USA – Commercial Agency Agreement

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To understand the regulation of commercial agency agreements in the US, it is helpful to remember the interplay between federal and state statutory and common law in the US legal system. Under the US Constitution, all power not specifically reserved for the federal government resides with the states. Federal law has exclusive jurisdiction only over certain types of cases (e.g., those involving federal laws, controversies between states and cases involving foreign governments), and share jurisdiction with the state courts in certain other areas (e.g., cases involving parties that reside in different states). In the vast majority of cases, however, state law has exclusive jurisdiction.

Commercial agency is regulated at the state level rather than by US federal law. Almost two-thirds of the US states have adopted specific legislation for commercial agency relationships with non-employees. Most state statutes regulating commercial agency relate to the relationship between a principal and an agent that solicits orders for the purchase of the principal’s products, mainly in wholesale rather than retail transactions (although state law often has special rules for agency relationships with respect to real estate transactions and insurance policies). Typically, state law in this area follows the common law definition of agency, which imputes a fiduciary duty upon the agent for the benefit of the principal to act on the principal’s behalf and subject to the principal’s control.

A second, overarching theme of note to understand the regulation of commercial agency agreements in the US is the primary importance of the doctrine of freedom of contract under state law jurisprudence. As the doctrine’s title suggests, as a matter of policy, courts interpreting a contract generally will seek to respect its terms. Exceptions exist where public policy requires otherwise (e.g., in the consumer or investor context, in cases of adherence contracts or where unconscionable terms are found to exist). As a result, state law generally contain few mandatory, substantive terms that are superimposed on the relationship between principal and agent in an agency arrangement. With certain exceptions (i.e., under certain state franchise regulation where the relationship is deemed to be a franchise under such law), the parties are generally free to contract as they wish in areas ranging from terms of payment to risk allocation to other commercial terms.

General Legal Provisions Applicable to Agency Agreements 

As noted, commercial agency is mostly regulated at the state level in the US State laws on agency mainly address commissioned agency, and, where in force, is primarily aimed at ensuring that the principal timely pays the agent the commissions that are owed by imposing liability on the principal for a multiple (often two to four times) of unpaid commissions, as well as for reimbursement of the agent’s attorneys’ fees and costs incurred in collecting the unpaid amount. Other states further require that agency agreements satisfy certain formalities, including that they be in writing (under the so-called “Statute of Frauds” in force in most states) and that they contain specified information (i.e., how earned commissions will be calculated). A minority of states further impose substantive requirements, such as a minimum notice period for termination, the obligation to payment commissions on certain post-term shipments or those in process at expiration or termination of the agency agreement.

Formalities for the Creation of an Agency

New York law does not impose particular formalities for the creation of an agency relationship. In fact, under New York law, absent circumstances under which New York’s general Statute of Frauds rules apply as set forth in § 5-701 of the General Obligations Law, parties may be deemed to be in an agency relationship even without signing an agreement evidencing the agreement consideration or any writing which evidences their agreement. New York law does regulate the payment of sales commissions under New York labor law. New York labor law defines a sales representative as an independent contractor who solicits orders in New York for the wholesale purchase of a supplier’s product or is compensated entirely or partly by commission. However, New York labor law does not otherwise regulate meaningfully the actual sales representative relationship.

Agency Elements and Purpose

Under the law of New York and the majority of states, an “agent” is a person or entity who, by agreement with another called the “principal,” represents the principal in dealings with third persons or transacts business, manages some affair or does some service for the principal. The key elements of an agency are: (i) mutual consent of the parties; (ii) the agent’s fiduciary duties, and (iii) the principal’s control over the agent. A principal may act on a disclosed, undisclosed, or partially disclosed basis in dealing with third parties.

The purpose of an agency may be broadly defined, and ultimately a principal may appoint an agent to perform any act except those which by their nature require personal performance by the principal, violate public policy or are illegal.

A defining element of agency under New York law and the law of the majority of states is the principal’s control over the agent. Indeed, whether the principal will be bound by the agent’s acts will depend, in large part, on whether the agent had actual or apparent authority to act on behalf of the principal. Separate from the question whether an agent’s acts bind the principal is the question whether the agent’s actions create a permanent establishment of the principal under applicable rules of taxation and/or an employer-employee relationship under applicable employment law in the agent’s jurisdiction, thereby potentially subjecting the principal to onerous state and federal tax and employment law obligations.

Factors taken into account in whether the relationship could give rise to a permanent establishment include, among others, the degree to which the agent has the authority to bind the principal and whether the agent carries out a material portion of contract negotiation ultimately signed by the principal. Two of the many factors taken into account in determining whether such a relationship could be characterized as one of employment include whether the agent: (i) provides the services according to her own methods and (ii) is subject to the control of the principal (other than with respect to the results of the agent’s work). Both analyses are specific to fact and circumstances.

