Top 6 tips for agreeing terms with a commercial agent
13 March 2017
For businesses thinking about engaging the services of a commercial agent, negotiating the terms of the agreement will be at the forefront of your decision-making process and provide the basis of your ongoing relationship.
What is a commercial agent?
A commercial agent is a self-employed sales person who has authority to negotiate, and possibly conclude, contracts for the sale or purchase of goods on behalf of a business. In this context, the business appointing the agent is known as the ‘principal’.
A commercial agent can be an individual, partnership or company.
Tip 1 – Consider whether appointing an agent is the best solution
Appointing an agent is not always the best solution for your business. The main attraction is that the agent is usually paid a percentage of any sales made, but the main disadvantages can be a lack of control over the agent, and potentially a large payment on termination of the agency agreement. You should consider taking advice on whether appointing a distributor or reseller, taking on an employee, or some other arrangement may be more suitable for your business.
Tip 2 – Make a commercial agency agreement in writing
There is no legal requirement for a commercial agency agreement to be in writing, but there is a right for you or your agent to insist that a written agreement is prepared.
Recording the terms of the agreement in writing is obviously sensible because it enables you to set out clearly what you and your agent expect of each other and what will happen in the event those expectations are not met.
Tip 3 – Consider what you want the agent to do
It is up to you and your agent to decide how your relationship will work and your obligations to each other. Generally, the more detail you can agree regarding what the agent will do, the better the relationship will work. However, there are some duties under the law that will apply in every case. For example, an agent will be obliged to act in your best interests, to carry out your instructions and must not exceed their authority. You will be obliged to give the agent all the information they need to perform the contract, to pay them the remuneration, commission and compensation agreed, and to let them know if you expect a fall in business.
Tip 4 – Agree remuneration in advance
It is for you and your agent to agree remuneration and how and when it should be paid. However, in the absence of agreement the default position under the law is that the agent will be entitled to commission on:
- all transactions concluded because of their efforts;
- with a customer originally secured by them; or
- if they have an exclusivity arrangement with you in respect of a certain geographic area, any transactions concluded with a customer in that area.
Unless you have agreed the rate of payment, the amount they receive will be fixed by reference to what other agents dealing with similar goods in the area receive or, if there are no comparable agents, a reasonable amount for the service provided.
Commission is payable during the agreement, but also sometimes following termination unless the agency agreement provides otherwise.
Tip 5 – Provide for termination of the agreement
It will be up to you to agree with the agent when the agency agreement can be terminated and whether, upon termination, the agent will be entitled to be paid commission for any contracts they have negotiated but which have not yet been concluded.
In almost all cases where the agent was appointed to sell goods, the agent will be entitled to a compensation payment, to reflect the value of the goodwill they have built up for your business. However, the agent is not entitled to such compensation if they breach of the agency agreement so as would justify it being immediately terminated. Therefore, to avoid compensation being paid where you feel it is not warranted, it is important to agree with the agent what grounds would justify immediate termination of the agreement at the outset.
Tip 6 – Think about including restraint of trade restrictions after termination
If you want to prevent the agent competing with your business once your agreement has ended, you will need to include provision for this in the agency agreement. Any restriction must be reasonable and should generally be limited to restricting the agent’s activities in relation to the:
- geographical area they have been responsible for;
- type of goods they have been trading in; and
- customers they have dealt with.
A restraint of trade provision should only be imposed for a maximum of two years following termination.
The commercial law team at Myers & Co Solicitors have a wealth of experience in drafting commercial agency agreements. Led by Director of business services, Dermot Callinan, our solicitors can also provide legal advice on existing agency agreements and on commercial agency disputes.
The contents of this article are for the purposes of general awareness only. They do not purport to constitute legal or professional advice. The law may have changed since this article was published. Readers should not act on the basis of the information included and should take appropriate professional advice upon their own particular circumstances.