What is an Agents Agreement?
An agents agreement is a contract between the principal and agent. The principal will be a business or individual and the agent will be an individual who is acting on behalf of the business or individual. The agent will be a person or organisation who introduces people to the principal with the aim of selling products or services or offering something the principal has requested through the agent . This agreement has to be clear on the responsibilities for both parties. This could be the duties of the agent or which area they are allowed to cover on behalf of the principal. Not having a clear agreement could mean either party overstepping the boundaries of the agreement.
Components of an Agents Agreement
The contract often includes in greater detail the scope of the parties’ obligations, quotas, the commission applicable and dispute resolution. However, the key components I consider essential for an agents agreement are:
i) Specifying the scope of the services to be provided by the agent;
ii) clearly setting out commission structures;
iv) setting sales or quarterly targets; and
v) addressing what happens if there is default.
However, in order to give any context to this, it is useful to consider the EU legislation. This legislation does not set out any specific formation requirements. In a nutshell, it will be fairly common that an agents agreement contains at least the following:
- Designation – The scope of the territory and/or products for which the Agent is appointed. Any exclusivity or right to appoint sub agents or support marketing arrangements are also common.
- Obligations – Standard minimum agent obligations include acting in good faith, participating in sales forecasting, adhering to term of appointment and compliance with law and/or company policies.
- Selling price – Establish the ways in which various destination selling prices are established. Attempt to document margins and other internal policies on discounts for sales through special channels, such as on-line sales. Where selling prices are set by law, consider what happens if legislation is amended. Be sure to require any sub-agents and distributors to adhere to these selling prices.
- Sales and Reporting – Standard obligations relate to reporting periodic results of sales, forecasts and financials. It is prudent to include records of actual sales in the form of invoices, and forecasts for the same period. Forecasts for the coming period may be broken down by the region, product, customer, month and type of sale. A statement that the Records are to be maintained for a reasonable period is advised given the business case for keeping them for a longer period.
- Commission – In setting out the commission arrangements the following should be addressed; when is commission due, allowances of give fixed fees, payment of foreign taxes.
- Termination – It is vital to ensure that you have sufficient flexibility to terminate the contract in reasonable circumstances. Under the European legislation six months’ notice is required. Domestic laws may also be relevant; even if not incorporated into the contract, such laws might imply a minimum notice period or a right to compensation if the contract is terminated.
Legal Factors in Agents Agreements
When entering into an agents agreement, parties must ensure that the contract is in compliance with all necessary laws and regulations. The Fair Trading Act 1985 and the Sale of Goods Act 1979 govern agreements granting or assigning exclusive agency rights for the sale of goods, and are only applicable to sales of goods that are not made by way of auction. It is imperative to state that in some circumstances, it can be a breach for an agent to sell certain goods that are regulated, for example certain animals, for which the proper permits must be obtained. It is also important to ensure that none of the terms of the agents agreement go against the Public Interest Disclosure Act 1998, and when making any changes to the business as a result of the agreement, that the employees who are affected by these changes, such as those that may be made redundant, and who may be transferred with the business must be properly informed, and both their existing and new employment terms must remain as similar as possible to avoid any issues arising.
Mistakes to Avoid in Agents Agreements
Mistake #1: Defining the Scope of Work Too Broadly
Agents are often given too much leeway in terms of the tasks they are expected to perform. The contract should specifically outline each task that is included in the scope of work and those that are not included. The clause should also make clear whether compensation will be paid for any services provided outside of the contracts which would make it apparent to all concerned what is included in the work undertaken for remuneration.
Mistake #2: Lack of specificity regarding methods of compensation
The contract should leave nothing to chance or surprise in terms of when and how the agent will be compensated. Conditions, circumstances or actions which must be fulfilled should be listed in detail to provide a complete guide to the compensation structure. Again, this eliminates any potential for misunderstanding or misinterpretation regarding compensation.
Mistake #3: Not including an out clause
It is critical that the contract includes a clause for the termination of the relationship between the parties. This clause should define the term of the agreement; include key dates; and list any actions or inactions which would result in an automatic termination of the contract.
Mistake #4: Failing to define important terms
There are a number of terms which could be used throughout the contract which should be precisely defined to avoid confusion. For example, the definitions of "territory" and "duration" should be given very careful consideration and detailed specifically. Additional details such as currency; the final date for sales; and what events constitute a breach of the contract should also be included.
Mistake #5: Using paid agents for exclusive contracts
One of the most troublesome things an employer can do is to use an employee who is on the payroll as the agent. This creates a conflict of interest and presents a liability to the employer. Further, while the employee may be getting paid, they may be giving away products or pricing because they also want to secure their commission or other compensation package.
