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The two most common marketing agreements are agency and distribution agreements. Drafting these requires a number of comprehensive clauses detailing the parties' obligations.
A sales agency agreement is one where an agent makes contracts with customers on behalf of someone else (its 'principal'). In other words, the agent binds the principal so that there is a contract between the customer and the principal. In the context of the sale of goods and services, the principal will often be the manufacturer, but as agency can be created at any stage of the marketing chain, it can also be a wholesaler.
If UK law governs the contract, basic prohibitions on anti-competitive agreements will apply. This is governed by the Competition Act 1998 which is almost identical to the European law on this matter.
If the agent accepts a financial risk in relation to the contracts it makes or negotiates, Article 85 of the European Community Treaty may apply. This means that the object or effect of an agreement cannot be to prevent, restrict, or distort competition. If the agent does not have any financial risk, Article 85 will not apply.
The Commercial Agents (Council Directive) Regulations 1993 govern the relations between commercial agents and their principals. They lay down the rules with which the parties must comply in relation to a number of important areas of agency agreement.
In particular, these are the rights and obligations of both parties, the agent's remuneration and the conclusion and termination of the agency contracts. The word 'commercial agent', however, does not cover a marketing agent who only has authority to find customers and not to negotiate on the principal's behalf. See the 'Financial provisions' heading below for more information.
The recital may be useful for setting out the basis on which the parties are making their agreement. For example, the parties may use the recital to show that their relationship is such that the agent is not acting as an independent trader and not accepting any financial risk in the transaction so that Article 85 of the EC Treaty will not apply.
Agency agreements customarily have an interpretation clause where there is a comprehensive definition of the products which the agent is marketing on the principal's behalf. The place where the agent is going to market the goods can also be defined here. In many cases, defining where the goods will be marketed will be straightforward, but it still should be expressed as precisely as possible. It should be noted that the 1993 Regulations will not apply to an agent acting outside the European Economic Area.
The appointment clause defines the extent of the agent's authority to bind the principal. In attempting to define the geographical limits of the agent's operations and the extent to which the agent will be protected from competition within this territory, this clause should be as clear as possible.
Strictly speaking, sole agency means that the principal will not appoint any other agents within the defined territory, but the principal itself can still sell the products there. Exclusive agency means that the principal cannot sell the products within the territory or appoint any other agents in the territory. However, for clarity's sake, it is better to state whether the principal can appoint other agents to market the products in the territory itself (and in what circumstances).
If the agent agrees to guarantee the customer's performance of the contract in return for a higher commission, it is likely to be recorded in the appointment clause.
The section on the agent's duties is likely to be the longest part of the agency agreement as the principal needs to have an appropriate amount of control over its agent's activities. It is useful when drafting the agreement, to have a clause relating to general duties, followed by individual clauses covering particular duties of the agent which can then be tailored specifically to the arrangement particular to that agent.
General duties would cover the agent's duties of doing all that it can in promoting and marketing the products. On top of these general duties, it may sometimes be necessary to include the following as specific duties of the agent:
These are often less onerous than the agent's duties to the principal. However, under Regulation 4 of the 1993 Regulations, a principal must act dutifully and in good faith in his or her relations with his or her commercial agent. Commonly encountered provisions are as follows:
It is important to note that the 1993 Regulations have provisions relating to an agent's remuneration and compensation or remuneration on termination of the agreement. If the 1993 Regulations apply, the principal must ensure that the remuneration provisions are consistent with such regulations. Some of these are as follows:
Alternatively, the principal may collect payment from customers, and then pay the agent a regular amount of commission. Further, the parties may wish to provide for the payment of interest on any sums outstanding if either side fails to account to the other.
Under the following circumstances, either side may want to terminate the agreement. It is desirable to set out the circumstances expressly in the agreement:
However, if the 1993 Regulations apply, it obliges the principal to give the agent a pay-off on termination of the agreement which amounts to either an 'indemnification' for any possible damages, or to compensation for any actual damage suffered as a result of the termination.
An agency agreement will usually have standard provisions, referred to as 'boilerplate', containing a number of miscellaneous clauses. Typically, it will include clauses on:
