Arrangements with commercial agents are often entered into by principals without any written confirmation of the terms of the appointment or the continued obligations of the agent. This approach is, however, risky and can lead to a number of difficulties throughout the agency and upon its termination. Richard Bailey, a Principal in the Commercial team, considers some of the advantages to principals of having a written agreement in place with its commercial agents.
Principals need to be aware that from day one of the appointment of the agent the Commercial Agents (Council Directive) Regulations 1993 (“the Regulations”) apply. These impose certain rights and obligations on both the principal and the agent, most of which cannot be derogated from. However, these duties can be expanded on and clarification given by a written agreement.
Whether or not a written agreement is entered into at the beginning of the agency, the agent will still have obtained a number of rights under the Regulations. These rights, will form the basis of the agent’s agreement with the principal. If a written agreement is subsequently wanted, it will need to be agreed by both parties. Often the reason for introducing a written agreement is for the principal to impose more onerous obligations and to limit its exposure upon termination of the agency. An agent aware of his rights under the Regulations may be reluctant to vary them and reaching an agreement could be a lengthy and difficult process.
One area where having a written agreement in place can be very significant, is upon the termination of the agency. Under the Regulations the agent is frequently entitled to a termination payment and the Regulations provide two forms of recompense known as compensation and indemnity. Unless there is a written agreement stating otherwise, the agent will be entitled to compensation rather than indemnity and this often is of greater benefit to the agent. With a written agreement, the principal could elect for payment on termination to be by way of indemnity.
Under the Regulations there is no method for calculating compensation. Current case law provides that the assessment of compensation should be based on the value of the agency as though it were a separate business, which is difficult to ascertain.
On the other hand, under the Regulations an indemnity is capped at one year’s commission. Often the indemnity will be the cheaper option for the principal.
If it can be shown that the agent is in fundamental breach of their contract with the principal, the agent will not be entitled to any termination payment. This is usually much more difficult to prove if there is no written agreement in place, as there are only a few basic obligations imposed on the agent under the Regulations. If however, a suitable written agreement was also in place it may be much easier for the principal to show that the agent is in fundamental breach of the agreement and therefore not entitled to recompense. The inclusion in a written agreement of a mechanism for setting ongoing minimum sales targets is one example where the agreement can be very beneficial.
A written agreement should also set out clearly what sales will give rise to commission for the agent. The agreement may define the principal’s House Accounts and perhaps include a procedure for the principal to convert other accounts to House Accounts during the agency.
There are many other clauses that can and should be included in a written agreement to protect the principal during the agency. Taking time to draw up a good agency agreement may save the both principal valuable time and money in the future and can be of great assistance throughout the term of the agency and also upon termination.
If you require any advice on agency matters, please do not hesitate to contact Richard Bailey by telephone on 01603 598000 or alternatively by email to rbailey@steeleslaw.co.uk.