Richard Bailey, an expert on commercial agency law and Principal in the Commercial team, outlines the main legal principles to consider when appointing a commercial agent in the UK.
Introduction
In the UK, a business may choose to have a self-employed sales force, typically consisting of a number of commercial agents operating in their own territory within the UK. It is important to realise that commercial agents enjoy particular protection under the Commercial Agents (Council Directive) Regulations 1993 (“the Regulations”), which can make parting company with an agent expensive for a principal. The following is a brief summary.
The legal relationship between principal and agent may be governed by an Agency Agreement as well as the Regulations. An Agency Agreement can be made orally or in writing. To ensure there is certainty and clarity in the relationship, it is best to have this Agreement in writing. However, it is important to be aware that the Regulations apply as soon as a commercial agency relationship is established and set out the basic rights and obligations of the principal and agent.
Duties of the Agent
The agent will have contractual duties towards the principal under the Agency Agreement. The agent must perform these duties with reasonable care and skill and comply with the principal’s reasonable instructions. In addition, there are other obligations imposed by the Regulations, including to ‘make proper efforts to negotiate and, whereappropriate, conclude transactions he is instructed to take care of’ and ‘to act dutifully and in good faith’ towards the principal.
Duties of the Principal
An important duty of the principal is usually to pay the agent commission. There are various ways this can be structured and it should be properly documented in the Agency Agreement. In addition, there are other obligations imposed by the Regulations, these include to ‘act dutifully and in good faith’ towards the agent and to provide the agent with ‘the necessary documentation relating to the goods’ to enable the agent to perform his obligations under the Agency Agreement.
Termination
The termination of a commercial agency can give rise to a number of difficult issues and it is important the principal takes legal advice before terminating an agency.
On termination, the parties should comply with the notice periods set down in the Agreement which cannot be shorter than the minimum periods specified in the Regulations.
Where a principal terminates the agency, a termination payment will generally need to be paid under the Regulations. Payment is due on termination unless:
• The principal has terminated the agency due to a fundamental breach of the Agency Agreement on the part of the agent;
• The agent has, on this own volition, terminated the agency (unless they have retired or terminated through ill health); or
• The agent has assigned the agency.
If the agent is entitled to be recompensed for the termination of the agency, the Regulations provides two alternative forms of recompense known as ‘indemnity’ and ‘compensation’. In the absence of a written term in the Agency Agreement opting for indemnity (which is often the principal’s best option), compensation will apply.
This is often a problem area when a principal terminates an agency as the different forms of recompense can often result in very different entitlements for the agent. This is one of the main reasons why it is important when appointing a commercial agent that the principal obtains some legal advice and has well drafted Agency Agreements in place. Getting it right to begin with may mean that the principal ends up paying significantly less if they decide to later terminate the commercial agency.
For advice on agency matters, please contact Richard Bailey by telephone on 01603 598 000 or alternatively by email to rbailey@steeleslaw.co.uk