In this article we explore agency agreements and consider how risk can be reduced in such agreements.
Agents: The simple truth
The concept of agents and agency agreements is, in itself, simple - an agency agreement exists when one party (the agent) is given the power to beneficially create or alter the legal position/relationship of another party (the principal). In exchange, the agent will receive a commission.
The use of agents is incredibly wide-ranging, with agents servicing many areas of business practice, from international sales agents dealing with high value product supply, to your local high street travel agent selling next year's summer getaway - they are both acting in the capacity of 'agent'.
It looks like a simple concept to follow, with clear benefits for both parties? What could possibly go wrong? Quite a lot, as it turns out.
Agents: The litigious truth
In almost each and every sector where agents operate, there are regular and often voluminous legal developments, with the murky legal waters of agency proving to be a hotbed for litigious action.
One of the key reasons for this is that agency law is a very subjective area, often with differing guiding principles in each area of agency. The perhaps inevitable result is frequent disputes.
As disputes begin, parties seek to apply the varying legal principles to their own agency situation and, ultimately, turn to the courts to determine the outcome, based on their specific factual circumstance.
The premise for many disputes can be brought back to two basic issues:
- lack of clarity and understanding behind agency agreements
- failure by parties to actively manage the relationship
One example of an issue often disputed is the concept of 'effective cause'.
A fundamental principle of agency is that an agent is not entitled to commission unless they can sufficiently demonstrate that they were the 'effective cause' in the principal's successful transaction with a third party.
The area of estate agency provides leading authority on this area. However, the underlying principles are applicable across the spectrum of agency agreements.
The wealth of case law serves to demonstrate one fundamental point: being certain about what is the 'effective cause' is not a simple question of fact, but one of interpretation and subjective assessment.
The leading case of Foxtons Limited v Pelkey Bicknell  EWCA Civ 419 provides a good demonstration of this.
Foxtons acted for a seller who was using other agents (under a multiple agency agreement) and claimed commission once the sale completed on the basis they were the effective cause of the purchase.
However, another agent acting for the same seller was paid commission on completion of the transaction, and the seller sought to defend Foxtons' action on the basis that Foxtons was not, in fact, the 'effective cause', but the other agent was.
The determining factor as to whether Foxtons was due a commission under its agency agreement turned on what was meant by the phrase 'introduced by', contained in its agency agreement.
Even without a detailed factual analysis, the Foxtons case demonstrates that agency disputes can turn on what, at the time of drafting, seem the most minute points; for example the meaning of 'introduced by'.
The benefit, however, is that this serves to provide good learning points from which to develop your own internal, risk averse approach to agency agreements, which are applicable whatever the sector of the agents' operation.
Consider the following simple steps for your next agency agreement:
Clarity of contract
As demonstrated in the Foxton's case, agency agreement disputes can turn on minute detail, so it is vital to draft agency terms with sufficient clarity, to document the agreement, and to understand the intention behind an agents' role.
All too often the terms are poorly drafted, misunderstood and generally overlooked by both parties.
To avoid this consider what the role of your agent is: what are they trying to 'effectively cause' on your behalf? Once this is established it needs to be drafted carefully and precisely.
Time spent carefully drafting a clear agency agreement, in particular the commission terms, is time that could help save you money by avoiding disputes, whilst at the same time promoting a clearer understanding between the parties.
It is all too easy to accept broad-reaching terms intended to capture the tiniest act as being an 'effective cause'. Before doing so, always consider if the proposed terms are:
Ongoing communication and monitoring
Once an agency agreement is entered into it is all too common only to correspond at the closure of a transaction or when the agent claims commission. A claim for unexpected commission can be the foundation for a dispute.
This can be avoided by having a contractually governed and transparent reporting structure in place, supported by your own internal monitoring. This also provides the opportunity to detail consequences for a failure to report, for example impact on commission.
A simple example is a requirement that estate agents report back weekly with all relevant information - enquiries, contacts, viewings etc. The provision of such reports enables a principal to actively manage the agent and, crucially, provides greater control over whether, for example, an introduction has occurred.
This is very much a subjective, tailored requirement to be adopted on a case-by-case basis. However, taking these steps at the drafting stage and, vitally, ensuring you monitor reporting compliance strictly, will put you in a much stronger position to avoid disputes over whether an agent has been the effective cause. It will also make you aware at an early stage of potential commissions which stop the 'shock effect' of an agent dropping an invoice on your desk.
Furthermore, such a structure benefits both parties, because it increases the amount of communication between you which should, in turn, mean a more effective working relationship.
What should I do?
The use of agents is fundamental to some business operations, and unfortunately it often provides areas for dispute.
Costly litigation, which merely leads to high expense and business disruption, can usually be avoided by taking the time at the outset carefully considering and drafting agreed terms and thereafter ensuring thorough internal controls and monitoring procedures are in place.
If you are in any doubt about what to do, seek legal advice.