Agency agreement is a legal document which establishes commercial relationship between the principal and the agent. It incorporates the conditions mutually agreed upon by the concerned parties for the conduct of business. When negotiating an agency agreement, Indian firms should be careful on certain points. These are:
Parties to the contract: The identity of the parties must be made explicit; especially whether the agency is assignable or not, should be made clear.
Contractual Products: The agreement should indicate specific products for which the agency is being concluded. If products are not specifically mentioned, this implies that the agent is working for the entire product range, both present and future of the firm which will be very unsatisfactory from the standpoint of the exporter.
The territory for which the sole agency is being granted is to be explicitly mentioned.
Generally the agent may be required to contact all potential customers. But in some cases the principal may like to reserve the right to him self to contact directly some specific group of buyers. If so, this is to be mentioned in the contract.
International Buying Groups’ operations are becoming increasingly important. There principal therefore may like to reserve the right to negotiate directly with such buying groups on his own country for orders which ultimately will be executed in the agent’s territory. Whether the agent will be eligible to commission on such sales should be made explicit in the agreement.
Acceptance for rejection of orders:
The principal may also like to reserve the right to accept or reject any order secured by the agent. This may be especially important when credit terms are involved and the principal is not sure of the creditworthiness of the buyer. Reservation of this right also will have to be mentioned in the agreement.
Payment of Commission:
Payment of commission is the crucial clause of the agreement. First, the rate at which the commission will be paid has to be indicated. Secondly, since commission payable is calculated on percentage basis, the base for such calculation is to be determined. Thirdly, the time when the commission becomes payable should also be indicated. Legally speaking, commission becomes due when the principal accepts the order. But there is a time gap between the acceptance of the order and the receipt of the payment. Many uncertainties are involved within this time gap. The exporter may make the shipment but overseas buyer may default. The result will be the same in either case, because the principal will not get the payment while the commission has already fallen due. To avoid such problems, it should be made that the commission will be paid o the basis of the invoice value and will become payable only on realization. The provision in fact, is necessary also in view of the RBI regulations.
Settlement of Disputes: With a clearly drafted agency agreement there should normally be no reason for disputes to arise. But in case disputes do arise, the mechanism for settling such disputes should be agreed upon in advance by both the parties and indicated in the agency agreement. Referring the disputes to arbitration is the best procedure. Care, however should be taken as to the venue and the proper law of the agreement. The Indian firm may attempt to get a place in India as venue and Indian law as the proper law. In case it is not acceptable to the agent, there are two possibilities of compromise viz., (1) that the venue will be in a third country, or (2) that the venue will be the place of the defendant.
Renewal and Termination: The agreement should in itself also provide or the renewal or termination procedure. If the agent is sound, obviously no principal will think of terminating the agreement. The problem of termination arises only when the agent is not effective. In the civil law countries termination may pose financial problems to the principal because of compensation to be paid to the agent.