When a principal and an agent put their agreement together, a handful of clauses cause most of the difficulty if they are not thought through. This guide by solicitor Kevin Manship walks through them in the order they tend to come up, from the products and territory the agent covers, through the principal’s rights in that territory, to the agent’s role with customers, the agent’s obligations, and the thorny question of sales targets.
By Kevin Manship, Solicitor. This guide brings together both parts of his 2022 series on Agentbase, published in February and July 2022.
One of the common questions I am asked, particularly by agents, is why agency contracts have to be so long. Quite often they are 20 – 30 pages, or even longer. In many cases, the contract doesn’t need to be that long and, in fact, where the contract is lengthy and complex there is a risk that neither party understands it, so neither party follows it. That can cause serious problems.
The really important elements of an agency contract will vary from contract to contract because they will depend on what is important to the individual principal and the individual agent. This guide focuses on the clauses which I have found to require the most discussion or which can cause the greatest difficulty if they are not clear and the agency relationship runs into trouble.
Let’s start with some of the provisions that are found right at the start of the contract and are likely to feature in early discussions between the principal and agent.
What products of the principal is the agent authorised to deal with?
Well that’s obvious, I might hear you say. It’s all of the products offered by the principal. That might be correct in many cases, but sometimes the agent might only be authorised for specific brands or product ranges. Where this applies, those brands or product ranges would need to be set out very clearly in the agency contract.
The principal and agent might also want to think about what happens if the principal introduces new product brands, products or product ranges into the market at some point in the future. Would the agent be automatically authorised to deal with these new products, or might the principal and / or the agent want the flexibility to be able to decide what to do at the appropriate point in time?
Similarly, what happens if some products are to be removed from the authorised product list? There may be circumstances in which the principal wants to be able to do what they want without having to get the agent’s agreement (e.g. if they decide at some point in the future to discontinue certain products or product ranges).
The agency contract might need some flexible drafting to cover the above points.
What geographical territory is the agent going to cover?
In many cases this will also be obvious, but the allocated territory should be clearly described to avoid any misunderstanding about what the agent is to cover. This can be done by reference to counties, postcodes or countries, depending on the size of the allocated territory. This description can be important where the agency contract prevents the agent from dealing with enquiries or sales from customers located outside the allocated territory. The agent’s entitlement to commission is also likely to be limited to sales of the “Products” which take place to customers located within the allocated territory.
The parties might also need to consider how best to deal with “national accounts”, which might have their headquarters in one agent’s allocated territory and a number of outlets or branches spread across various other territories. The principal might decide to treat such customers as house accounts (i.e. they are dealt with internally by the principal, not by agents and no commission is payable to the agents). Alternatively, it could be agreed that the agent is paid commission (possibly at a reduced rate) on sales made to outlets or branches of the “national account” which are located within the agent’s allocated territory or, where all sales are made through the headquarters, commission on sales could be apportioned between agents depending on how many branches are located in their allocated territory. The level of commission payable might depend on how much contact the agent has with the “national account”, whether through the headquarters or by visiting the outlets or branches in their allocated territory. There are a number of different ways to deal with what can be a difficult and emotive issue.
What is the principal permitted to do in the agent’s allocated territory?
This question can sometimes lead to heated discussions between the parties. Many agents would prefer to have the exclusive right to generate sales within their allocated territory, with no right for the principal to make any direct sales or to appoint anybody else to cover the territory.
On the other hand, the principal might want to retain the right to make direct sales within the territory to certain types of customer (e.g. to existing customers or national accounts) without involving the agent. Depending on the nature of the products, the principal might also want to be able to appoint other agents or distributors to seek sales within the allocated territory. The logic behind this might be to keep the agent at the top of their game in the face of competition. However, this would need to be considered carefully as it could be counterproductive to the principal’s business to have multiple representatives pursuing the same customers.
Careful thought and clear drafting can save a lot of problems here.
What is the agent’s role with customers?
Two of the more common phrases used to describe agents involved with the supply of goods to customers are “sales agent” and “marketing agent”. What do they mean?
A sales agent will usually be authorised to promote, market, negotiate and enter into contracts on the principal’s behalf. A sales agent will not be a party to the sale contract – that will be between the principal and the customer. However, a sales agent may be authorised to commit the principal to a sales contract with the customer.
In contrast, a marketing agent will be authorised to promote and market the principal’s products and solicit orders for them. They will not have authority to enter into a contract of sale on behalf of the principal.
While these two phrases are generally understood in the industry, we would not recommend that the agency contract simply states that the agent is to carry out the duties of a sales agent or a marketing agent. The agency contract needs to set out clearly what the agent is authorised to do with customers and what they are not.
