Main idea: In a (commercial) agency contract, the principal appoints an agent for a certain territory, market segment, or product or customer channel. The agent will conduct business development work, market the principal’s goods and facilitate a sales contract with the principal.
Note: the term “with the principal”. When a sales contract is facilitated by an agent, it is not the agent who enters into the contract with the customer, It is the principal (represented by the agent) who enters into the sales contract with the customer.
Applicability of the ITC Model Contract. The ITC Model international commercial agency contract is intended for use in connection with the introduction, promotion, negotiation and conclusion of sales of products or services by an independent agent on behalf of a principal, within a defined territory or market. A main reason to appoint an agent is that the principal is unable to carry out by itself the introduction, promotion, negotiation and conclusion of sales of products or services in that particular territory or market, or is not prepared to make the necessary investments required.
The commercial agent may be a physical person or a company. If the agent is a physical person, under no circumstances can it be considered as an employee of the principal. When an agency contract applies to products, the principal may or may not be the manufacturer of these products. The principal may instead be, for example, a distributor.
Activities on behalf of the principal. Although the sales contract is clearly between the principal and the customer, sometimes (but not always) the principal requires that its agent:
- negotiates and signs the sales contract on behalf of the principal:
- takes care of any delivery and installation work;
- collects the purchase price on behalf of the principal; and
- takes care of various kinds of aftersales servicing (including complaints handling).
In such cases, the agent may almost seem like an employee of the principal: it represents the principal vis-à-vis the customer.
Exclusivity. As with distribution contracts, the commercial agency contract may provide that a self-employed agent shall have sole, or exclusive, or sole and exclusive trading rights in a particular territory (see the ITC Model Contract, Article 1). In this context, the character of the agency is territorial, not personal. The parties may wish to limit the scope of the agency contract to certain categories of customers.
Commission. The agent is normally paid commission on all sales emanating from his territory, whether procured by efforts of his own or of others. The commission is usually based on the price of the goods sold by or through him, sometimes augmented by bonuses or commissions.
Several points require particular attention and should be dealt with in the contract in precise terms, as follows.
Minimum volume commitment. The more volume (i.e. certainty) a customer can commit to in its estimated purchases, the higher a discount a supplier can offer. This is reflected in minimum purchase commitments (see the ITC Model Contract’s optional Article 1.4). For large customers, such commitments effectively imply more exclusivity (and less opportunism) regarding the supplier that will be chosen. The long-term character of a supply relationship allows the parties to alleviate any undesired effects of minimum volume commitments: circumstances of force majeure and shortfalls in any year can be compensated in subsequent years.
Commission on orders received directly by the principal. The agent is entitled to commission if the transaction concerned is the direct result of its efforts. The agent cannot claim commission if a customer places an unsolicited order with the principal, or if the order has been obtained by the principal himself or other agents. These rules are frequently modified by contract parties or a custom of the trade, which may provide that the agent shall be entitled to commission on all transactions emanating from his territory. That arrangement is particularly frequent when an agent is appointed as exclusive agent for a defined territory.
Repeat orders. Parties often arrange that commission shall be payable on repeat orders. If parties fail to make an express provision on this point, the principle that applies is that if the first order was the result of the agent’s efforts, the agent is entitled to commission on repeat orders (because they have to be considered as the continued effect of his or her original efforts). It is irrelevant whether these repeat orders are placed with the agent or with the principal directly.
Reimbursement of the agent for expenses. The self-employed sales agent abroad who solicits orders for an exporter cannot claim his trading expenses from the principal, unless this was expressly agreed upon in the contract. If the agent, with the approval of the principal, incurs liabilities in the courts of the country where the customer resides, he is entitled to be indemnified for any losses sustained or liabilities incurred.
Web shops and internet-sales. The increasing importance of electronic commerce is a further aspect of distribution that needs to be dealt with in the contract (see the ITC Model Contract Article 6).
Del credere agency. In a del credere agency, the agent will be responsible for assessing the creditworthiness of the customer and payment of the sales price. A del credere agent can be held liable for non-payment, depending on the contract, for amounts up to:
- the sales price;
- the commission; or
- part of the commission.
Termination: Payment of goodwill. The agent’s strength lies in its contacts with customers, and its weakness derives from the fact that its customers ‘belong to’ the principal. This explains why, in many countries including the EU Member States, public policy laws aim to protect the agent’s rights, especially upon the termination of the contract.
Applicable law (and local mandatory law). The parties are indeed subject to mandatory legal provisions of public policy that may apply regardless of the applicable law chosen by the parties. The background of this is that an agent may need a level of protection similar in scope and nature as that granted to an employee. Such provisions are binding, meaning that the parties cannot ignore or decide not to apply them. These provisions may restrict the validity of certain provisions in the contract, and may allow a court to reduce or extend the obligations of the parties. Before any discussion takes place between the parties, it is therefore strongly recommended to check whether the foreseen agency contract will be impacted by such laws.
Quick overview of obligations. The main purpose of a commercial agency contract is to establish the level of each party’s obligations towards the other, such as the authority of the agent to commit the principal (Article 2.2), to receive payments on his behalf (Article 2.3), the obligation for the principal to accept the orders transmitted by the agent (Articles 3.4 and 3.5), the information that the principal should pass on to the agent, such as the minimum overall orders, any change in the range of products or services, price, etc. (Articles 3.3 and 3.7), minimum orders (Article 4), advertising, fairs and exhibitions (Article 5), internet sales (Article 6), non-competition (Article 7), trademarks and property rights (Article 9), exclusivity (Article 10), commissions (Articles 11 and 12), consequences on termination (Articles 14 and 15), and assignment and appointment of sub-agents (Article 19).
Detailed description of the agent’s duties. If the agent is an individual or a small company that is not necessarily involved in the granted market fully or on a daily basis, it is common to include a detailed list of activities that the principal expects the agent to undertake. An example of such a detailed list is included in the (possible) outcomes of the cases proposed in Annex to this book (see Annex – Cases).
Miscellaneous clauses. Standard provisions have been incorporated into the ITC Model Contract, including the financial responsibility of the agent (see optional Article 13), force majeure – excuse for non-performance (Article 16) and change of circumstances (hardship) (Article 17).