The “Simple” Agency Agreement and Its Pitfalls

Truth is agency agreements are used very often in a business context, as if these are the simplest agreements in the world. In a sense they are, in another – they hide some pitfalls which should probably be flagged more often. The more popular they are, the more people think “it’s no big deal”, just go ahead and sign already.

First of all, with the risk of sounding a bit silly, agency agreements need to be agency agreement, namely: (i) the agent needs to act upon the direction and instruction of the principal; (ii) the agent needn’t bear any financial or commercial risk resulting from their activity with the principal; (iii) there needs to be dependency between the two. Any deviation from these key points leads to the so-called “agency-washing”[1] hybrid models; in other words, agreements that are not really agency agreement, but actually distribution agreements or alike.

Why does this matter anyway?

It matters at least from a competition law perspective. Given the dependency between the agent and the principal, agency agreements are not considered to be agreements which may trigger the distortion of competition – the principal and agent act as one. Hence, they are not caught by Art. 101(1) TFEU (or the relevant national law provisions covering the same scope) which forbid agreements between undertakings  which would harm competition.

The EC Guidelines on the topic provide that “(12) An agent is a legal or physical person vested with the power to negotiate and/or conclude contracts on behalf of another person (the principal), either in the agent's own name or in the name of the principal, for the: purchase of goods or services by the principal, or sale of goods or services supplied by the principal. (13) The determining factor in defining an agency agreement for the application of Article 101(1) is the financial or commercial risk borne by the agent in relation to the activities for which it has been appointed as an agent by the principal. In this respect it is not material for the assessment whether the agent acts for one or several principals. Neither is material for this assessment the qualification given to their agreement by the parties or national legislation.”[2]

Adopting hybrid models, whereby the agent is acting more like an independent distributor brings about the need to assess whether in fact the hybrid agency agreement contains some provisions which may trigger competition law issues such as market sharing aspects, prohibition of sales, non-compete etc. This is because, if an agreement fails to meet the features of a genuine agency agreement, it will likely be considered to be a distribution agreement, subject to the prohibition included in Art. 101(1) TFEU (and the national provisions covering the same scope).

One additional practical question: what if the agent/distributor is a freelance natural person? Then there are some tax/labour related considerations for which you would want the guy or girl to be considered independent. Well then – they need to be independent in terms of working hours, leave etc., but they need to follow the principal’s instructions should they want to be qualified as agents.

In this case, business needs to decide: do we want an agent (in the real sense of the word) or do we want a distributor (that may sometimes follow our direction)? Who knows? Please only be compliant when deciding

[1] “Agency washing” is a term not used officially by the European Commission, but it appears as such in less formal discussions.

[2] EC Guidelines on Vertical Restraints, OJ C 130, 19.5.2010, pp. 1–46.