Some key obligations of the agent
Some obligations will automatically apply as a result of common law and (where applicable) the Commercial Agents (Council Directive) Regulations 1993, whether or not they are set out in a written agency contract. Many agency contracts will include these obligations, which is a sensible approach because it makes clear to the agent what is expected of them. These automatic (implied) obligations include obligations to look after the interests of the principal, to act dutifully and in good faith and to comply with reasonable (lawful) instructions given to the agent by the principal.
There are a whole host of other obligations that could be included within the agency contract. The extent of the list quite often depends on the bargaining power between the parties and how much control the principal wants to exert over the agent. If the principal is in a strong bargaining position and wants to be kept fully informed of what the agent is doing, the list is likely to be longer. In contrast, if the principal really needs the agent’s expertise and/or is prepared to let an experienced agent get on with things, the list of obligations might reflect a lighter touch.
In many cases, the parties might want to think about:
- the extent of the agent’s reporting obligations to the principal. Does the principal want detailed reports for each customer visit made by the agent, or would a monthly overview be sufficient? Is the agent required to keep the principal updated on developments in the market, including the actions of competitors?
- whether the agent is needed to provide support at trade fairs or exhibitions.
- how advertising responsibilities are to be divided between the agent and the principal (e.g. product samples, marketing materials etc).
- whether the agent has a role in issuing invoices to customers, chasing payment or dealing with complaints.
If the agency is to be successful, it is important to strike the right balance here. If an agent is bogged down with a heavy administrative burden, they are unlikely to be as successful in generating those all important customer orders. On the other hand, it is helpful for a principal to have visibility of what an agent is doing, not least because this can give an early warning if things are not going as well as expected.
Should the agency contract include a minimum sales target for the agent?
Many agency contracts function perfectly well without sales targets but, equally, in other contracts such targets play an important and effective role in setting the expectations of the parties for each sales year.
If sales targets are to be included in an agency contract, how are those targets to be set? The principal might want to have absolute discretion to set whatever targets they see fit. Such an approach is likely to set alarm bells ringing with an agent about the risk of the principal setting the sales targets at levels that would be impossible for the agent to reach. This approach is sometimes used by principals as a mechanism to get rid of an agent they no longer want to use, not necessarily because the agent’s performance is poor but because the principal feels they are paying the agent too much.
There might be a reasonable middle ground available, which involves the principal and agent discussing and agreeing reasonable sales targets before the start of each sales year. From the principal’s perspective, there might be concern about what happens if the agent refuses to agree any sales targets (again, this is not unheard of). Provisions could be included to protect against this, for example setting the sales targets at 5% more than the previous year’s sales targets if agreement cannot be reached by a certain deadline.
A key element of minimum sales targets is what happens if they are not met. In some agency contracts, failure to meet minimum sales targets would entitle the principal to terminate the agency contract. However, even where the agency contract contains such a provision, care must be exercised by the principal because, although the failure enables the principal to terminate the agency contract, the principal could still be liable to pay compensation or indemnity under the Commercial Agents (Council Directive) Regulations 1993. The Regulations state that the principal can only avoid having to pay compensation or indemnity upon termination of the agency contract where it has terminated the agency contract because of default attributable to the agent which would justify immediate termination by reason of the agent’s failure to carry out their obligations. In other words, for a principal to escape having to make a termination payment, the agent’s failings must be so serious that the Court, looking at the nature and consequences of the breach, decides that the principal was justified in terminating with immediate effect.
But there could be any number of valid reasons why minimum sales targets have not been met. It might have been due to a general deterioration in the market, or orders being cancelled by customers because the principal did not make deliveries on time, or because a competing product has entered the market. The circumstances that have arisen during the COVID-19 pandemic highlight a number of further examples, such as national lockdowns and entire industries and sectors having to close down or significantly reduce their activities at short notice. None of these reasons could be classified as “default attributable to the agent”.
In such circumstances, it seems likely that the agent would still have a good claim for compensation or indemnity notwithstanding that the agency contract was terminated because minimum sales targets were not reached. This does not necessarily prevent minimum sales targets from being included in the agency contract in the first place. The risk is around whether the principal actually uses its termination rights if those targets are not met.
Kevin Manship, Solicitor
Albertson, 14 Old Square, Lincoln’s Inn, London, WC2A 3UE
Email: kevinmanship@albertson.law | Telephone: 07778 010574
This is general guidance, not legal advice, and every agency contract turns on its own facts. Please take specialist advice before relying on anything set out here.
Further Reading
One of the clauses that causes the most confusion is exclusivity. For what exclusive, sole and non-exclusive actually mean, see exclusive, sole or non-exclusive agent.
Post-termination restrictions are limited by Regulation 20. For how far they can go, including a case where a restraint was struck down for being too wide, see restrictive covenants in commercial agency agreements.
Contracts rarely stay static. For how much a principal can change later and what protects the agent, see making changes to a sales agency contract.
Clear wording at the outset saves arguments later, because a court holds you to what the contract says. For how the courts read the words, see interpreting the agency contract.