Appointing an Agent

What is an agent?

An agent is an intermediary involved in making a contract between his principal and the principal’s customer. In English law, an agent has the power to bind his principal to contracts with third parties.

There are various terms used to define the particular type of agent. Where the sale of goods is concerned, there are sales agents and marketing agents. An agency might be described as exclusive or non-exclusive. These terms can mean different things to different people.

Why appoint an agent or distributor?

In appointing a selling agent or a distributor, a manufacturer is effectively sub-contracting the selling function of his business. He may wish to do this for a number of reasons: to take advantage of an agent’s or distributor’s local knowledge and established trade connections, or to save the cost of having to establish his own selling operation.

Unfortunately the labels “agent” and “distributor” are sometimes used interchangeably causing considerable confusion. Always be clear about which arrangement is being used, as it is possible for a party to be both agent and distributor of different products under the same agreement (for example, a distributor in selling products but an agent in respect of software relating to such products).

As the agent acts on behalf of his principal, he is generally not a party to the contract between the principal and the principal’s customer.

Typically the commission paid to an agent is lower than the margin which a distributor will earn (since the distributor is taking a greater financial risk). Agency will therefore, at least in everyday terms, probably cost the supplier less than a distributorship. In situations where the Regulations do not apply (see below, but this is not always an easy thing to decide) the exit route from an agency relationship, if things do not work out well, may be cheaper for the supplier than that from a distributorship. Where the Regulations apply it will generally be the other way round.

As a rule, English common law has conferred few rights on agents. It was generally assumed that it is the principal who required protection against the agent rather than the reverse. This follows from the ability of an agent in English law, in some situations, to bind his principal even where he acts beyond the scope of the authority given to him by his principal.

Subject to variation by agreement and subject to the Regulations (where applicable), the agent has the following duties:

• To obey the lawful instructions of the principal;
• Only to act within the limits of his authority;
• To use reasonable diligence and care, and reasonable despatch;
• Not to put himself into a situation where his interests will conflict with those of his principal;
• To disclose all material facts to the principal and to refrain from divulging confidential information to third parties;
• Not to make a secret profit or accept bribes;
• To account to the principal for property and money of the principal which is under his control;
• Not to delegate his authority.

At least in situations where the Regulations do not apply, these duties (even the fiduciary ones) can be varied and contracted out of as between principal and agent where both are businesses.

Common law duties of the principal

Subject to variation by agreement and subject to the Regulations (where applicable), the principal has the following duties:

• To pay the agent remuneration and/or commission;
• An agent is entitled to be paid where the terms of the agreement expressly or impliedly makes provision for such payment.

Bribery Act 2010

The Bribery Act 2010 (BA 2010) came into force on 1 July 2011, replacing the criminal offences of bribery which existed before that date, and also introducing a new strict liability offence of a commercial organisation (section 7). Principals are particularly at risk under the section 7 offence.

Under the section 7 offence, a commercial organisation (including a company or partnership) will be guilty of an offence if a person associated with it bribes another person intending to obtain or retain business for the commercial organisation, or to obtain or retain an advantage in the conduct of business for the commercial organisation. A person (A) is associated with a relevant commercial organisation (C) if A performs services for or on behalf of C (section 8). It does not matter in what capacity A performs services for or on behalf of C; A may be C’s employee, subsidiary or agent. Under this definition, an agent will be an associated person to his principal (the commercial organisation). Principals will therefore need to consider how to mitigate the risk of a section 7 offence arising.

The civil law on bribery sits alongside the criminal law on bribery. A bribe is where a person makes or agrees to make a payment to an agent without the knowledge and consent of the principal; it is not necessary to prove any corrupt intent or improper purpose. Nor is it necessary to show that the agent has breached his duty to the principal (that is, to act in the principal’s best interest, and not to have any interest that conflicts with the principal’s interest). There is a non-rebuttable presumption that the agent has been influenced. Because of the lack of intent for an improper purpose, bribery in an agency context is sometimes referred to as a secret commission or secret profit.

Competition law

In general, commercial agency agreements will not give rise to competition law concerns, although the position in EU law is still not as straightforward as it might be.

The first question is whether the agreement can be looked at purely in terms of UK law, or whether EU competition law is relevant. (Where both apply, EU principles have traditionally prevailed.) The answer depends on where the effects of the agreement can be said to be felt.

An agency agreement can be a very useful commercial contract to have in place if it is skilfully drafted and is clear as to the parties’ rights and obligations.

It can however be critical to remember that legal advice should be sought before engaging, dismissing or pursuing any dispute with an agent.