A special report comparing European and United States laws relating to commercial or manufacturers’ agents and the principals for whom the agents act.
Prepared by MANA with the assistance of legal counsel from Europe and the United States.
This publication is intended to provide general information about aspects of the legal relationships between agents and principals and to compare the treatment of certain issues under the laws found in Europe to the laws found in the United States. This special report is not intended to provide legal advice. Those seeking counsel about specific laws and factual situations must discuss those issues with a qualified professional advisor. Courts and legislative bodies can modify, interpret or void laws. Consult with a qualified professional advisor to determine the appropriate law applicable to any specific situation.
For many years, in both the United States and throughout Europe, suppliers of products and services have used agents to obtain orders from customers. In Europe, it is common to refer to such agents as “commercial agents.” In the United States, these agents are usually referred to as “manufacturers’ agents” or as “manufacturers’ representatives.” In this special report, we will use “commercial agents” when discussing European law and “reps” when discussing United States law.
In both Europe and the United States, the persons for whom commercial agents and reps obtain customer orders are commonly referred to as “principals.” However, many suppliers of products and services are not principals as that term is used in connection with commercial agents or reps. For example, in the United States, the laws applicable to the rep-principal relationship are not normally intended to apply to insurance agents or to those that sell door-to-door. There are many other particular state laws that apply to such activities. Similarly in Europe, the European Union (“EU”) has adopted Directive 86/653/EEC (“Directive”) with the purpose of harmonizing up to a certain minimum level the national laws of the Member States applicable to commercial agents and their principals. The Directive does not cover agents soliciting the sales of services, such as travel and insurance agents, who are covered by specific national laws of the Member States.
A brief comment on the use of the word “law” in this special report is in order. When discussing the law of the United States, law will generally mean statutes passed by state legislatures unless otherwise stated. In the United States, there are five main sources of law other than case law: (1) the Constitution of the United States; (2) International Treaties to which the U.S. is a party; (3) federal laws passed by the Congress of the United States; (4) state laws; and (5) the constitutions of the individual states. For the most part, there are few federal laws that directly apply to the rep-principal relationship, but over 30 states have enacted particular state laws that cover that relationship. Accordingly, in this special report, most often the “law” of the United States will refer to state laws.
The discussion of applicable European “law” in this special report shall generally mean the Directive unless otherwise stated. Even though the Member States implemented the general provisions of the Directive into national law, the specific national laws must be consulted in each case in view of the fact that important differences continue to exist.
The purpose of this special report is to compare how the laws of the United States and Europe address certain important general issues in the business relationship between reps and commercial agents and their principals. The intent is to provide a perspective on the treatment of some common significant issues within the United States and within Europe. The publishers and authors of this special report do not intend to provide legal advice or legal guidance for specific situations. Laws change and can be interpreted and voided by courts. Please consult with a qualified professional for advice on particular laws and factual issues.
1. Definition of Rep and Commercial Agent
In the United States, the law usually defines a rep as someone who solicits customers and/or orders for the products of a principal. In other words, a rep seeks to influence customers to buy goods from a principal. Some laws broaden the definition to include reps that solicit the purchase of services provided by a principal.
The laws, however, may state that reps soliciting certain services are not covered by the law. For example, some laws expressly exclude insurance agents (although insurance agents and other agents in the United States are subject to many other state laws, which do not apply to the reps discussed in this special report). Other laws might apply only if the rep/principal contract is in writing and almost all apply only when wholesale orders are involved.
Reps under United States law are almost always independent contractors and are not employees or distributors. Most of those laws do not apply to employees or to those that either buy and resell or buy for their own account. In addition, the laws typically state that the rep must be paid in whole or in part by commission. Some of the laws state that they only apply to reps that solicit orders in the state that has enacted the law.
The laws do not describe what the rep can and cannot do within the business relationship. In the United States, the authority of the rep to act on behalf of the principal is left to the definition of it by the parties as expressed either in the written contract or in their conduct. Typically, and unlike under European law, the rep in the United States does not have authority to conclude the solicited purchase by accepting the order or to otherwise bind the principal.
The Directive defines “commercial agent” as a self-employed intermediary who has continuing authority to negotiate the sale or purchase of goods on behalf of another person (his “principal”) or to negotiate and conclude such transactions on behalf of and in the name of that principal.
The Directive expressly excludes company officers, partners, receivers, liquidators and trustees in bankruptcy. It also excludes unpaid agents and those operating on commodity exchanges or in the commodity market or UK “Crown Agents.”
