Making changes to a sales agency contract

It’s not unusual for a principal to want to make changes to their contractual relationship with a sales agent during the course of an agency. Subjects that can come up for discussion include:

  • Conversion of customer accounts into house accounts (so that the principal, rather than the sales agent, deals with those customers);
  • Reducing the territory covered by the sales agent;
  • Reducing the commission rate payable to the sales agent on some or all of the customer accounts serviced by the sales agent;
  • Setting annual sales targets;
  • Increasing the sales agent’s reporting obligations.

Sometimes the principal seeks to impose such changes, rather than discussing and trying to agree them with the sales agent. Can they do that? Much will depend on the specific circumstances – in particular, whether there is a written contract in place and what that contract says.

The general position

The starting position is that, under the law of England and Wales, any changes, or variations, to an existing sales agency contract (or any other contract) have to be agreed by all of the parties to that contract in order to take effect. You might think that if the sales agent doesn’t agree to the changes proposed by the principal that would be the end of the matter – the principal can’t force the sales agent to agree the changes. That would be a correct legal interpretation in many cases, but there are some nuances and ‘exceptions’ to this general position.

Where there is a written contract

Written contracts often contain a clause which sets out the process to be followed in order to make changes or variations to the agency contract. Such clauses will usually specify that any changes to the contract will only be effective if they are set out in writing and signed on behalf of both parties. This is important and means that if sales agents and principals agree changes verbally, the verbal agreement would not be legally effective.

However, the original contract may itself contain provisions which enable the principal to impose specific changes on the agent without needing the agent’s consent. This is something that a commercial sales agent will need to be particularly aware of when reviewing the draft contract before agreeing and signing it. If the sales agency contract already permits the principal to make such changes without needing the agent’s consent, then the variation clause mentioned above would not apply.

Where the Commercial Agents (Council Directive) Regulations 1993 (“the Regulations”) apply to the agency contract, the situation can become more complicated where the principal seeks to remove customers or territory from the sales agent. Regulation 4 of the Regulations requires the principal to act dutifully and in good faith in their relations with the agent, while Regulation 7 of the Regulations provides that a commercial agent shall be entitled to commission on commercial transactions concluded during the period covered by the sales agency contract where the transaction has been concluded:

  • as a result of the sales agent’s action; or
  • with a third party whom the agent has previously acquired as a customer for transactions of the same kind.

There is something of a grey area as to whether the sales agent’s rights to be paid commission under Regulation 7 of the Regulations can be excluded by the agreement of the parties (for example, where the parties agree that customer accounts can be converted to house accounts or the agent agrees to a territory reduction). There is a good argument that if the agent has acquired a new customer for the principal, under Regulation 7 they would still be entitled to commission on all sales to that customer even if that customer becomes a house account or is removed from the agent’s territory.

The grey area arises because it is not clear whether Regulation 7 can be overruled by the terms of the commercial sales agency contract. A number of the Regulations explicitly state that they cannot be overruled by the terms of the sales agent contract, but there is no such statement in relation to Regulation 7. Surprisingly, the Courts have not yet had to deal with this issue. The general consensus seems to be that Regulation 7 could be overruled in this way, but until we get a definitive view from the Courts there remains some uncertainty here. In order to protect themselves when dealing with house account or territory reductions, it would be sensible for a commission-only sales agent to try to negotiate something with the principal that either confirms commission will continue to be paid for sales to those customers or gives the agent a payoff for losing those customers. That might be easier said than done in practice!

Where there is no written contract

Where there is no written agency contract in place, it would still be necessary to show that the parties have agreed to change or vary the terms of the agency contract. The circumstances in which this could take place are potentially wider and a Court would consider carefully what evidence there is to show that the parties agreed to change or vary the contractual terms. That evidence could be in writing and signed on behalf of both parties, or it could be produced in a number of other ways, including by email or other correspondence, verbally, or even by the conduct of the parties (e.g. the principal seeks to impose a change, the sales agent does not object to that change and continues over a period of time to perform their duties in accordance with that change).

Commercial reality

While the legal position might be that a principal cannot impose contractual changes on an agent, the practical and commercial realities of the situation might be very different, especially given the economic impact of the Covid-19 pandemic. A principal might be faced with the unenviable situation of having to reduce costs in order to keep their business alive and having to terminate the sales agent contract if costs cannot be reduced. In such a situation, you would hope that the principal and agent could work together to find a way forward – if they are unable to do so then disputes are likely to arise.

Kevin Manship, Solicitor

Peter Dovey and Co Solicitors, 8 Lincolns Inn Fields, London, WC2A 3BP

Email: kevinmanship@pdcosol.com

Telephone: 07778 010574

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