What to arrange in an agency agreement

A commercial agent looks for customers for principals on behalf of a client. This client is called a principal. Principals are usually a foreign manufacturer or trading company. Commercial agents and principals make arrangements and document them in an agency agreement. This agreement is the basis of their cooperation. Agents and principals often have different interests, so agreeing on a contract can be challenging. Find out what to look out for when entering into an agency agreement.

Paul Holtrop is a partner at Van Till Advocaten and secretary of the Association of Dutch Commercial Agents and Importers (VNHI). In this article, he explains which arrangements commercial agents and principals should always lock down in an agreement. He also goes into how European legislation protects commercial agents.

Realistic goals in an agency agreement

Agreements can be verbal or put in writing. Holtrop notes that commercial agents and principals often just get to work, without a contract. “Agency contracts are usually initiated by principals, who like them to include revenue targets.” 

Targets can be dangerous for commercial agents, Holtrop warns. “Principals often set high targets by basing them on turnover made by fellow commercial agents in Germany, for instance. I then ask whether the German market is a carbon copy of the Dutch market, with the same number of potential customers and competitors. And of course that is not the case. Every market is different. Besides, gaining a foothold in a local market takes time. If you want a long-term partnership, negotiate with the principal and set realistic goals.” 

Important arrangements for commercial agents

The individual interests of commercial agents and principals may differ. Holtrop lists 5 key things that commercial agents should include in the agency agreement: 

1. Exclusivity 

As an exclusive commercial agent, you have the exclusive right to serve a geographic area with a certain customer base for your principal. For example, retailers in the Netherlands. The principal may not work with other commercial agents in your region. Or sell goods or services to Dutch retailers without your involvement. 

“Some principals prefer non-exclusive agreements. This is unfavourable for commercial agents because it opens up competition. A retailer you introduced, for instance, may decide to order directly from the principal. If you have a non-exclusive agreement, you will not earn a commission on these orders, which you would receive if you had exclusivity. Does the principal also accept direct orders despite an exclusive agreement? Make clear agreements about checking all placed orders on a monthly or quarterly basis. This creates a lot of administrative work. Agents should partner with principals who do not accept direct orders and will refer potential customers to them.” 

2. Commission payment 

Commercial agents receive compensation from their principal for orders placed by customers they find. This is known as a commission (in Dutch). To claim their commission, commercial agents have to send their principal a commission invoice. The commission is usually a percentage of the net order amount. This excludes VAT and shipping costs. Agents should receive the commission when the principal confirms the order, “But some principals wait until the customer has paid or the product or service has been delivered. This is not always in the agent’s best interest. 
 Suppose you represent a machine manufacturer and the delivery time of the machine is 6 months. In that case, you will have to wait half a year for your money. If you still have to build a presence in the market, you may be able to negotiate a fixed annual start-up fee on top of your commission.” 

3. E-commerce 

Some principals sell their products directly to consumers online. “E-commerce lets principals cut out the retailer and the commercial agent. As such, you will not receive any commission on online sales either. Agree with your principal that you also receive commission on these online sales.” 

4. Expenses 

Commercial agents usually do not have their expenses covered as part of an agency agreement. Principals tend to claim that these expenses are priced into the commission. In the first year, however, you might spend most of your time building a customer base. So you may not get any orders until the second year. This means you will have no or little income at first. “Make sure to negotiate with the principal and ask for an allowance for your travel expenses, for example. Or suggest that you receive a fixed monthly expenses allowance for the first year only.” 

5. Duration of the agency agreement 

“I always say that, ideally, an agent and principal should enter into a fixed-term contract. Preferably for at least 3 years,” says Holtrop. “This gives you the time to build something together and it gives the agent a bit more certainty. After all, if I were a principal and entered an indefinite contract with a commercial agent, I would be entitled to cancel it tomorrow. And that is a major pitfall for the agent.” 

European protection for commercial agents

Dutch commercial agents usually work for European principals. This is beneficial for the commercial agent. Holtrop explains: "The European directive for independent commercial agents contains minimum requirements for the protection of the independent commercial agent. For example, under certain conditions, the commercial agent is entitled to customer compensation if the cooperation with the principal ends. The right to customer compensation, or goodwill, is mandatory. You may not deviate from that, even if it is stated in the contract."  

