If you’re interested in an agency relationship, this guide is relevant to you. It covers the application of the Commercial Agents Regulations 1993 to any agency arrangements you could be considering. It’s highly important, because if the regulations apply to you, then many of their key terms cannot be excluded from your agency relationship and these terms can have a large financial impact if you don’t handle them correctly.
When do the regulations not apply?
The Regulations do not apply if:
• Your arrangement is a distributorship rather than an agency
• The agent is selling services rather than goods
• The agent’s activities as your commercial agent are considered secondary to the main purpose of your agreement
• Your commercial agent is unpaid, or
• The limited conditions outlined in Regulation 18 apply (we cover these in more detail below)
When do they apply?
For commercial agents to benefit from the protection of the Regulations, they must fall within the definition of a “commercial agent”.
A commercial agent is a self-employed intermediary who has continuing authority to negotiate (and potentially also to conclude) the sale or purchase of goods on behalf of another person (the principal).
If this definition is met, then any agent whose agency contract is terminated in particular circumstances will be able to invoke the compensatory benefit of the regulations.
Those circumstances are set out in Regulation 18 of the Regulations.
In short, if the agent has brought in new customers and this has significantly increased your business and the agent has now lost access to its commission and/or suffered other damaging consequences due to the terminated contract, it can invoke these regulations to claim compensation against you.
The agent would only be prevented (by Regulation 18) from succeeding in a compensation claim against you, where:
(i) you have rightly terminated the contract because the agent has broken the terms of what you both agreed (and your draft wording gives you the right to end the relationship for those reasons)
(ii) the agent chose to end the relationship without cause (i.e. there was no breach of the agreement by you), and it wasn’t a termination on grounds of the age, infirmity or illness of the agent, such that the agent cannot reasonably be required to continue acting as your agent, or
(iii) you both agree that the agent’s rights and duties can be assigned to someone else.
What do the regulations impose on the agency relationship?
An agency agreement between an agent and their principal will set out their duties to each other. However, certain duties also derive from the Regulations. These duties in the Regulations cannot be excluded, even by a specific clause in the agency agreement.
The most important provision in the Regulations is the agent’s right to a compensation payment on termination or expiry of the agreement in particular circumstances.
This provision cannot be avoided. The compensation is usually substantial, so it is important that it is dealt with carefully.
Under the Regulations, this payment is calculated on a “compensation” or an “indemnity” basis. The compensation alternative is the default rule if the parties have not expressly chosen the indemnity basis.
If you’re the principal, not choosing the indemnity approach and specifically including this in your drafting, can be problematic: the compensation alternative is generally a higher sum and it is not capped, unlike the indemnity alternative. Failure to address this issue in your drafting can therefore lead to a much higher pay-out for the agent if your arrangement is terminated and any of the trigger circumstances are met.
Other provisions in the Regulations relate to minimum notice periods for terminating agency relationships especially those which are drafted to continue indefinitely (see Regulation 15) and the agent’s right to commission (including on sales after termination which were the result of the agent’s efforts – see Regulation 8).
Whilst our agency agreement template is drafted to comply with the Regulations, we strongly recommend that you take legal advice when you’re setting up an agency relationship.
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