An agent is someone who acts on your behalf to negotiate sales of your products or services. They are often used when selling products in overseas markets. We outline what an agent can do for your business, how to manage the relationship and your legal obligations
What is an agent?
An agent is someone who acts on your behalf to negotiate sales of your products or services, and can bind you legally. Although an agent may arrange a sale, the sales contract will be between you and the customer. Most agents are self-employed - ie they are not employed by your business - and this is who we are focusing on here.
What an agent does
Agents can help you reach markets you could not otherwise target, or not target as economically - for example, if you are a new business, or venturing into a new, unknown market. Businesses often appoint agents in overseas markets because a local partner has existing local customers, contacts and relationships, and understands the local business culture and practices better.
You must be sure the agent has a good enough market reputation, and the financial strength, to deliver what you want.
Managing the relationship
You must both have a clear understanding of what is expected of you. A written contract covering all the key elements of your relationship is vital. Take legal advice to check that the agreement will achieve your aims and that you will not suffer any unexpected obligations or restrictions.
Put the right systems in place to help you fulfil your responsibilities. Practical problems - for example, with payments or delivery of stock - can put a serious strain on the relationship and could make you liable for any damage suffered by the agent.
Communicate regularly. This helps you to identify potential problems at an early stage, making it more likely that you will be able to resolve them before the consequences become serious.
Beware creating an agency inadvertently. For example, if you allow someone to act as if they are your agent, other businesses may be entitled to assume they are, in fact, your agent, even if you have no explicit agreement.
Key elements of an agency agreement
- the agent's territory and whether they have exclusive rights;
- which products they can sell;
- what authority they have to act on your behalf;
- any restrictions on the agent's activities (eg selling competing products);
- your respective responsibilities in terms of promoting your product, making sales and fulfilling orders;
- the agent's rights and restrictions in relation to your intellectual property;
- restrictions on disclosure of confidential information;
- how the agent is paid (including rules on expenses);
- rates of commission and whether it differs from product to product or customer to customer;
- arrangements for terminating the relationship.
In the case of self-employed agents, the agreement also needs to take into account your obligation to notify them of any expected shortfall in their earnings and the rules regarding termination of the agency and compensation payments.
Special statutory rights
Agents performing their duties within the EU in relation to goods (not just services) have significant statutory rights. Some of these can be contracted out of and some cannot (but it may be appropriate to address them in other ways) and all of them need to be considered.
Individual agents and employee status
There is a risk that agents might be treated as your employees, with potential tax and employment law implications.
An individual is likely to be considered self-employed if they:
- have a degree of control over what they do (eg making their own decisions on approaching customers and arranging meetings);
- bear an element of risk (eg using their own equipment and meeting their own expenses);
- have more than one customer (eg acting as agent for other businesses as well).
One practical step is to require the agent to produce confirmation from HM Revenue & Customs that they are self-employed, although this, in itself, does not guarantee that they will not be considered your employee. Always take legal advice.
Common sticking points
Exclusivity in their territory
Agents often want exclusive rights in their territory and assurances that you will not sell there through other channels, eg your sales force, your distributors or online.
If you want to be able to sell in a territory in other ways, your agreement must say so. You will also need to agree what sales in that territory the agent will receive commission for - all sales or just those generated by the agent.
If it is a genuine agency relationship, you can limit the territory within which the agent has the right to sell, or the customers the agent is allowed to approach. Take advice on whether it is a genuine agency relationship.
Acting for competitors as well
Agents often want to act for competitors as well. If you have the bargaining power, you will usually want to prohibit this in your agreement with the agent.
Controlling the agent
The agent may want to offer all your relevant products, to all potential customers. You can limit the products they can offer, the customers they can target and the contract terms that will apply. You can also agree how the agent should promote to, and approach, customers.
However, too much control can inadvertently create an employment relationship with the agent - take advice if you want to impose major restrictions.
