Before establishing a formal presence in the EU, many businesses decide to “test the water” by appointing a local reseller. Depending on the basis on which the reseller is appointed, EU regulation can often give rise to unforeseen consequences, including potentially significant costs on termination of the relationship.
Some resellers act as distributors, as this is often seen as a low risk route into a new market. Distributors act in their own name to purchase products from a supplier, then sell those products on to customers, usually at a mark up. By contrast, some businesses prefer to appoint sales agents to act on behalf (and in the name) of that business. The agent represents the business (the “principal”) in the negotiation and conclusion of contracts with end customers. Whilst neither approach is without its risks, there are some particularly thorny issues that arise in respect of agents that operate within the EU.
In the early ’90s, the EU introduced the Commercial Agents Directive, the main purpose of which was to enhance the rights of commercial agents relative to their principals. The legislation also sought to harmonize divergent agency laws that applied across the various EU Member States. Whilst it’s true that agents have benefited from the Directive, its implementation by EU Member States’ has varied significantly, resulting in a lack of uniformity among European agency rules. In an effort to provide clarity, some of the key protections conferred on EU agents, which often catch out non-EU principals, are summarized below.
When does the legislation apply?
Broadly, the relevant national rules will apply to agents that (i) operate within the territory in question and (ii) have authority to negotiate and/or conclude contracts on behalf of their principal. Merely stipulating that a non-EU law governs an agency agreement will not defeat the application of the legislation.
In many EU countries the rules apply to agencies that are concerned with the sale of goods, services and software (whether on-premise or in the cloud). This is, however, just one area where the rules have been implemented differently – in the UK, for example, the rules only apply to agencies that are concerned with the sale of goods.
What are the implications?
Where the regulations apply:
- Written statement of terms: Either party may at any time request a written statement of terms that apply to the arrangement. In practice, it’s likely that a written agreement will exist in most cases, and that approach comes highly recommended.
- Scope of agent’s appointment: Certain jurisdictions (e.g. Italy) require that the territory to be covered by the agent is clearly specified. It is also advisable (particularly in jurisdictions such as the UK and the Netherlands) to specify whether the agent’s appointment is exclusive or not.
- Additional implied obligations: Various duties are imposed on the agent (e.g. to act in good faith towards the principal, to comply with the principal’s reasonable instructions, and to disclose relevant information to the principal). They also impose duties on the principal (e.g. to act in good faith, to provide documentation about its products, to inform the agent of any expected drop in turnover, and to tell the agent if it intends not to fulfil a particular customer contract). Breach of these duties can give rise to claims for damages.
- Commission: Commission payments are due to an agent on any transaction concluded during or after the agency as a result of the agent’s actions. The rules also impose strict deadlines for payment of commission.
- Minimum notice periods: Where an agency agreement runs for an indefinite period, or runs beyond its initial term, a principal must give a minimum amount of notice in order to terminate the agreement. The minimum notice periods correspond to the duration of the agency, usually one month during the first year, two months during the second year, and three months during the third and subsequent years. However, in some countries (e.g. Italy) specific collective bargaining agreements may require longer notice periods.
- Termination payment: The agent is entitled to a termination payment at the end of the agency, except in certain limited circumstances. In many (but not all) jurisdictions, this payment may be calculated in one of two ways, and unless the parties have expressly agreed otherwise, the payment that is usually most beneficial to the agent will apply.
- Post-termination restrictions: Any post-termination restrictions on a commercial agent can only last for up to 2 years after the end of the agency (subject to any competition law/local law rules that mandate a shorter period). For agents acting in jurisdictions such as the Netherlands, it is particularly crucial that such restrictions are explicitly agreed and are specific about the good/services/software, geographical area and group of customers they cover. In other jurisdictions, e.g. Germany, separate compensation may be payable in respect of these restrictions.The vast majority of the rules cannot be excluded by agreement.
What can I do about it?
- Conduct upfront analysis of the proposed relationship and consider whether the EU rules will or might apply. This could have a bearing on whether to appoint a distributor or agent, or adopt an entirely different route to market, e.g. appointing a local workforce. Bear in mind that in some territories (e.g. Germany) agency law will – under certain conditions – apply to resellers, agents and distributors (and possibly even franchisees), so it may not be possible to avoid the rules by choosing other types of distribution arrangements.
- Where applicable, consider which termination payment should apply and make express provision in the agency agreement if necessary. Each party is likely to prefer one termination payment over the other, but that is not always the case, so thought should be given to the issue up front. In practice, a lot is likely to depend on the parties’ bargaining power.
- Seek local legal advice on the differing implementation of the Directive, particularly where resellers are being appointed in more than one EU jurisdiction. It is unlikely that an “EU-wide” view of the rules will be adequate.
- Agency contracts do not need to be written (although some jurisdictions, e.g. Italy, require the agreement to be evidenced in writing) and the rules may therefore apply to oral agency agreements. Take care when conducting discussions with (potential) agents to avoid inadvertently establishing a contract.
This is not new legislation but it does mean that agency arrangements often give rise to issues and risks that are unfamiliar to many non-EU businesses. The effect of the rules can be mitigated to an extent, although careful upfront planning and analysis will be required. This, coupled with the different approaches to the Directive that exist across the European market, highlights the need for good local legal advice at an early stage when looking to appoint overseas representatives to act on your behalf.