Do You Need a Written Commercial Agency Agreement?

What are the advantages of having a written agency agreement?

A clear, well-drafted written agreement offers several benefits: 

• Clarity of Terms: Clearly outlines obligations, rights, and expectations for both the agent and principal. 
• Dispute Resolution: Minimises ambiguity and potential disputes by providing documented terms. 
• Termination and Compensation: Clearly specifies compensation or indemnity arrangements upon termination and defines notice periods. 
• Sales Targets and Restrictions: Allows principals to set specific, measurable sales targets and to establish enforceable post-termination restrictions on agents. 

What are the potential drawbacks of a written agency agreement?

While beneficial, a poorly drafted written agreement can create problems: 

• Ambiguity: Vague or unclear clauses can lead to disputes. 
• Unfavourable Terms for Agents: Written agreements may impose stricter obligations on agents compared to default protections under the Commercial Agents Regulations. 

What happens if you don’t have a written agency agreement? 

Even if there's no written agreement, the Commercial Agents Regulations still apply. This can sometimes favour agents, particularly regarding termination payments, as the default position is compensation rather than an indemnity payment. 

However, relying solely on Regulations may lead to uncertainty, especially around specifics such as sales targets, commission calculations, and territorial exclusivity. 

Is it better to have a written agreement or not have one? 

This will depend on the circumstances of the relationship between the agent and the principal.  

Written agency agreements can often impose obligations on agents which are more onerous than the obligations set out in the Regulations, so it may be in an agent’s interests not to have a written agreement in place. The absence of a written agreement also means the agent is likely to benefit from the payment of compensation on termination under Regulation 17 rather than an indemnity, and generally speaking, compensation will be more favourable to the agent because an agent’s entitlement to indemnity is capped. 

There can also be advantages to having a written agency agreement in place. For example, a written agreement will usually give clarity to the rights, duties and obligations of both agent and principal, which can assist in determining the contractual relationship between them.  

If you are a principal, it may be advantageous for you to put a written agreement in place. That will allow you to set clear sales targets and to specify that an indemnity rather than compensation is payable on termination under Regulation 17.  A principal may also want to impose restrictions on the agent after termination. 

Whilst there can be advantages in having a written agreement, if the written agreement is poorly drafted or is drafted by someone without an understanding of the complexities of the Regulations and how they apply in different situations, the agreement may not do its intended job and may in some circumstances even give rise to ambiguity and disputes concerning the parties’ rights and obligations. 

What are the common issues with written agency agreements?

When negotiating your agreement, consider these common points of dispute: 

• The imposition of sales targets on the agent 
• When the parties are entitled to terminate the agency relationship 
• Whether compensation or an indemnity under Regulation 17 is payable on termination 
• The exclusion of Regulation 8 (pipeline commissions) 
• Restrictions on the activities of the agent after termination 
• Which country’s laws and courts should determine any dispute (where the agent and principal are based in different countries) 

Should a Commercial Agent agree to sales targets? 

If you are an agent and you agree to the imposition of sales targets in your agency agreement, you are accepting that you are contractually bound to meet those sales targets.  If you do not then meet those sales targets you are likely to be in breach of contract, which can have serious consequences. 

In some circumstances, they may entitle the principal to terminate the agency agreement and attempt to avoid paying compensation. You should therefore think carefully about whether the sales targets are achievable and whether you wish to be bound by them. 

What happens if I don’t meet my sales targets as a commercial agent? 

In some circumstances, a failure to meet sales targets may be give the principal the right to terminate your agency without having to give you any notice or pay compensation under the Regulations.  

Agents should be wary of clauses which set out the consequences of breach or seek to exclude an agent’s rights or entitlement. These types of clauses, depending on their wording and effect, might be unenforceable.  

Can a principal force a commercial agent to sign up to a written agreement partway through an agency? 

If a commercial agent has been acting for a principal for some time without a written agreement in place, the principal cannot “force” the agent to sign up to a written agreement at a later date. The agent is generally within his or her rights to refuse. 

Can a Principal change a signed agreement? 

A principal may be entitled to vary the terms of a written agency agreement, but this will depend on what the proposed change is. An agent does not have to agree to a significant change, although minor changes may be imposed without the agent’s agreement, since an agent has a duty to comply with “reasonable instructions”. 

A written agreement will usually set out the procedure for varying the agreement, and the variation procedure must be followed for a variation to be valid. 

If the written agreement does not set out the procedure for varying its terms, it is advisable to obtain both parties’ written agreement to the variation to ensure it is binding. 

What if the agent is in breach of the agreement? 

If a commercial agent is in very serious breach of the terms of the agency agreement, this may entitle the principal to terminate the agreement and avoid paying the agent certain termination payments. It is always advisable for a principal to take advice before taking any steps to terminate to ensure its position is not prejudiced. 

What if the principal is in breach of the agreement? 

If the principal breaches the agreement, an agent may be able to take action to compel the principal to adhere to its obligations under the agreement. If the breach is serious enough, the agent may have the grounds to bring the commercial agency to an end and pursue the principal for compensation and other entitlements under the Regulations. It is always advisable for an agent to take advice before taking any steps to terminate to ensure their position is not prejudiced. 

What should I look out for when negotiating an agency agreement? 

An agent should also consider all other obligations the agreement seeks to impose, particularly those which appear onerous or seek to restrict or exclude legal protections afforded by the Regulations. 

If you are an agent and are being asked to sign an agency agreement, it is advisable to seek legal advice prior to signing the agreement to ensure that the terms of the agreement reflect your interests and that you understand the terms which will apply to your agency. 

Can a principal take clients away from an agent? 

When agents service large or repeat order customers, it is not unusual for principals to wish to take certain customers “in-house”, to remove the agent’s involvement to avoid paying the agent substantial commissions on sales made to those customers.  A principal will generally not have the right to do this, and the agent is likely to be able to resist such a change. A principal must always act in good faith when seeking to vary the terms of an agent’s contract, or it is likely to be in breach of the Regulations. 

A principal who takes customers in-house without the agent’s agreement or prevents an agent from continuing to service certain customers may give the agent the right to terminate the agency and claim compensation or an indemnity. A principal should therefore be sure it understands its rights before taking such a step. 

It may be possible for an agent to negotiate a settlement with the principal, compensating the agent for the loss of future commissions that the agent would have received from future sales to those customers, though the entitlement to compensation would not arise unless the agency is terminated in full. 

What do I do if my principal wants to reduce my territory? 

A principal may try to reduce an agent’s territory, and if it does so, the agent’s commissions are likely to fall as a result. 

Whether a principal has the right to do this will depend on the express terms of the agency agreement. However, a principal must always act in good faith when seeking to vary the terms of an agent’s contract, or it is likely to be in breach of the Regulations. 

Can my agency agreement be for a fixed term? 

Yes commercial agency agreements can be specified as being only for a fixed term. However, the fact that a commercial agency is specified as being only of a fixed duration does not prevent the application of the Regulations. The provisions relating to termination payments under the Regulations will still apply where the agency agreement terminates at the end of the fixed term.  

Additionally, if the agency continues after the fixed term expires, the Regulations will still apply.  

Can a principal stop an agent from competing after the agreement has ended? 

A principal can only prevent an agent from competing against it if there are enforceable restrictive covenants in place. Whether the restrictions are enforceable will, in part, depend on whether they are reasonable in scope and only go as far as reasonably necessary to protect the principal’s legitimate business interests. As a rule of thumb, the wider the restrictions, the more likely it is that they will be vulnerable to challenge by the agent.