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In this article we’ll cover the process by which a company can make full use of the agency contract to achieve its commercial goals.

In fact, save for a few highly competitive sectors, the agency contract’s potential is today largely unexpressed.

The main features that a company can leverage in its business growth are: (a) cost effectiveness; (b) flexibility; (c) control. That’s why the agency contract, among vertical integration agreements, is the first to be used to access new markets.

Cost efficiency and flexibility allow for a wide degree of experimentation. Control allows the contractual business relationship to be contained within predictable boundaries. In the EU, the agency contract has long been subject to common regulation, thanks to Directive 1986-653, adding another level of certainty to the management of the various agency relationships across the Union.

Let's dive a little deeper into each feature:

cost-efficiency

This feature is essentially due to the fact that the agent's fee is linked to the sale made by the principal and must be paid only when the deal has been executed by the third party client procured by the agent. All agency fees are therefore borne entirely by the agent.

Of course, in opening up new markets, it will often be necessary to provide a fixed fee, at least for an initial period, to secure the services of a competent agent. This fixed fee is, however, fully recoverable on future sales commissions by means of an appropriate contractual clause.

flexibility

The agency contract can be used to regulate relations with different types of commercial promoters, from professionals working alone to more structured representation companies. The type of work entrusted to the agent is also substantially indifferent to the scheme of the agency contract. Agents can be those who procure business by telephone, via the Internet, visiting clients at their premises, receiving clients at a physical point of sale or even at a warehouse organized by the principal. The one characteristic that must always be present is that the work assigned to the agent must involve promoting business on behalf of the principal within a specified area. However, the area may consist not only of a geographical area, but also a list of clients, a distribution channel or a product category.

Another aspect that makes the agency contract interesting from a business point of view is the lighter mandatory regulation and freedom to terminate the relationship, which differentiates it from the employment contract, that in large part of continental Europe is subject to strong rules on dismissal, minimum pay, working hours and social security.

control

The agency contract is regulated similarly in all EU countries due to the harmonising effect of CEE directive 1986-653. Apart from a few mandatory rules, the parties are free to set the regulation they wish for the relationship. In particular, it is possible to agree contractual clauses that allow the principal to unilaterally change the terms of the contract during the business relationship. Of course, this power must be based on appropriate contractual clauses and exercised within the bounds of reasonableness. However, it is possible, in this way, to impress on the agency contract a particularly high degree of plasticity and modifiability. That feature stems by the fact that the agent under EU law is an independent contractor and is therefore largely outside of the principal’s sphere of responsibility. Despite this, EU law still recognises the agent as a principal’s collaborator, therefore binding him to the latter's general instructions.

By means of agency contract it’s thus possible to set up a sale network on a variable cost-only basis. That’s a lightweight organisation that can help drive sales in new markets and open up possibilities for future, more structured developments, such as distribution, dealership or joint venture agreements.

Theoretically is it possible to build a fully integrated sales network on agency contract alone. That means that even middle management figures can be treated and paid under the terms and conditions of agency contract. Furthermore, the type of activity entrusted to the agent may be expanded to include tasks of a different nature, such as technical assistance, as long as they remain ancillary to the main activity, which must in any case remain sales promotion. However, a principal willing to build such a sales network from scratch would still have to make a significant investment in terms of time spent recruiting capable local operators. On the other hand, by entering a new market, the principal could also leverage existing sales networks, mostly organised by local agents and already operating in the targeted markets.

In the latter case, the real difficulty lies in finding the right fit, considering that agents are prohibited from handling business for several competing principals at the same time. It is therefore important to have access to a wide network of contacts to find the right partner.

In conclusion, any business seeking to expand its sales on new markets in continental EU should look into agency contract as a possible tool. Traditionally, the agency contract is an excellent instrument for market exploration, preliminary interaction and information gathering. This allows the company to start working effectively in the target market without having to make large investments that may result in costly losses in case of poor market fit.