may consider himself bound by the oral variation, but careful consideration should be given to the terms of any written agency agreement.

The validity of such clauses has recently been considered by the Supreme Court in the case of Rock Advertising Limited v MWB Business Exchange Centres Limited [2018] UKSC 24. The Supreme Court overturned the earlier decision of the Court of Appeal and held that such clauses are valid. This means that if a variation to the contract is not made in writing in accordance with the requirements of the clause, the variation is not binding even if the parties have orally agreed the change.

This is a welcome decision for commercial agents which will empower them in situations where the principal is seeking to impose variations to the terms of their agency against their will.

The reality is that a clause which requires any variation of a commercial agency agreement to be in writing is no more of a fetter on the agent or principal’s autonomy than any other provision in the agreement. The parties are simply required to follow the express terms of the agreement if they want to vary it. Failure to do so will invalidate any purported variation. This will mean that agents who have their territory reduced, for example, may have a future claim for unpaid commissions from the carved out territory. The sums can be added to the usual claims for compensation or indemnity at termination of the agency.

Agents who are negotiating terms of their agency at the outset of the relationship are advised to include a “no oral variation clause” within in any written agreement. It will restrict the ability of a principal to undermine the written agency agreement by informal means, which may be open to abuse. A variation which is recorded in writing will give certainty to the parties and provides welcome protection for the agent further down the line.

Adam Maher, Partner, Dispute Resolution & Commercial Litigation, Myerson Solicitors
Regent Road, Altrincham, Cheshire, WA14 1RX
Adam.maher@myerson.co.uk
Tel: 0161 941 4000
www.myerson.co.uk

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Amending the Territory: Principals be alert, Agents be aware!

Territory specifically: whether a clause letting the principal cut your territory can sit alongside your right to a termination payment (Vick v Vogle-Gapes).

Although the relationship between a commercial agent and his principal should be one of collaboration, after a while a tension often creeps in when the principal feels that the agent has become lazy and is not doing enough to promote his products.

The principal then has a problem. If he ends the agency, perhaps to appoint his own sales force in place of the agent, he faces a substantial risk of having to pay out compensation or an indemnity under the Commercial Agents (Council Directive) Regulations 1993 (“the Regulations”). One way in which the principal might have tried to protect himself against this is by including in the agency agreement a provision for him to amend the territory if he feels that the agent is not doing enough. The Regulations provide that the principal cannot exclude the agent’s right to a compensation /indemnity payment on termination. The exact wording in the Regulations (Regulation 19) is that “the parties may not derogate from [the agent’s right to a compensation/indemnity payment] to the detriment of the commercial agent before the agency contract expires”. How does a clause which gives the principal the right to reduce the territory, fit in with the prohibition that a principal cannot get out of having to make a payment upon termination by excluding in the agency contract the agent’s right to receive such a payment? The question came up in 2006 in a case called Vick v Vogle-Gapes Ltd. Mr Vick was the agent for Vogle-Gapes Ltd. Vogle-Gapes Ltd was not satisfied with Mr Vick’s performance. The agency agreement provided that if in their reasonable discretion Vogle-Gapes Ltd believed that Mr Vick was failing to maximise sales opportunities within his territory they could amend the territory.

This is what they did. Mr Vick brought a claim for compensation. The case did not in fact turn on the reduction in territory point but, rather, whether Mr Vick had by his behaviour treated himself as no longer being bound by the agency so that the company were not required to pay him compensation (this was the finding which the Court made and Mr Vick failed in his compensation claim). However, one point of discussion in the case was the reduction in territory point. There was a discussion that by reason of the company varying Mr Vick’s territory, Mr Vick could treat the agency as at an end and claim compensation. The argument for Mr Vick was that the Regulations (Regulation 19) prevented the parties from derogating from the agent’s right to a compensation/indemnity payment on termination. His point was that if there had not been an express right in the agency agreement to reduce the territory, the only way in which a reduction in his territory could have been achieved was by a termination of the agency agreement and the substitution of some other agreement. On the termination of the agency agreement, the compensation/indemnity payment would have become payable under the Regulations. Mr Vick’s argument was that because the express clause in the agreement enabled something to be done which otherwise could not be done without terminating the agency agreement, the clause served to derogate from his right to compensation. Regulation 19 prohibited this. Mr Vick’s argument was not accepted. It did not seem to the Court that it was a derogation from a right to compensation upon the termination of a contract, for the parties to agree to a provision in their contract which did not involve termination (but which, if they had not agreed it, the situation covered by the express clause could only have come about by the parties making some further agreement). Thus if the agency agreement when made had not included an express right to vary the territory, that provision could have been added later by agreement between Mr Vick and the company without terminating the agency agreement. The Court accepted that (if the agency agreement had not included the express clause) what the company could not have done was unilaterally modify the territory.

However it went on to state that this did not mean that by agreeing the express clause in the first place as part of the consideration for the making of the agency agreement, the parties therefore derogated from Regulation 17 (Regulation 17 being the Regulation which gives the agent the right to a compensation/indemnity payment on termination). A principal must act dutifully and in good faith so that any decision made by a principal to reduce the territory must be both genuine and rational, e.g. allowing the agent more time to devote to customers whom he was left to service. If the reduction was shown to be made in bad faith as a device to avoid having to make a compensation/indemnity payment, the strategy would fail and if the agent chose to treat the reduction as entitling him to treat the agency as at an end, the principal would likely end up having to make a compensation/indemnity payment. From the principal’s point of view the inclusion of a clause allowing him to amend the territory would at the very least give him a good negotiating position to deal with an agent whom he feels is not pulling his weight. From an agent’s point of view he should resist a clause in an agency agreement which gives the principal the right to vary the extent of the territory so that the principal (short of trying to come to an agreement to reduce the territory) faces the choice of either doing nothing or of terminating the agency and possibly facing a compensation/indemnity claim from the agent.