Your agreement should clearly spell out the extent of the agent's authority to act on your behalf. If the agent exceeds that authority, but you go along with it, you may well have given the agent authority to act in that way in future. For example, if the agent arranges a sale without authority and you then agree to fulfil the sale contract.
To be paid, even if the customer has not paid you yet
Your agreement with the agent should specify payment arrangements, including when payments will become due. Typically, the agent's commission becomes due either when you have received payment or when you supply the goods (or services) to the customer. If it does not, it will be assumed that any normal practice in your industry applies.
If your agreement says nothing to the contrary, then the commission does not have to be paid if the sales agreement with the customer is not executed through no fault of your own: for example, where a customer refuses to pay for the goods (or services) for no good reason.
Your responsibility for the agent's activities
You are bound by the agent's actions if he is acting within the authority you have given him. For example, if he has the right to negotiate sales on your behalf, you must fulfil contracts he makes for you.
You may also be liable if, for example, your agent injures someone, destroys someone's property or makes misleading claims about your product to win a sale. The law in this area is complicated and legal advice should always be sought. You may be able to bring a claim against your agent for breach of the agency agreement if such liability arises.
If an agent earns less than expected, but the shortfall is due to your failure to fulfil your obligations, the agent may have a claim against you. For example, if you fail to provide products you were committed to supplying.
Under UK and European law you must notify the agent if you anticipate that sales will be lower than the agent could reasonably expect. Failure to do this could make you liable to cover any shortfall in the agent's revenues.
Terminating the agency
You can agree an agency relationship for a fixed term or indefinitely. Indefinite agreements can only be terminated by giving notice, or if the agreement is breached.
If the agreement is for a fixed term, it terminates automatically on expiry. If, however, you allow the agent to continue to act for you after the term expires, the law will imply an indefinite agreement.
An indefinite agreement should state the notice that you and your agent must give to terminate.
UK and European laws say the notice you give your agent must be a minimum of one month in the first year; two months in the second year; and three months thereafter, but can be longer if agreed.
The notice your agent has to give you must not be longer then the notice you have to give them. In practice, if your agent gives notice, you may want them to stop acting for you immediately. You may, however, be obliged to pay the agent some compensation to cover this.
You can terminate an agency relationship without notice if the agent breaches the contract with you - for example, if the agent fails to provide you with the information you need to fulfil sales or underperforms.
The agent can do the same - for example, if an agent loses sales because you are unable to fulfil orders.
Under UK and European law, self-employed agents are legally entitled to either indemnity or compensation payments if you terminate the agreement, even if it is because the agent breached the agreement, unless the agent was guilty of gross misconduct.
Indemnity payments reflect the value of the agent's work in building up your sales - for example, their efforts to identify customers and build relationships with them. They can be capped at a maximum of one year's commission.
Compensation payments reflect the value of what the agent has done, and the agent's loss of future earnings - for example, future sales to customers who the agent introduced to you. They are calculated by reference to the value of the agency if it had continued - ie the agent's prospect of earning future commissions from it. So a successful agent, acting on behalf of a successful business, may be entitled to significant compensation, while an unsuccessful agent acting on behalf of a business that has ceased trading will be entitled to very little - nothing at all in some circumstances.
The old rule that an agent's compensation payment should be roughly two years' gross average commission is now obsolete.
Even if you agree a capped indemnity payment with your agent, this will not necessarily rule out the possibility of the agent claiming compensation as well. It is important to take advice on your potential liability to make termination payments if things go wrong - the law is complex, and you can end up paying significant sums.
If the agent is self-employed, you will be required to pay an indemnity or compensation even if the agent dies or retires.
The statutory provisions about payments are complex, and cannot be contracted out of, so legal advice should be sought both at the time of drafting the agreement and when calculating or agreeing any such payments.
Restrictions on the agent's activities after termination must be agreed in advance, in writing.
The agreement will need to relate to the customers, or territory, or type of goods in relation to which the agent was acting for you. Restrictions can in no case last more than two years, and must be seen to be reasonable.
Always take legal advice before entering into or terminating an agency agreement.