Appointment of Sub-agents

Under New York law and the law of the majority of states, a principal may authorize an agent to appoint another agent to act on the principal’s behalf. The second agent may be a subagent or a co-agent. A “subagent” is commonly defined as a person appointed by an agent to perform functions that the agent has consented to perform on behalf of the agent’s principal and for whose conduct the appointing agent is responsible to the principal. Thus, an agent who appoints a subagent delegates to the subagent power to act on behalf of the principal that the principal has conferred on the agent. Appointment of a subagent requires that the appointing agent have actual or apparent authority to do so, and it may be inferred in certain circumstances. As an example, in one case from New York, a claims adjuster hired by an insurance company (acting as agent of the insured) was held to be a subagent of the insured because it was common practice for insurance companies to retain adjusters to aid them to pursue insurance investigations.

With respect to subagents, we note that the relationship between an appointing agent and a subagent is also one of agency. A subagent acts subject to the control of the appointing agent, and the principal’s legal position is affected by action taken by the subagent as if the action had been taken by the appointing agent. As such, in most states, a subagent typically has two principals: the appointing agent and that agent’s principal. In New York and a limited number of other states, by contrast, the agency relation does not exist between the principal and a subagent. Under New York law, a subagent that has been appointed with proper authority will owe the principal the same duties as would the agent; however, for the subagent to have a fiduciary duty to that principal, the subagent must be aware of the identity of the ultimate principal.  An agent may appoint a subagent only if the agent has actual or apparent authority to do so.

Rights and Obligations of the Agent

Generally, the following are the most important duties of the agent under state common law:

  • Agent must not act outside of its express and implied authority.
  • Agent must use care, competence and diligence in acting for the principal.
  • Agent must obey the principal’s instructions as long as they are legal.
  • Agent must avoid conduct which will damage the principal’s business.
  • Agent must not act for an adverse party to a transaction with the principal.
  • Agent cannot compete with the principal in the same business in which the agent acts in such capacity for the principal without the principal’s consent.
  • Agent must provide the principal with information relevant to the marketing of the principal’s products.
  • Agent must separate, account for and remit to the principal all collections for the principal’s account and other property of the principal.
  • Agent must not receive compensation from any third party in connection with transactions or actions on which the agent is acting on behalf of the principal.
  • Agent must maintain the confidentiality of, and not misuse, the principal’s confidential information.

The agent is subject to a general duty of good faith in the performance of its responsibilities and dealings carried out on behalf of the principal under an agency agreement. However, the agent’s duty generally will not override the specific terms provided for in the agreement between the parties. Under New York law, the agent owes the principal duties of loyalty, obedience and care. Under these duties, an agent cannot have interests in a transaction that is adverse to its principal (e.g., self-dealing or secret profits), the agent must obey all reasonable directions of the principal and the agent must carry out its agency with reasonable care (which includes a duty to notify the principal of all matters that come to the agent’s knowledge affecting the subject of the agency).

Rights and Obligations of the Principal

The following are the most important duties of the principal under state common law:

  • Principals must promptly pay terminated agents the commissions that they are owed; in most states, failure to pay can result in penalties, including multiple-damages. Some states apply similar penalties to failures to pay commissions in a timely fashion during the term of the relationship; in contrast, a few states require that a commission be paid on transactions in the pipeline at the time of termination.
  • Under the law of some states, an agency arrangement must be in writing, and certain formalities complied with, for the agency arrangement to be binding.

Generally under state law, principal and agent alike are required to act in good faith in performing their obligations in an agency relationship, subject to the express terms agreed to in the agency agreement. Additionally, under the law of some states, the principal is required to indemnify the agent against liabilities vis-à-vis third parties arising out of the performance of the agent’s duties, to compensate the agent reasonably for its services and to reimburse the agent for the reasonable expenses it incurred in carrying such service. New York law does not provide for any mandatory obligations by the principal in favor of the agent in this regard (New York courts having constantly held an agent’s right to indemnification from a principal is based on contract).

Exclusivity 

State law generally does not contain mandatory provisions on exclusivity. Indirectly, certain rules (such as the Statute of Frauds under New York law that requires that exclusivity provisions be in writing if they will exceed one year) may apply. Otherwise, parties to a commercial agency arrangement generally may agree contractually on the terms of exclusivity, including whether: (i) to prohibit the agent from entering into agency arrangements with other principals covering the same subject matter within the same territory; (ii) to allow the principal to deal directly with customers located in the same territory without the agent’s involvement; (iii) to limit marketing and sales through the internet (including whether to prohibit the same through the principal’s website and/or whether the agent may do so through its own website); and (iv) a commission is due to the agent on sales made by the principal online to customers in the territory.

Remuneration

There are no specific federal or state regulations regarding commissions or stock consignments generally in commercial agency agreements. Generally, provisions regarding commissions, including the right to the same at and after contract termination or expiration, loss of commission rights and the right to inspect the principal’s books are provided for contractually. We do note an exception: in some US government contracts suppliers are required to certify that they are not paying commissions to non-employees. Furthermore, some federal funding of purchases by foreign buyers carry with them restrictions on commissions payable by the sellers.

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Eric Kuhn
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