Ws7 - Agency Agreement Consolidated

WS7 – AGENCY AGREEMENTS Agency (Commercial Agents (Council Directive) Regulations 1993) and Distribution Agreements Two most common forms of marketing arrangement.

Agency  an agreement where on person acts on behalf of another.  Agents, if acting within their authority, bind their principal who can sue and be sued on the contract.  Principal and Agent treated as one undertaking (Regulations apply) Distribution agreement  supplier sells goods to a distributor who buys to re-sell on his own behalf.  The distributor’s profit is the mark up he charges on the subsequent re-sale.  Supplier has no contractual relationship with end customer.  Two + separate undertakings and Art. 81 applies (not Regulations)

Why chose one over the other?

Agency Agents generally bind the principal

Agent does not (commission based). If goods are tailor made then agency agreement is better suited. If principal wants to be contractually bound with end user then agency agreement is better.



Distribution agreement If client cannot supervise agent, to an extent, then distribution agreement is better. If client wants to break an unfamiliar market a distribution agreement is better. Client will not have the risk, distributor has local knowledge, language problems avoided. Distributor has own profit incentive If goods to be sold are standard then may be more suited to a distribution agreement. Is easier for supplier to control liability to distributor than to customer in an agency. End user deals as a consumer and thus cannot exclude liability as easily.

Principal makes the profit and pays a commission in an agency agreement, unlike in a distribution agreement. Agency may be more appropriate re services than goods. Genuine agency agreements cause fewer competition law problems, unlike distribution agreements. Cheaper than distribution Resources of P important (supervision and communication vital) Exclusive Rights: → gives Agent stronger rights to commission (compensation easier to claim). Agent won't work in a territory w/o exclusive rights.

NB : If client is a large business it may be able to set up a subsidiary or use an existing one to avoid both types of arrangement. (May not be possible, may be expensive, time consuming)

1

Types of authority The agent’s authority

A principal will be bound by a contract entered into by its agent if the agent had authority to enter into the transaction • Actual authority – express (i.e. in the agency contract) or implied Depends on the agreement between the parties 1. Express actual authority

The P has expressly given prior consent to the A’s actions.

If the A has express actual authority then there is no need to look any further.

2. Implied actual authority

The P has impliedly consented to A’s actions.

The question then is whether the A had implied actual authority (e.g. through a course of conduct)?

• Apparent (‘ostensible’) authority: Is there apparent authority, 1. Did P hold A out as having authority? 2. Yes, then, third party can assume A can do anything which is ‘usual for agents in this sort of business.’ If so, the third party is entitled to assume that the agent has whatever authority is ‘usual’ for agents in that sort of business The principal will be bound as long as the third party relied on the ‘holding out’ However, if third party knew A was acting outside his authority then P shall not be bound. IMPACT: • If the principal is bound, he may have a claim against the agent for exceeding his actual authority If A breached agreement, termination under reg 16? • If the principal is not bound, the third party may have a claim against the purported ‘agent’ for breach of warranty of authority

2

AGENCY STRUCTURE 1. Do the Commercial Agents (Council Directive) Regulations 1993 apply?

The regulations ‘govern the relations between commercial agents and their principals’ per regulation 1(2) Main purpose – TO PROTECT THE AGENT Requirements: 1. ‘commercial agent’ per 2(1) 2. in Great Britain (NI excluded per 2(5)) 3. parties have chosen UK law to govern contract per 1(3)

2. Is the person an ‘agent’ within the definition?

Is agent a ‘commercial agent’ for purposes of regulations? 2(1) defines ‘commercial agent;’ • •

‘self-employed intermediary who has continuing authority

•

to negotiate the sale or purchase of goods on behalf of another person (the principal), Marketing agent

or

•

to negotiate and conclude the sale or purchase of good on behalf of and in the name of that principal.’ Sales agent

Outline what type of agency agreement is it? LOOK FOR CLAUSES IN THE CONTRACT

 Holding out - must describe as agent of principal  Promotes interests of principal  Conclude contracts for the sale of products on behalf of principal. MAIN THING TO LOOK OUT FOR EXAM  Agent doesn't own the products, c.f. distribution where they do. a.

Sales agency: Agent: 1 – finds, 2 – negotiates, and 3 – enters into contracts with third parties on the principal’s behalf thus binding the principal.

b.

Marketing agency: Agent: 1 – finds and 2 – negotiates with them and they then contact the principal

c.

Del credere agency: where agent guarantees the customer’s performance of the contract in return for additional commission.

d.

