In (commercial) agency agreements, the principal party, as supplier of goods or services, 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 sales contracts with the principal. Note the term “with the principal”: when a sales contract is facilitated by an agent (under an agency agreement), 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.
In addition to business development, marketing and closing the deal, an agent’s activities may also include after-sales services, customer care, any product-related servicing, as well as the collection on behalf of the principal of payments by 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.
Key clauses of a (commercial) agency agreement #
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.
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.
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.
Various clauses in the ITC model (commercial) agency agreement #
In the ITC Model (commercial) agency agreement, 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.
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 may be responsible for assessing the creditworthiness of the customer and even for 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 their 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).
A commercial agent’s obligations and 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. A detailed list of a commercial agent’s obligations and duties would reflect the entire sales cycle as is characteristic for the product or service, and the particular market of the commercial agent.
General responsibilities. Agent shall be free to organise its time and its activities pursuant to this Agreement. Agent shall make best efforts and devote such time, manpower and other resources as are necessary or helpful to promote, market, sell and maintain for Principal, and where required cooperate in the conclusion and completion of substantial sales of Products to the Market in the Territory.
…If desired, in view of the experience of the appointed agent, the specificity of a product’s or services’ sales cycle and required business development work a clause listing in more detail what an agent must do (or omit):
Specific responsibilities. Without limiting the generality of Section [General responsibilities], Agent shall:
As regards marketing, business development and sales:
- regularly (as often as is suitable) visit Customers and follow up on all leads and prospects provided by Principal, except that Agent shall not solicit sales from Key Customers;
- reply to all requests of Customers for quotations and shall pass on all orders for Products promptly upon receipt to Principal and has no authority to commit Principal in any manner. Quotations that are given, orders that are recorded and agreements that are negotiated by Agent shall reflect that they remain subject to the agreement of or a written order confirmation by Principal;
- refer promptly to Principal all enquiries for the purchase of Products received from persons operating inside or outside the Territory or the Market but for sale outside the Territory or the Market;
- keep Principal informed of any changes in the prevailing market conditions and shall periodically supply general and specific market reports relating to the Product and the Product’s equivalents, including: (A) information regarding Customers and general complaints from Customers, (B) details with regard to market shares and prices in the Market in the Territory, (C) promotional or other activities in the Market in the Territory, (D) technical information which can be considered to be relevant to the marketing and sale of the Products, and (E) information on Customers’ wishes for improvements of the Products. Agent shall, if so requested, actively assist Principal in its market research; and
- submit to Principal, at least [annually, by the end of November of each calendar year] a sales plan to be implemented by Agent, with target sales figures for each Product, for the following year, so as to allow Principal to schedule the manufacturing of the Products.
As regards its business operations:
- describe itself as an agent of Principal in all correspondence, letterheads, business cards, telephone directories, advertising materials and other external communications;
- conduct its business in accordance with proper business standards, in good faith and not commit any act which would adversely affect Principal or its Products, business, integrity or reputation;
- comply with all laws and regulations to which it is subject (including VAT, tax and social security) and avoid all unethical or misleading business practices, and keep Principal informed about (any changes in) the laws, regulations or requirements that (are to) apply in the Market and the Territory and to which the Products must conform;
- engage resources as are necessary for the efficient and effective performance of its obligations under this Agreement; and not engage in any other activities that would detract Agent from or hinder Agent in the performance of its obligations under this Agreement without the prior written consent of Principal, which consent shall not be unreasonably withheld or delayed; and
- at its own expense, attend and participate in trade fairs, industry meetings, conventions and other sales exhibitions (pre-approved by Principal), and attend meetings at Principal’s request with Customers and with representatives of Principal.
As regards support services:
- provide Customers with adequate after-sales servicing of all Products for Principal and address and resolve Customer complaints, breakdowns, off-specification deliveries of Product;
- subject to Section 2.4, refer promptly to Principal all contacts or inquiries by a Key Customer with respect to the Products;
- notify Principal of each complaint, breakdown or off-specification delivery with full particulars of the nature of the problem, the actions taken by Agent in response to the problem, the recommendations suggested by Agent, and such information as Principal may reasonably require; and
- provide Principal upon its first request with assistance in relation to handling of complaints and claims from Principal’s customers where it relates to (Principal’s operations) in the Market and the Territory.
As regards financial matters:
- not transmit orders from potential Customers of which Agent knows (or ought to know) that they are in a critical financial position, without informing Principal in advance of such fact; and actively support Principal in its assessment of Customers’ (ongoing) financial capability to fulfil their financial obligations duly and timely;
- not be authorised to collect or accept payments on behalf of Principal, but shall, when so requested by Principal, provide credit control and solvency review assistance on Customers (including follow-up of outstanding invoices and, where so requested, support in the collection of debts);
- [Agent shall be liable, up to the amount of the commission, for the solvency, capacity and willingness of the Customer to pay for the Product that such Customer ordered from Principal as a result of the activities of Agent under this Agreement, unless Principal has changed the delivery or payment conditions without Agent’s consent; and]
- provide Principal upon its first request with assistance in relation to invoicing to and debt collection from Customers.
Pricing and GTCs. Agent shall offer the Products for sale to the Customers as per the then current price lists, the volume discount schemes (if applicable) and the General Sales Conditions. Agent shall make no warranty or representation concerning the Products or their delivery other than those expressly made by Principal in its then current sales materials or otherwise authorised by Principal in writing.
It is important to note that national laws on agency agreement may impose restrictions on the agent’s involvement or responsibility (in terms of liability and risk) regarding financial matters. The above clause listing obligations of a commercial agent is also shared on our model contracts platform (in Word-format).
Standard provisions have been incorporated into the ITC Model (commercial) agency agreement, 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).
Conversely, you might want to use the following agency clauses in a distribution contract:
- Article 4 (minimum orders); and
- Article 5 (advertising, fairs and exhibitions).
In such case, when using the ITC model distribution agreement, the term Agent must be changed to “Distributor”; and the term Principal to “Supplier”.
This paragraph discusses the general framework of commercial agency agreements by reference to ITC’s Model Contract for international commercial agency. For own use, the parties should adapt the sales contract developed by the ITC.
Note: this chapter is also included in the e-book Cross-border contracting – How to draft and negotiate international commercial contracts, written by Weagree-founder Willem Wiggers and published by the ITC (the joint agency of the U.N. and WTO) and downloadable free of charge.