Managing risk in commercial agency contracts

Commercial agency contracts are integral to modern business operations, and appointing an agent is one way of entering a market for your business and expanding its reach. It can also be a great way to test the waters in another country prior to committing to employ someone.

In broad terms, an agency relation is one whereby you (the “principal”) would allow another person (the “agent”) to do something on your behalf, or on behalf of your business. Clearly passing on this type of authority also entails some inherent risks, particularly where the agent is outside of your jurisdiction and outside your direct control.

This article delves into five risks associated with commercial agency contracts, offering practical strategies to safeguard and mitigate against them in order to protect your business’ interests.

Is there a ‘true’ agency relationship?

While the label ‘agency’ can often be used to cover a wide range of business relationships, in reality this may not be the true nature and intent of the relationship. Often, when agency agreements are disputed, the courts will not  take the label of the relationship at mere face value and instead will look further into what the relationship implies.

When a true agency relationship is established, your business as the principal will have a number of rights and duties which it will be afforded, as well as various protections for the agent, such as those enshrined in the Commercial Agents Regulations 1993 –  implementing the EU Commercial Agents Directive (86/653/EC). There is also a common law of agency which applies much more broadly and further advice will be required in anticipation of such a relationship being formed.

Common risks

There are several common problems which can arise when an agency relationship goes awry, and so it is important to consider these in advance.

1. Agents acting beyond authority

An agent may act beyond the scope of their authority. The risk in such circumstances is that you as a principal could still be bound and be held responsible for any acts which the agent were to carry out which incur civil liability within their territory. For example if your agent contracts to provide a certain quantity or specification of goods which you cannot supply, any contractual liability incurred would likely be yours.

2. Exclusivity

The agent may also seek to exceed their authority by operating outside of their jurisdiction, which could conflict with any exclusivity agreements your business has with other agents who may have been appointed in neighbouring territories.

Principals are able to appoint agents on an exclusive or non-exclusive basis; however it is worth noting that at common law, contracts restricting trade are generally unenforceable. However they will be held valid where it can be demonstrated that the restraint is reasonable for the protection of a legitimate business interest and is not contrary to public in interest. Therefore, a careful drafting regarding this within the agency agreement is key.

3. Confidential information

The agent may take advantage of the confidential or commercially sensitive information afforded to them in their capacity as Agent for your business and may seek to disclose this information to a competitor for their own financial gain. Again, adequate protections in this regard need to be drafted into the agency agreement.

4. Subcontracting

The agent could seek to subcontract the agency work to a third party who is not known to your business.

Any commercial agency agreement should be drafted in a way that strictly prohibits this kind of action.

5. Termination

It is imperative that any agency agreement is terminated correctly, as failure to do so may mean the ability of the agent to seek recovery of significant compensation from your business under the agreement or under the Commercial Agents Regulations 1993. Please see our article detailing further information on the consequences or terminating an agency relationship.

It is also key to make sure you consider prior to terminating an agreement the restraint of trade provisions which would apply post-termination. The 1993 regulations set out the parameters for this.

However, you may wish to include these clauses explicitly within your agency agreement. These provisions would place certain limitations and restrictions on the agency’s post-contractual behaviour, such as that relating to the geographical area they can cover, types of goods they can sell and the groups of customers which they could engage with. These can all be covered under the agency agreement. However, such restrictions can last for no more than two years post-termination.

Clearly, the potential risks and liabilities associated with instructing an agent can be significant. In these circumstances the advice of a specialist commercial lawyer is essential to ensure that the full extent of the risks arising are understood and where possible, limited.