As the definition of commercial agent relates only to the sale or purchase of goods, agents in service industries such as travel and insurance agents, as well as musical, theatrical and sporting agents, are excluded. It should be noted however that many of the Member States, when implementing the Directive, have extended the scope of their national laws to also include agents in service industries.
Moreover, the Member States have the freedom when implementing the Directive to exclude those persons “whose activities as commercial agents are considered secondary by the law of the Member State.”
2. Rights and Obligations
Most laws in the United States do not extensively detail rights and obligations (“duties”) of the rep and the principal except with regard to commission payments not timely paid under the contract or upon the termination of the relationship (discussed below in the “Remuneration” section). In the United States, the parties usually set forth their duties in a written contract. Parties have a great deal of freedom to determine what the respective duties will be.
The freedom is not unlimited. Here are some examples. For a rep to be recognized as an independent contractor in the United States by the Internal Revenue Service (“IRS”), the principal cannot exert control over the details of the methods by which the rep performs services for the principal or to otherwise usurp the independence of the rep to operate its business. If the principal exerts such control, the IRS will likely reclassify the rep as an employee of the principal and require the principal to pay withholding taxes, interest and penalties. This issue can create significant legal and financial problems and should be carefully discussed and documented before a rep begins to perform services in the United States.
The laws of a few states set forth some duties that must be in a written contract between the rep and the principal. Most often, the laws require the contract to describe how commissions are calculated and payable as well as to list any customers excluded by the principal from the solicitation efforts of the rep (“house accounts”).
Some of the laws are concerned with the details of the creation of the rep-principal relationship. A significant number of state laws require a written contract. Some enforce the payment of commissions due under verbal agreements. A minority of the state laws include a requirement that the principal provide a signed copy of the contract to the rep and even obtain a written receipt from the rep.
A variety of state laws or court decisions create other rights and obligations in the rep-principal relationship. Each party must keep confidential the trade secrets and proprietary business information of the other party. A small number of laws expressly either state that good faith is required in certain circumstances or state that certain acts or omissions create a presumption of bad faith. Most states have not passed laws that allow courts to imply good faith requirements in the rep-principal relationship, but some states have, through court decisions, recognized implied promises of good faith and fair dealing between reps and principals.
Under United States law, the parties are generally free to negotiate between themselves such matters as how much notice must be given and in what form before an action becomes effective. Similarly, they will usually state in the contract that the rep has no authority to change the terms of sale offered to the customer by the principal through the rep without the prior permission of the principal. The contract will prohibit the rep from accepting orders from the customer or otherwise binding the principal without prior authority.
The primary focus of the state laws concerns the duties of the principal to pay commissions upon the termination of the rep-principal relationship. This issue will be examined below in “Remuneration.”
The Directive addresses rights and obligations only in general terms. It provides a basic minimum and may not be derogated from by the parties.
The agent is obliged to “look after his principal’s interests and act dutifully and in good faith.” This includes making proper efforts, keeping his principal informed and obeying his reasonable instructions.
The principal is obliged to act dutifully and in good faith. This includes providing the agent with all necessary documentation and information. In particular, he should give reasonable notice to the agent if he expects a significantly lower volume of commercial transactions than the agent would normally have expected. The agent also has the right to be informed within a reasonable time of the outcome of transactions procured by him for his principal.
No law in the United States mandates what the commission rate or other remuneration for a rep must be. The parties are free to negotiate such terms. As discussed in the prior section, some state laws require the parties to include the method of calculation of commissions in the written rep-principal contract.
The state laws set forth specific requirements for the payment of commissions during the relationship as well as upon the termination of the rep-principal business relationship. The laws differ, and it is beyond the scope of this special report to list the requirements in over 30 state laws. In general, the laws require that commissions must be paid within a fixed period of time. If commissions are not paid as required contractually or by law, the rep may sue the principal for the amount of the unpaid commissions and also seek additional exemplary damages (in some states, up to three times the amount of unpaid commissions) plus court costs and attorney fees. If the rep brings a frivolous lawsuit and the principal gets it dismissed, the laws often permit the court to award attorney fees to the principal.
These laws concerning commission payment requirements are often referred to as “commission protection acts” (“CPAs”). Some of the CPAs refer to paying commissions that are “due”; others refer to “accrued” commissions. The CPAs have varying other requirements that affect their interpretation and application. Both reps and principals should examine the applicable CPA with the assistance of a qualified professional advisor prior to making payments or other payment decisions at the end of the rep-principal relationship.