Article written by Paul Samuel of Ashby Cohen LLP, a leading law firm operating in all areas of employment law, partnership law and in matters arising out of the Commercial Agents (Council Directive) Regulations 1993

Ashby Cohen Solicitors Ltd, 18 Hanover Street, London W1S 1YN
Tel: 0207 408 1338
Email: info@ashbycohen.co.uk
www.ashbycohen.co.uk

Disclaimer: This column does not contain legal advice and is for general guidance only. Agentbase, Ashby Cohen LLP and the writer accept no liability in connection with the general guidance given in this column. Please ensure that you obtain legal advice before acting in reliance upon anything in this article. For example, please be clear that the answers given in this column may not cover all possible angles, aspects, relevant considerations and/or points of law and so that all or any information which is given above needs in every instance to be referred for legal advice for clarification and amplification, before being relied upon

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Turn to Face the Change

The other direction: when a principal can require the agent to change how they work, plus five drafting tips for principals.

Competition never ceases. A business can succeed or fail by its willingness or not to accept change, to adapt, or to move forward.

But what of a situation where a principal needs an agent to change? Is the agent obliged to do so? Can the agent treat the requirement to change as a material breach of the agency agreement triggering a claim for compensation or indemnity?

In one case decided in 2006, the relationship between principal and agent had been disintegrating for some time, not least as a result of what the principal considered to be the underperformance of the agent. The principal had attempted to address the agent’s underperformance by requiring him to use a palm computer. However, the agent pointedly refused to use the computer and was generally disruptive and abusive.

Ultimately, the principal informed the agent that it was reducing the extent of the agent’s territory and market. This was an action which was specifically provided for in the agency agreement. However, it resulted in the agent claiming compensation under the Commercial Agents Regulations on the basis that the agency agreement had been wrongly terminated by the principal.

Before the court, the agent pointed to the obligation on the principal to act dutifully and in good faith. However, the court concluded that the agent had failed to maximise sales opportunities and that this was in part as a result of his refusal to use new technology. His refusal went to the heart of the agreement and, as such, the termination was justified.

Four years later, in a similar pattern of events, the court again concluded that an agent’s non-compliance with a principal’s reasonable instructions justified the termination of the agency agreement. In this particular case, the principal had bent over backwards to accommodate the agent’s repeated refusals to use email, even to the extent of offering to pay for the agent to attend evening school classes. However, at the same time, the principal informed the agent that if he continued to refuse to use email, it would impose an administration fee on him.

When, ultimately, the principal did impose this administration fee, the agent verbally abused the principal’s managing director and it was on this verbal abuse that the principal relied for its defence when the agent brought a claim in court against it under the Regulations.

In relying on this verbal abuse as showing a breakdown in the relationship between principal and agent, the principal was taking a chance. It would have been better advised to rely simply on the agent’s refusal to comply with the principal’s reasonable instructions to embrace a change in the way in which the agent had been working, namely to use email.

A different scenario was at the heart of another judgment six years ago where the principal required a change in the work undertaken by the agent. In this particular case, the principal was able to rely on a provision in the agency agreement which enabled the principal to require the agent to change the way in which it worked. As a result, in the subsequent litigation, the court decided, unsurprisingly, for the principal.

So what can be drawn from these judgments?

First, it is clear that the courts will not stand in the way of reasonable requirements made by the principal. Equally, the courts will permit businesses to become more efficient, an agent refusing to ‘move with the times’ may find himself on thin ice. But third, it will help enormously if the agency agreement enables the principal to expressly require various changes in the way in which the agent goes about his business to take place.

Five top tips for principals

• A formal agency agreement will invariably enable the principal to maximise the agent’s performance and minimise the principal’s exposure.
• An agreement which is clear as to goods or territory will protect the principal. In contrast, an agreement which refers to “the principal’s products” or is vague as to territory (for example, north of a line from the Severn to the Wash) will only harm the principal.
• The agency agreement should provide expressly for the agent to comply with the principal’s reasonable requirements.
• A contractual provision by which the agent acknowledges that from time to time the principal may need the agent to change the way he works will assist the principal.
• If the agent is to be required to address different markets, handle different territories, or seek orders for different goods, the principal should look to put in place a number of separate agency agreements with that agent.

Stephen Sidkin, Fox Williams LLP
Ten Dominion Street, London, EC2M 2EE
Tel: 020 7614 2505
www.foxwilliams.com

Disclaimer: This column does not contain legal advice and is for general guidance only. Agentbase, Fox Williams LLP and the writer accept no liability in connection with the general guidance given in this column. Please ensure that you obtain legal advice before acting in reliance upon anything in this article. For example, please be clear that the answers given in this column may not cover all possible angles, aspects, relevant considerations and/or points of law and so that all or any information which is given above needs in every instance to be referred for legal advice for clarification and amplification, before being relied upon.