Agency Agreement (favouring the Agent)

Explanatory Notes

Agency Agreement (favouring the Agent)

This Agency Agreement suggests that a manufacturer or supplier of goods in one country will appoint an agent in another on an exclusive basis for the sale of those goods. The Agency Agreement is fairly evenly balanced, but biased in favour of the Agent. Whereas a distributor buys for re-sale, purchasing from the supplier/manufacturer (known as the 'Principal'), the role of an agent is to sell on behalf of the Principal and usually on the Principal's terms and conditions of business.

Because of the cross-border nature of the Agency Agreement, the Agent should have the text checked by a lawyer in the Principal's jurisdiction even if the Agent wishes to use the law of his own country, i.e. the Territory, as the governing law of the Agency Agreement.

Specific comments on our Agency Agreement, by reference to clauses, are set out below:

1. DEFINITIONS

This clause in the Agency Agreement contains a number of defined terms that need to be considered by the parties in the light of their own particular arrangements. 

Products are to be listed in a Schedule. Especially when the relationship between the parties is a new one, the Principal will need to consider whether to list all his Products or only those which he considers are likely to sell most effectively in the Agent's Territory. It's sometimes possible for a Principal to appoint different agents for different products in the same territory. The Agent should be aware of this and may endeavour to persuade the Principal that all Products of the Principal are covered by the Agency Agreement.

If the Principal is new to the region where the Agent operates, the Agent may wish to propose that the Territory shall cover not only the Agent's own country but also neighbouring ones. In that case, wording may need to be introduced in the Agency Agreement under which any local sub-agents that the Agent has to appoint are adequately covered under the commission arrangements with the Principal: suggested wording is included in the Agency Agreement. It's possible that the Principal may insist upon an indemnity from the Agent in the event of a claim being made by a sub-Agent against the Agent in respect of commission claimed by the sub-Agent. Any such suggested indemnity must be discussed with the Agent's local lawyers before agreement. Under English law the effect of an indemnity is to make it easier for a party claiming recovery of loss or damage rather than extending the scope of legal liability.

The Territory covered by the Agency Agreement is defined by reference to a Schedule. The Territory may cover a complete country, part of a country or more than one country, but whichever the case, it is important to define it clearly in the Agency Agreement. 

2. APPOINTMENT AND DURATION

This clause in the Agency Agreement confirms the Agent appointment on an exclusive basis, i.e. the Principal by appointing this Agent will not be able to make another agent appointment for the same products in the Territory.

In 2.2 the Agency Agreement contemplates a fixed Initial Period of [two] years and after that the Agency Agreement will roll over unless terminated.

3. MAJOR TERMS OF APPOINTMENT

The basic principle of this clause in the Agency Agreement is that the Agent should be entitled to commission on all sales of the Products to customers in the Territory, including Products sold elsewhere but destined for delivery to the Territory. This may be very different from the Principal's perspective under which, for example, certain sales are sensitive and the customer wants to deal only with the Principal. In such a case, the parties need to reach agreement on what, if any, commission will be payable. As noted under "Definitions" above, where sub-Agents are appointed wording may be required in the Agency Agreement to deal with payment of commission to the Agent on behalf of the sub-Agent.

4. AGENT'S GENERAL OBLIGATIONS

This clause in the Agency Agreement requires the Agent to promote the sale of the Products, undertake an advertising campaign, etc. As this Agency Agreement is drafted from the Agent's point of view, it's shorter than the Principal might wish for. (See contract template Agency Agreement (favouring the Supplier/Manufacturer) for a clause favouring the Principal.)

5. ORDERS AND SALES

Since the Agent is selling on the Principal's behalf, he is required in this clause of the Agency Agreement to apply the Principal's list prices and not to offer any discount or impose any surcharge outside agreed limits.

The second alternative (in clause 5.4 of the Agency Agreement) requires the Agent to pass orders directly to the Principal, which will be confirmed by the Principal.  Payment will be made directly by the Customer to the Principal, but if the Agent does receive payment, he is required (in clause 5.5 of the Agency Agreement) to forward the payment to the Principal within 30 days.

Commission is dealt with by reference to Schedule 3.

Clause 5.7 of the Agency Agreement deals with statements to be sent to the Principal against which the Principal will make Commission payments. Under this wording, the Principal is required to pay relatively quickly from the date of receipt of a statement, which is acceptable to him. Longer payment periods would require adjustment of the wording. Interest is payable to the Agent in the event of late payment.

6. PRINCIPAL'S GENERAL OBLIGATIONS

For the Agency to operate successfully, the Principal needs to provide regular support, including advertising material, technical data, etc. as well as ensuring that price lists are kept up to date.

In appropriate cases where training is necessary for the Agent's staff, clause 6.1.4 of the Agency Agreement provides for the Principal to give free training, which may include the employees' travel and accommodation costs. 

The clause in the Agency Agreement also obliges the Principal to confirm orders and make deliveries in accordance with those confirmations, as well as maintaining product liability insurance and indemnifying the Agent against any Product defects.

7. INTELLECTUAL PROPERTY

The Principal will usually want to protect his trademark, trade name and other intellectual property rights. The Agent is required to notify any infringement and prevented from registering any of the Principal's trade names or other intellectual property rights. Provision for protection of the Agent's intellectual property rights is also included in the Agency Agreement.

8. TERMINATION

Under this clause in the Agency Agreement, either party can terminate in the event of the other's material (i.e. not trivial or insignificant) breach of contract or insolvency. Termination by the Principal may not be as easy in practice as this clause in the Agency Agreement suggests and legal advice is recommended before attempting to terminate the Agency Agreement.

Clause 8.3 of the Agency Agreement deals with the consequences of termination. Outstanding sales will be honoured and the Agent will receive commission that has already been earned.

Clause 8.4 of the Agency Agreement contains provision for the Principal to pay compensation to the Agent, unless termination is due to the material breach of contract or insolvency of the Agent. This clause of the Agency Agreement is intended to avoid disputes as to what the level of compensation should be, but, once again, advice on this clause before the Agency Agreement is signed is important.

Under EU legislation, there is provision in the Agency Agreement for the Principal to pay either compensatory damages or an indemnity to the Agent, unless termination is due to a material default or insolvency of the Agent. It should be noted that this right to compensation/indemnity will also arise where the Agent terminates by reason of ill health/old age or by reason of the Principal's conduct.

Note that under EU law, if the Agency Agreement is within the EU, claims for compensation or indemnity must be made within 12 months of termination.

9. NON-COMPETITION

This clause in the Agency Agreement is intended to restrict the Principal from competing with the Agent's business after the Agency Agreement has been terminated by appointing another agent in the Territory, unless the Agent's material breach of contract or insolvency was the reason for termination.  (This is the opposite of contract template Agency Agreement (favouring the Supplier/Manufacturer.)

10. GENERAL

This clause in the Agency Agreement contains a number of standard provisions designed to regulate the arrangements between the parties.

Clause 10.1 of the Agency Agreement restricts either party from assigning the Agency Agreement without the other's written consent. 10.2 gives the Agent the right to appoint sub-Agents. 10.3 deals with formal notices. In 10.6 we have suggested direct negotiation followed by mediation (if agreed) and, ultimately, arbitration in the event of disputes.