A few of the CPAs have provisions that may impact the payment of commissions upon termination in other ways. These laws contain provisions that arguably permit the rep to recover commissions if the rep can prove: (a) that the termination occurred after the principal had received and accepted an order from the rep’s territory; (b) that the order was shipped and paid for at some point; and (c) that the termination was motivated to avoid paying commissions to the rep.
Member States have the right to maintain or enact specific legislation concerning agents’ level of remuneration. In general the principal and the agent are free to agree on the payment. In the absence of an agreement, the agent is entitled to the customary local rate for the kind of goods he is selling or to a reasonable rate in the absence of any established custom.
The following rules laid down by the Directive apply exclusively to payment of commission and not to other forms of payment:
- Commission is payable during the contract period on all transactions concluded as a result of the agent’s action. If further business is done subsequently with a customer acquired by the agent for the same kind of business, the agent is entitled to commission on that subsequent business during the contract period. If the principal receives an order from such a customer during the agent’s contract period, then he must pay the agent commission on that contract.
- Even if the transaction is concluded within a reasonable period after the termination of the contract, the agent is entitled to commission if the transaction is mainly attributable to his efforts during the contract period.
The above rules could give rise to a situation in which both a current and a previous agent were entitled to commission. In this case the previous agent is entitled to the payment, “unless it is equitable because of the circumstances for the commission to be shared between the commercial agents.” It may also be provided that the agent is entrusted with or has the exclusive right to a specific geographical area or group of customers. In this case he is entitled to commission on all transactions with customers from that area or group. Under some of the national laws, exclusivity is assumed unless explicitly agreed otherwise.
The commission becomes due as soon as the transaction has or should have been executed by the principal according to the agreement made with the customer, or as soon as it has been executed by the customer. This protects the agent against non-performance or breach of contract by the principal. The commission shall be paid when the customer has executed his part or on the last day of the month following the quarter in which the commission became due, whichever occurs first.
The state laws have few requirements as to what information must be provided to either of the parties. A minority of state laws require that commission charge-backs for unpaid or returned orders and commission calculation information must be specifically addressed in the written contract or with the commission payment itself. The parties commonly negotiate the provision of information to each other and then include their agreement in the written contract.
In the event of a dispute as to orders, shipments, payments or similar information, in the United States an aggrieved party could file a lawsuit and then seek “discovery” within the lawsuit. In brief, there are rules of civil procedure which apply to business (and other) disputes. A number of these rules involve discovery, which is the specific procedure by which the attorneys for each party gather informationthat is relevant to the dispute by asking questions and requesting documents to examine and copy.
According to the Directive the agent is entitled to receive quarterly information relevant to the amounts and breakdown of his commission. If Member States have national rules which permit the agent to inspect the principal’s books, these rules are to take precedence over those found in the Directive.
5. Execution and Termination of Contracts Between Principals and Reps/Commercial Agents
Some state laws require agreements between reps and principals to be in writing in a document signed by both parties. (There is no federal law that requires written contracts between the parties.) The state laws apply regardless of whether the principal is inside or outside the United States. Some of these laws also say that no provision of the state law can be waived either by express waiver or by an attempt to make the agreement subject to the laws of somewhere else.
Moreover, most states in the United States also have a state law generally known as the “Statute of Frauds.” This state statute requires certain contracts to be in writing. Typically, if performance of the contract will take longer than one year, the contract must be in writing. Since some contracts with reps in the United States will be for a fixed period of time, the applicable state statute of frauds may apply, and the contract should be in writing.
These laws do not prevent the parties from agreeing to a business relationship through a verbal or implied agreement. In addition, the rules of evidence in the United States may permit proof of the terms of an agreement through some writings that might not take the form of a traditional written and mutually signed contract. However, these rules and laws may also prohibit certain proof of a rep-principal relationship that was not embodied in a written contract.
If the parties continue to perform after the expiration of a contract for a fixed period of time, there may be an issue as to whether the contract as a whole was renewed by the actions of the parties or whether the agreement is now a new one for an indefinite period of time which can be terminated upon notice.
A minority of laws in the United States set forth the circumstances under which a party to a rep-principal contract may terminate it. Similarly, few laws state any required length of notice that must be given of termination or non-renewal. The parties are generally free to negotiate such terms. Termination or non-renewal may be with or without cause and upon such notice as agreed upon. “With cause” means there is a reason for the termination; “without cause” means that no particular reason is required. The reason for a “with cause” termination is usually the breach of the agreement by a party. Sometimes, the contract gives the party claimed to have breached the agreement the right to cure the alleged breach within a certain period of time after notice of the alleged breach. The parties may also agree to immediate termination in particular circumstances such as a “material” or major breach of the contract, an uncured breach or in the event of a significant change in ownership or participation in the selling effort (“key person” clause).