Introducing agent and no ability to negotiate (NOT IN EXAM)

3

3. Is the relationship excluded?

1. Within the exceptions: Regulation 2(1) excludes certain people. 2(1)(i) officer of a company who can bind his company 2(1)(ii) partner who can bind his partners 2(1)(iii) an insolvency practitioner 2. Within the exclusions? Regulation 2(2) excludes relationship when 2(2)(a) agent is unpaid 2(2)(b) agent operates on commodity market/exchanges 2(2)(c) agent is a crown agent for overseas government

3. 2(3) and 2(4) say they do not apply where activities as a commercial agent are considered ‘secondary’ eg part time Schedule para 4 says is secondary if: merely supplying promotional material direct to potential customers, person is granted an agency without reference to other agents in area and where customers normally select goods themselves and merely place order through agent. Para 5 says consumer credit agents and mail order catalogue agents for consumer goods are secondary agents. If meet requirements and not excluded, regulations govern agency relationship. What do regulations provide for? Regulation 3 DUTIES OF AGENT TO PRINCIPAL

(1) agent must look after principal’s interests and act dutifully and in good faith (2) agent must (a) make a proper effort to negotiate and conclude (b) communicate all necessary info to P (c) comply with all P’s reasonable instructions

Regulation 4

(1) P must act dutifully and in good faith

DUTIES OF PRINCIPAL TO AGENT

(2) P must

(a) give A all necessary documents re goods (b) obtain necessary info for performance of agency contract

(3) obliges P to tell A inter alia (i) which transactions accepting (ii) which refusing (iii) which not performing Regulation 5

Reg 5(1) - CANNOT derogate from 3 or 4

Regulation 6

(1) If P and A have not agreed remuneration, A shall receive a customary remuneration for his practise. If no custom, then a reasonable remuneration. (3) possibility of remuneration other than by commission

4

Regulation 7 COMMISSION DURING CONTRACT

(1)(b) A’s entitled to commission during his agency period where the transaction is concluded as part of his action or the transaction is achieved with a third party which A acquired – before entered into agency agreement

(2) A entitled to commission re a transaction entered into with a customer if he has an exclusive right to commission in that specific area or to that specific group of customers – where P gets customer in period of exclusivity but A not involved Regulation 8 COMMISSION AFTER CONTRACT TERMINATED

(1) Post-agency commission if; (a) transaction was mainly attributable to A’s efforts and transaction was entered into within a reasonable period of termination of that contract, or (b) where contract concluded post agency yet order received before the end of A’s agency period.

Regulation 9

(1) No commission for A under 7 if payable to other under 8, unless equitable to share it. (a) Gives priority to earlier agent, successor can share if equitable

Regulation 10

(1) Commission due on - execution of transaction by P, P should have executed transaction or third party has executed it.

WHEN COMMISSION DUE

- ‘due’ at the moment when agent can be certain its earned, even though P may not actually have to pay it until later. (3) Payable not later than last day of month following quarter in which it became due.

Regulation 11 EXTINCTION OF RIGHT TO COMMISSION

Regulation 12

(1)(b) Right to commission lost if contract between third party and P shall not be executed and P is not to blame for this. (3) Agreement to vary above to detriment of A is void if detrimental (1) P shall supply A with statement of commission due, not later than last day of month following quarter in which commission became due. (3) derogation from above is void

Regulation 13

(1) A and P can get document setting out terms of agency contract on request

RIGHT TO HAVE WRITTEN CONTRACT

(2) purported waiver of above is void

Regulation 14

Fixed period agency which A and P continue post period is deemed for an indefinite period.

Regulation 15

(1) Indefinite period is terminable on notice

MIN NOTICE PERIOD ON TERMINATION

(2)(a) 1m for first year, (b) 2 m for second year, (c) 3 m thereafter. Cannot agree shorter (3) If longer, notice to be observed by P must not be shorter that that to be observed by A (4) Unless agreed, end of period must coincide with end of month

5

Regulation 16

Regs do not affect a rule of law which would otherwise terminate agency contract Eg preserves right to terminate agreement for repudiatory breach

Regulation 17

(1) On termination A shall be indemnified or compensated

INDEMNITY / COMP PAYABLE TO AGENT ON TERMINATION OF CONTRACT

(2) A shall be compensated unless agreed otherwise Indemnity (3) A’s entitled if; (a) he has brought new customers or significantly increased volume of business from existing customers and P continues to derive substantial benefits, and (b) payment of indemnity is equitable having regard to all circumstances, especially commission lost (4) Amount shall not exceed a figure equivalent to an indemnity for one year calculated from average remuneration over preceding 5 years (effect – encourage principles to opt for express indemnity provision in their agency agreements so that they know how much they will be liable for). (5) A can still seek damages too Compensation (focuses on compensating the agent for the value of their efforts) (6) A is entitled for damage he suffers as a result of termination (7) Deemed damage when termination deprives A of commission which proper performance would have secured for him, or when he has not been allowed to amortize costs and expenses incurred performing agency contract. – substantial benefits or amortize costs (8) If A dies still entitled to indemnity or compensation (9) Loss of right to either if A has not notified P he intends to pursue entitlement within 1 year from termination Effect of Reg 17

If not for Reg 17, a principle could terminate the agreement at any time by giving the required amount of contractual notice. The principle could then deal direct with the agent’s customers, taking the benefit of all the work the agent did. This reg recognises a form of investment by the agent for which they are entitled to be paid when the agency ends.