Mistake #6: Neglecting to designate governing law
The governing law of a contract governs the validity and interpretation of the contract. This is an important legal concept which should be added to the contract. Many factors are considered by the court when deciding issues of governing law and the law as it pertains to agents in particular can vary widely from jurisdiction to jurisdiction.
Negotiating an Agents Agreement
Negotiating an agents agreement requires effective and extensive communication between the agent and principal representatives. The first step in negotiating an agents agreement is for the agent to review in detail the draft agents agreement. Any issues identified by the agent during the review stage can be dealt with to the benefit of both parties before the agents agreement reaches a stage in which discussions become protracted and the relationship is sour. An agent that is proactive in addressing issues is able to keep the focus on remuneration rather than any dispute. Any issues raised by the agent during the review of the agents agreement should be dealt with by the agent at the earliest possible opportunity. It is in the best interests of both parties to agree on an agents agreement that is as comprehensive as possible in order to avoid future disputes.
The agent should provide a report of issues raised to the principal at the earliest possible opportunity . The report should list the issues, and explain in a straightforward manner the reasons why each issue is important to the agent. The report should be regarded as an insight into the mind of the agent and the principal’s lawyers ought to address the issues in a manner that is sympathetic to the agent’s concerns. By doing so, the principal’s negotiation strategy is likely to have a beneficial impact upon the relationship between the agent and the principal, which is a favorable result.
During negotiations, the ultimate goal is for the agent and principal to reach a common understanding on all issues and finalise the agents agreement. To arrive at this outcome, it is important for the principal to remember that the negotiations will only be successful if they are regarded by both parties as a natural and reasonable evolution in their relationship. The main vehicle for ensuring that the negotiations are successful is communication.
Success Stories: Effective Agent Agreements
To illustrate the effectiveness of agents agreements, let’s look at two examples of successful agents agreements.
Case Study 1: Real Estate Agent Agreement
A real estate agency wanted to hire a new agent for its sales team. The owner of the agency was cautious, however, and wanted to reduce the risk of having the agent leave and take clients with him. The owner understood that keeping client lists and other information that could be used in an agency’s own business is Melbourne commercial litigation law, so he never disclosed such information. Nevertheless, he believed that he and the agency’s clients were at risk and that there were too many legitimate reasons for the agent to have access to sensitive information. Therefore, the owner decided to use a real estate agent agreement that included a non-compete and non-solicit clause, which would prevent the agent from competing against the business and possibly take away clients. It would also restrict the agent’s ability to disclose or use any confidential information he learned throughout his employment. The agent agreed to these terms, and everything worked well for nearly a year. Then the agent handed in his notice, walked across the street and signed with a competing agency. The owner was furious, but thankfully, because of the agent agreement, he has a good case to pursue against the agent.
Case Study 2: Referral Agent Agreement
Imagine that you own an accounting practice and decide to expand your services. You want to hire a woman named Emily, whose main job will be to find and refer new clients to the company. The reason you believe this will be successful is because you’ve been friends with Emily for years and she knows many people who need business accounting and bookkeeping services. She even worked at a large accounting firm from which you have many referrals. She signs a contract agreeing to find and refer new clients only to your agency in exchange for a percentage of the agency’s take. A few years later, she moves to Italy and starts her own practice. Because this agreement was in writing and because she was paid a commission, it is a fair and binding document. When she returns to Melbourne, you discover that she has taken many of your clients with her. Because you have a written agreement that was signed with your client (which all your clients signed), you have a good case of breach of contract against her.
Strategies for Ending an Agent Agreement
An agent may decide to terminate an agency before the expiry of the agreed term. For these purposes, knowing what is required to terminate an agent agreement legally and amicably is important. Section 14 of the CPA ("Termination") give a principal the right to terminate a contract of agency at any time upon the giving of 30 days written notice to the agent. However, we recommend that the demands of commercial contracts form the basis of the contractual relationship between a principal and agent. Section 14 could therefore be used to protect an innocent principal from an agent that requests a 90 day exit period, for example. It is advisable for a principal to therefore terminate the agreement, even if an agent has requested the termination period. Section 14 will not therefore act against the innocent principal. In addition, the agent may terminate an agreement prior to expiry if same is ex facie lawful . This means that a principal has the right to terminate the contract on the same day that the agent has the right to terminate the agreement. Such a contractual right needs to therefore be included in the agreement beforehand, before the strategic advantage is lost. The provisions of section 14 will also not therefore act against the innocent principal as section 14 does not remove the right of the parties to contractually regulate their relationship. The factors to consider when termination of an agent agreement are discussed below: The main requirement for termination in terms of the CPA, is the giving of 30 days notice to the other party. Notice can be given in writing (including by email or by an electronic communication). The termination made in terms of the CPA must be self-explanatory in the sense that the other party is put on notice that the contract is being terminated. The terminating party should also make sure that it is in compliance with any prior notice given, or allowed by the other party, or stipulated in the contract itself.