The directive applies to all countries within the European Economic Area (EEA). These countries are allowed to implement the minimum requirements of the directive in their own way. Holtrop gives an example: "Dutch law says the customer fee is a maximum of one year's commission. The fee is based on the average of the commission received by the agent over the past five years. In France, the maximum customer fee is 2 years of commission, calculated on the average of the past 3 years." 

Important arrangements for principals

Principals want their commercial agents to spend as much time as possible building and expanding a customer base. In addition to turnover targets, Holtrop says there are 5 more arrangements that are important in an agency agreement:

1. Non-compete clause 

A non-compete clause bars a commercial agent from offering identical or similar products from other principals within their catchment area during or after the partnership. “As a principal, you want to prevent agents from simply directing orders to the principal that offers them the highest commission. A European directive for self-employed commercial agents stipulates that the non-compete clause remains valid for a maximum of 2 years after the end of the agency agreement. You have to put the clause in writing.” 

2. Insight into representation and activities 

It is also important for principals to know if their agents intend to represent other principals in the future. “This lets you determine if they are competitors or not. You also want to know how active the agent is for you. You can agree that the commercial agent reports visits to prospective and existing customers. For example, every month or quarter. This way you know what the results of these visits are. ” 

3. Notice period 

Do you as principal opt for an indefinite agency agreement? If so, keeping the notice period as short as possible works to your advantage. “Be mindful of different rules on legal notice periods in different European countries. Under French and Dutch law, for example, agreements that lasted 3 years or more are subject to a minimum notice period of 3 months. In Germany, on the other hand, agreements that run for more than 5 years are subject to a minimum notice period of 6 months. You are allowed to agree on longer notice periods.” 

Do you not include a notice period in the agreement? Then statutory notice periods of at least 4 to 6 months apply under Dutch law. The period depends on the duration of the agreement. 

4. Del Credere clause 

Commercial agents are not allowed to take orders from customers who are unable to pay. However, it is important to remember that agents do not always know how creditworthy customers are. This puts you, the principal, at risk of unpaid bills. “Do you want your trading agent to always assess the customer’s financial situation before placing an order? Then set this down in the agreement using clear language. 

If you want the agent to exercise even more due diligence, include a so-called 'Del Credere clause' in your agency agreement. With this clause, the commercial agent is liable under Dutch law if a customer does not pay you or fails to do so on time. The liability applies to an amount equal to the agreed commission and not to the invoice value.” 

This clause means the commercial agent also must assume some risk. So it is usual for the agent to receive a higher commission in return. A Del Credere clause only applies if it is set out in writing in an agency agreement. 

5. Marketing 

Principals provide their commercial agents with samples and documentation. Such as price lists, brochures, and general terms and conditions. It is best if all these documents are in the language of the commercial agent’s country. “Do you want to increase your marketing efforts? Have your agents visit trade fairs or run a showroom that suits your product and image.” 

Choice of law

You can make agreements on which laws apply in the agency agreement. Agents and principals often agree to apply Dutch law or the law of another EEA member state. Is there no agreement on applicable law included in the agency agreement? Then the law of the EEA country where the commercial agent is based and works will apply. 

If you want to work with principals or commercial agents outside the EEA, they may propose having their country’s law apply to the agreement. “Make sure to investigate what this means for you first”, Holtrop warns. “Many countries outside Europe do not have specific legislation for commercial agents. The level of protection commercial agents enjoy in Europe is truly unique. 
 
But in some situations, the laws of other jurisdictions may offer advantages. Are you a Dutch principal who has entered into an agency agreement with a Chinese agent under Chinese law? Then you do not have to pay customer compensation after terminating the agreement. There is no such thing in China.” 

The protection Europe awards commercial agents is truly unique

Choice of forum

In addition to a choice of law, you can also mention a choice of forum in the agreement. This means you agree which court is competent in the event of a legal conflict. “If Dutch law applies, designate a judge in the Netherlands to rule on the conflict”, Holtrop advises.