Checklist
This checklist provides an overview of agency agreements.
Definition
An agent is an individual or a legal person who has been appointed by another individual or company (the principal) to act on his, her, or its behalf and to create legal relations between him/her/it and other parties.
The agent and the principal usually enter into an agency agreement, which is drafted by the principal, and then negotiated and amended by the agent. Agency agreements can be oral or written and, in certain cases, can be implied by the conduct of the parties.
An agent can be appointed for many purposes, which can include the distribution, sales, and consignment of goods, or to negotiate, represent, and act on behalf of a principal who is an artist.
From a legal point of view, an agent can exercise all powers given to him or her under the agreement. The agent must carry out with skill and diligence the instructions given by the principal. He or she must promote the principal’s interests and must not profit secretly from the agency.
Before entering into an agency agreement, the parties should thoroughly investigate the market and territory and weigh the advantages and disadvantages of establishing an agency and operating within that market. If the agency to be set up relates to the manufacturing and sale of products, it is advisable to think of the way in which these products will be distributed and sold. Under an agency agreement for the sale of goods manufactured by the principal, the principal gives the agent the right to sell its products in a well-defined territory, for a certain period of time, in exchange for a commission fee. The agency can be simple, sole, or exclusive. A sole agency means that the principal will not appoint any other agents within that territory but the principal itself is still entitled to sell the goods there. An exclusive agency gives the agent the sole right to sell products in that territory: the principal will not appoint any other agents or sell the products itself. A simple agency usually means that there are other agents in the territory, as well as the principal, all selling the same products. Exclusive agencies are, therefore, the most expensive and sought after.
The agency agreement should stipulate in detail the commission an agent will be paid. This is usually calculated as a percentage of the gross takings for the product.
An agency agreement must be clear and well structured. It should specify in detail the scope of the agency, the territory where the agency will operate, the obligations of the principal and the agent, the commission, and the payment terms. It should also specify the duration of the agency and any termination clauses. Conflict clauses should be included to deal with nonperformance and breach of contract, with provision for solutions such as mediation.
As an agent will be able to bind a principal to other parties legally, special care should be taken in making sure that the right agent is appointed. Warranties and indemnities should be sought from an agent to cover any potential liabilities a principal may have. On the other hand, an agent should be careful not to take any responsibility for the products of a principal and should seek to be compensated in this respect should it be necessary.
Advantages
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An agency allows a principal to increase the market for its brand by giving others the right to use it under certain conditions and for a certain price.
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It also allows an agent to operate a business and to exploit, for his or her benefit, a product that belongs to someone else and that would otherwise be too expensive to acquire.
Disadvantages
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Negotiating an agency agreement can be complex and time-consuming. It involves thorough research of the market and territory in which the products will be sold or used.
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Exclusive and sole agencies are more expensive than simple agencies.
Action Checklist
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Study any agency with which you might sign. Obtain as much information from as many sources as you can before committing to an expensive agency agreement.
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Know your market and make sure that you have analyzed the consequences for your own business of entering into an agency agreement.
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Be prepared for complicated negotiations, which could prove time-consuming and costly.
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Economize by negotiating a reasonable rate with your legal advisers, but remember that it is better to incur costs by obtaining legal advice than to enter into an agency agreement under terms that you do not understand.
Dos and Don’ts
Do
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Choose your agent carefully.
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Involve your solicitors in the evaluation of both the risks and potential benefits of entering into an agency agreement.
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Negotiate your rates and make a contingency plan for any cost overrun.
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Plan carefully how the agency will operate in the territory.
Don’t
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Don’t make the mistake of being attracted by an agency that has not been thoroughly investigated.
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Don’t overlook the importance of negotiating warranties and indemnities that will protect you in the event that underlying liabilities are discovered.
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