It can be common for a business to appoint an agent to conduct some of its affairs. It usually happens when a company wants to distribute its products in another country or simply in another region of the UK and it doesn’t know the geographical area and market well. This is known as “Agent” and “Principal” relationship. Within the European Union this is regulated by the Commercial Agents Regulations 1993.

Before entering into any kind of contract with another party, it is important for a business to consider whether or not they are engaging in an Agent/Principle relationship. If they are they should be conscious of the fact that if they intend to end that agreement in the future, which is likely, that compensation will be payable. It is always best to prepare a formal written agreement to avoid any future disputes.
What is an Agent?

The Regulations define a commercial agent as:

“a self-employed intermediary who has continuing authorities to negotiate the sale or purchase of goods on behalf of their principal or to negotiate and conclude such transactions on behalf of and in the name of that principal”.

Breaking this definition down, in order to be caught by the regulations the following criteria needs to be apply:-

1. Independent
The Agent must be self-employed. This is not just limited to individuals but also applies to all commercial entities. The basic test would be weather the Agent is its own standalone, independent person/company.

2. Buying and Selling
The agent must be buying or selling goods on behalf of its principal, to sell on to a third party; not directly purchasing from the principal itself.

3. Continuing authority
An agent must conduct the sales and purchases on behalf of the principal on more than one transaction.

4. Negotiating power
The agent acts in a manner which is more than simply promoting the principal’s products.

5. Contracting in own name
If an agent is contracting with a third party in its own name it will not be an agent for the purposes of the regulations.

6. Outside the scope
Some agents fall outside the scope of the regulations such as those who are unpaid, agents who operate on a commodity exchange or commodity markets, brand agents or agents whose activities are considered to be secondary to their other activities.

Agent/ Principle Contract

If the relationship between the parties is caught by the above criteria, then it is more likely than not that the regulations will apply. In that instance, the parties are equally entitled to a written contract to regulate the agreement between them.

One of the terms of that contract is the right of the agent, upon termination, to a compensation payment. That compensation will include any outstanding commission, any “pipeline” commission along with compensation payable as a result of termination.

Compensation is calculated on either the indemnity or compensation basis. The sum to be paid is intended to reflect the value of a goodwill the agent has generated for the principal. If no written terms as to how this compensation is calculated, the payment will be valued on the compensation basis.

a. Indemnity basis – This payment must be equitable and is subject to a cap based on one year’s average gross commission based on the five years prior to termination or the whole life of the agreement if it is shorter.

b. Compensation basis – The agent will be entitled to compensation for the damage it suffers as a result of the termination of the agreement. The level of damages awarded will take into account the fact that the agent has been deprived of commission that it would have earned had the agreement continued and/or those costs that the agent has not been able to recover in connection with the performance of the agreement.

However, neither compensation awards will be due if the principal has terminated the agreement due to a material breach by the agent or where the agent has terminated the agreement (unless the principal is in breach of contract).

Before entering into any kind of contract with another party, it is important for a business to consider whether or not they are engaging in an Agent/Principle relationship. If they are they should be conscious of the fact that if they intend to end that agreement in the future, which is likely, that compensation will be payable. It is always best to prepare a formal written agreement to avoid any future disputes.

The content of this blog is not intended to be specific legal advice. If you require any assistance in relation to this area of law please contact Michael Clark for a no obligation telephone consultation.