Regulation 18

Effect – agent won’t be able to claim compensation or indemnity

ABILITY TO EXCLUDE PAYMENT OF INDEMNITY / COMP UNDER REG 17

(1) Commission’s not payable where (a) P terminated following a breach by A justifying termination, or (b) A terminated agreement, unless termination is justified by circumstances attributable to P, on grounds of age or illness or A assigns his right and duties to another under agency contract (c) agent loses entitlement if he assigns the agency to a third party

Regulation 20

A and P cannot derogate (contract out) from 17 and 18 to A’s detriment.

RESTRAINT OF

6

TRADE CLAUSE

Regulation 22

(1)(a) Restraint of trade clause is only valid if is in writing and 1(b) relates to the area or customers entrusted to A in contract

NOTICE

(2) Only valid for not more than 2 years post termination. (3) 20 does not affect restrictions imposed by law. I.E. It must also be reasonable as common law so requires – it must be no more than is reasonably necessary (in duration and scope) to protect P’s legitimate interests – common law Regulation 22

Re service of notice

5. If the clauses of the contract DO NOT COMPLY with the regulations, does the Regulation permit DEROGATION from clause?

Reg. 5(1) - CANNOT derogate from 3 or 4 Reg. 10(3) - Derogation from 10(2) or (3) to the detriment of the agent = void. Reg. 11(3) - any agreement to derogate from 11(1) to the detriment of the agent = void. Reg. 12(3) - any agreement to derogate from 12(1) or (2) = void Reg. 19 - A and P cannot derogate (contract out) from 17 and 18 to A’s detriment before agency contract expires. NB. i

DEROGATION PERMITTED UNLESS STATED OTHERWISE

ii

IF NO DEROGATION, REGULATION PREVAILS

7

6. Termination

Circumstances Allowing Either Side to Terminate that Maybe Included in Contract:

P 86 - 88 TB

a) Financial difficulties b) Breach of the agreement (will often have notice procedure for party in breach to resolve the breach where poss c) Change in control of agent Contract Should Deal With Effects of Termination? (a) stock, samples and advertising material held by the agent. (b) Sales agent has already negotiated, but where no moneys have been paid over. (c) The agent’s authority to negotiate on behalf of the principal. (d) The agent’s duty of confidentiality. (e) The agent’s right to compensation on termination. Does Principal Need to Pay Agent on Termination? Reg 17 obliges P to give A 'pay-off' on termination On basis of Lonsdale v Howard and Hallam…(i.e. goodwill)

-

Compensation assessed by reference to value of agency business including goodwill at date of termination i.e. loss to agent  No presumption that starting point = 2yrs minimum  No 'just and reasonable' test in assessing compensation  Perhaps favours P instead of A (esp where business of A in decline) Only v limited grounds (reg 18) for excluding A's right to indemnity or compensation (also see reg 19 re. derogation).

Regulation 17 – does the PRINCIPAL need to pay anything to the AGENT on termination. 5.3.6.3 Tigana v Decoro

Found that a regulation 17 lump sum is also payable when a fixed term agreement expires through effluxion of time. Factors affecting level of compensation to be paid: a.

period of agency contract (Indefinite per 14)

b.

period agency actually lasted

c.

terms and conditions attaching to agency agreement (E.G. having to return goods at A’s expense may increase compensation)

d.

nature and history of agency

e.

17(7) matters - (a) damage from termination (b) lost commission (c) write-off costs

f.

nature of client base – regular orders?

g.

exclusive therefore more loss?

h.

has P retained a great benefit?

i.

can A act now? Restraint clause valid?

j.

Regulation 8 payments to take into account

k.

manner agency ended

8

l. Lonsdale v Howard & Hallam Ltd 2006

A’s financial contributions to A’s goodwill.

Courts reviewed previous case law: a) it is inappropriate to apply French law in the UK and no reason why the UK should use 2 years commission in calculating compensation for damage b) purpose of Reg 17 is to compensate for damage to the agent’s business as a result of termination c) Compensation should be calculated on the value of the agency business to the agent at the date of termination and this INCLUDES goodwill

9