Each party has the right to receive a written document setting out the terms of the agency contract. The right to receive such a document cannot be waived. The contract of the agency itself can be concluded orally or tacitly, except the Member State has provided that an agency contract shall not be valid unless evidenced in writing.
The Agency contract may be concluded for a definite period. If such a contract continues to be performed after the expiration of the agreed period, the agreement is transformed automatically into an agreement for an indefinite period which can be terminated by notice. The period of notice cannot be shorter than one month for every expired contract year. With the beginning of the fourth year, the Member State can adopt longer periods of notice to a maximum of six months.
If longer periods of notice are adopted, these should be identical for both agent and principal. Fixed period agreements are also subject to the cumulative notice provisions described above.
The contract can also be immediately terminated by either party in certain cases, e.g., when one party fails to carry out its obligations or in “exceptional circumstances,” such as force majeure.
6. Indemnity and Compensation
In the United States, these terms have different meanings from their European counterparts. In America, “indemnity” means a promise by one party (the “indemnifying party”) to protect and hold harmless the other party from financial liabilities arising from wrongful acts or omissions of the indemnifying party. The laws of the various states often have some indemnification provisions, but they may not be directly or clearly applicable to the rep-principal relationship.
Therefore, it is usually a matter of negotiation as to what indemnification provisions appear in the contract between the parties. The indemnification should be reciprocal so that each party is protected from loss due to wrongful acts of the other party. It is helpful to include specific indemnification for breach of the rep-principal contract and for court costs and attorney fees. In the United States, the general rule is that each party pays its own attorney fees unless a law or contract clause requires otherwise.
There are few state laws that provide post-termination compensation for reps that are terminated or non-renewed regardless of the length of service to the principal. Again, in the United States, such issues for the most part are left to the negotiation of the parties. If a rep fails to negotiate post-termination payments of either commissions or a severance payment, courts are often reluctant to impose an obligation on the former principal to make such a payment. Of course, egregious circumstances may permit assertion of claims for post-termination payments outside of the contract. For example, if the principal terminates the rep on the eve of accepting a large order which the rep has solicited for months or years, the rep may have a claim against the principal. There could be a number of other examples. The point, however, is that it is much better practice under United States law to anticipate, negotiate and document the post-termination compensation issue.
As discussed above in the Remuneration section, a few state laws permit a terminated rep to prove entitlement to post-termination commissions if it can be shown that, among other things, the reason for the termination was to deprive the rep of commissions.
Indemnity refers to payment in respect of business goodwill accumulated by the agent during the period of agency. If the indemnity option is chosen by the relevant Member State, then an agent is entitled to an indemnity if and to the extent that he has brought the principal new customers or has significantly increased the volume of business with existing customers and the principal continues to derive substantial benefits from the business with such customers, and the payment of this indemnity is equitable.
The articles in the Directive which deal with indemnification and compensation for agents bear the mark of political compromise. The principle of indemnification for agents at the termination or expiration of agency agreements was already applied in a number of Member States including Germany, Austria and the Benelux countries. The principle of compensation on the other hand was already applied in France. As these two positions had to be accommodated in the final text of the Directive, the Member States were given the option of implementing either the indemnity or the compensation principle. With the exception of France, The UK and Ireland, Member States have incorporated the indemnity option into their national law. The UK has permitted the parties to choose the indemnity option, but if they fail to do so, the agent will be entitled to compensation.
An agent must at least notify his principal that he intends to make a claim for indemnity or compensation within a limitation period of one year of the termination of the contract. Indemnity or compensation is payable even if the contract is terminated because of the death of the agent.
Indemnity or compensation is not payable if the principal has terminated the agency contract because of default attributable to the commercial agent which would justify immediate termination of the agency contract under national law, or where the commercial agent has terminated the agency contract, unless such termination is justified by circumstances attributable to the principal or on the grounds of age, infirmity or illness of the commercial agent in consequence of which he cannot reasonably be required to continue his activities, or where, with the agreement of the principal, the commercial agent assigns his rights and duties under the agency contract to another person.
The indemnification may not exceed an amount equivalent to the agent’s commissions for one year, calculated from the agent’s average annual commissions over the preceding five years or the period that the agreement has been in force, whichever period is the longer. However, if the agent thinks he suffers damages that exceed the indemnification as calculated above, he is entitled to claim additional compensation. It is not clearly indicated which damages are included, but it is generally assumed that it refers to damages caused by breach of contract.
Under the compensation system, the agent is entitled to compensation for the damage he suffers as a result of the termination of the contract. Such damage is deemed to occur particularly when the termination takes place in circumstances…
- …depriving the agent of the commission which proper performance of the agency contract would have procured him whilst providing the principal with substantial benefits linked to the agent’s activities;
- and/or which have not enabled the agent to amortize the costs and expenses he had incurred for the performance of the agency contract on the principal’s advice.
There is no maximum level of the compensation.
7. Post-Termination Restraint Clauses
In the United States, some state laws expressly prohibit what are called “covenants not to compete” Others permit them. Such covenants are promises not to serve as a rep for a competing principal for a period of time and within a territory after the end of a rep-principal relationship.
If state law permits such covenants, the restrictions must be reasonable in three ways: (1) the length of the restraint must be reasonable; (2) the geography or territory within which the former rep cannot serve a competitor must be reasonable; and (3) the restriction must be generally reasonable in view of the interests sought to be protected by the principal and otherwise not unreasonably restrict the ability of the rep to earn a living. It is impossible to set forth what a particular court might find reasonable because the circumstances can vary so much. Suffice it to state that a principal seeking such a clause should draft it with professional advice and reasonable restraint.
Reps are free to negotiate such clauses and should consider seeking post-termination commission payments during the period of any agreed-upon restraint. If the clause is reasonable and permitted by state law, courts will likely enforce it.
Another clause to consider is an “anti-piracy” clause. Such a provision prohibits either party from seeking to employ or actually employing the employees or sub-agents of the other party for a period of time after the end of the rep-principal relationship. This clause will protect the respective organizations from predatory hiring efforts after the end of the working relationship.
A restraint clause is only valid if it is concluded in writing and it relates to areas, groups of customers and kinds of goods that were covered by the contract and the restraint lasts not longer than two years.
This special report can only highlight certain aspects of the rep-principal business relationship and some of the ways the laws of the United States and Europe deal with such issues. There are similarities and there are differences between the laws.
In Europe, the Directive and the harmonization efforts of the EU have led to more uniformity among the laws of the Member States concerning reps and principals. In the United States, there are over 30 state laws governing rep-principal relationships. These laws vary in some significant ways and often apply only in certain situations. Courts in both Europe and the United States regularly interpret applicable laws and also announce or clarify other legal issues that apply to reps and to principals.
Those interested in the legal aspects of the rep-principal business relationship in Europe or in the United States must become aware of the applicable law and of any court treatments of such laws prior to acting or to reaching conclusions.
Legal Specialists Who Contributed To This Report
Gerald (Jerry) G. Salmen, formerly a partner in the Cincinnati law firm of Wood & Lamping, recently formed his own practice, The Law Offices of Gerald G. Salmen. A graduate of the University of Cincinnati College of Law, Jerry has practiced law for nearly 25 years. He has represented both manufacturers and agents in contractual matters and in the resolution of disputes. He is counseling attorney for MANA, as well as for the Manufacturers’ Agents of Cincinnati and has written articles and spoken to many groups, including MANA’s educational symposiums, regarding the principal-agent relationship. Jerry has extensive experience in product liability concerns of those involved in product distribution.
Florentino Ramirez, founding partner of the international law firm, Ramirez & Associates, P.C., based in Dallas, Texas, with offices also in Mexico City, Mexico. He has been practicing for over 45 years in the area of domestic and international sales distribution, representing reps throughout the country. He is also counseling attorney for MANA as well as a member of the Legal Working Group of IUCAB based in Amsterdam. He has written numerous articles, and spoken to Rep and Bar groups, on related topics.
Günther Viehböck contributes many years of legal experience in dealing with particularly complex tasks, especially in the area of marketing law. His firm, Viehböck & Partner, is a team of young lawyers who have acquired their relevant specialist knowledge through their work in international law firms, through academic work as university lecturers and in national and international authorities. The Committee for Independent Commercial Agents and Brokers has appointed Viehböck & Partner as advisors to its members. Many commercial agents use this ongoing advisory service regularly. Viehböck & Partner also cooperate closely with the Central Federation of German Commercial Agents’ and Commercial Brokers’ Associations (CDH), Cologne.
Jaap Van Till, principal of the law firm Van Till Advocaten in Amsterdam. He is the Secretary General of the Internationally United Commercial Agents and Brokers Organization (IUCAB) serving commercial agents and brokers throughout Europe. As head of IUCAB and its Legal Working Group, Jaap not only represents agents privately, but through the LWG contributes to cases and legal sessions in which legislation or rulings are pending in Europe, affecting Commercial Agents.