International Agency Agreements in Commercial Practice

 

December 20, 2024

BRACE Law Firm ©

 

The agency agreement holds a special place in the system of foreign economic activity (hereinafter – "FEA"). This agreement regulates the relations between two parties: the principal and the agent, where the agent acts on behalf of and in the interests of the principal.

An agent can perform various functions, such as searching for new clients, conducting marketing research, concluding deals, and even organizing logistics. Such agreements allow companies to effectively manage their international operations, expand sales markets, and minimize risks associated with entering new markets.

Legal Regulation of the Agency Agreement in Russian Law

In Russia, legal regulation is carried out in accordance with Chapter 52 of the Civil Code of the Russian Federation (hereinafter – "CC RF"). Chapter 52 of the CC RF consists of only 7 articles and refers to Chapters 49 ("Mandate") and 51 ("Commission"), which are applied to relations arising from an agency agreement depending on whether the agent acts on behalf of the principal or in their own name, provided these rules do not contradict the provisions of Chapter 52 or the nature of the agency agreement (Art. 1011 CC RF). [1]

According to Article 1005 of the Civil Code of the Russian Federation, under an agency agreement, one party (the agent) undertakes, for remuneration, to perform, on the instructions of the other party (the principal), legal and other actions in its own name but at the expense of the principal, or in the name and at the expense of the principal.

Legal literature notes that the agency agreement regulated by the CC RF cannot be reduced to traditional commission or mandate agreements, as it possesses features absent in both. Primarily, this concerns the subject matter of the agency agreement, which involves the agent performing not only legal but also factual actions.

In an agency agreement between a Russian and a foreign company, the parties may choose the law applicable to their rights and obligations by agreement between themselves, either at the time of concluding the contract or subsequently (Article 1210 CC RF). If the applicable law is not determined by the parties, then according to Article 1211 of the CC RF, the law of the agent's country applies to the agency agreement.

For instance, in case No. A32-22704/2018, while considering a dispute over an agency agreement, a Russian court established that the parties had not chosen the applicable law. The agent in the dispute was the plaintiff, who provided evidence that it "is a Brazilian company whose sole location is the state of Brazil." Based on this, the courts concluded that the dispute should be resolved according to Brazilian law. [2]

Furthermore, in accordance with the position of the Supreme Court of the Russian Federation, parties to a contract complicated by a foreign element may choose the law of a country that has no ties to the contract or its parties (choice of neutral law) (paragraph 1 of Article 1210 CC RF). [3]

International Legal Regulation of the Agency Agreement

At the international level, efforts have been made to unify the substantive and conflict-of-laws regulation of representation in international commercial turnover.

Specifically, the Hague Convention of 14 March 1978 on the Law Applicable to Agency (the "1978 Hague Convention"), containing conflict-of-laws regulation, and the Geneva Convention of 17 February 1983 on Agency in the International Sale of Goods (hereinafter – "1983 Geneva Convention"), which resulted from the unification of substantive legal norms, were developed. It is important to note that Russia is not a party to these conventions. Additionally, the Geneva Convention has not yet entered into force. [4]

Under representation, the 1978 Hague Convention understands relations of an international character arising because one person (the agent) has the authority to act, acts, or intends to act on the instructions of another person (the principal) in relations with third parties, regardless of whether the agent acts in the name of the principal or in their own name. The agent's functions may include performing factual actions, such as receiving and transmitting offers and conducting negotiations on behalf of the principal.

The 1978 Hague Convention regulates internal (between the representative and the represented) and external agency relations (between the representative, the represented, and a third party). Relations between the representative and the represented are regulated based on the principle of party autonomy: the representative and the represented can choose national law to regulate their relations (Article 5), meaning they cannot choose international convention norms as the applicable law. Article 6 directly refers to the law of the state where, at the time the agency relationship arises, the representative has their business establishment, or in its absence – their habitual residence.

When deciding on the law applicable to external agency relations, Article 11 of the 1978 Hague Convention refers to the law of the country where the representative's business establishment is located or the law of the place where they conduct their primary activity. There is also a possibility for the represented party or the third party to choose the law regarding the regulation of external aspects of the agency: if a written proposal from the represented or third party regarding the law applicable to the existence and scope of the agent's authority is accepted by the other party in an express form, the law thus determined shall apply to said relations.

Currently, only 4 states are parties to the 1978 Hague Convention: Argentina, France, the Netherlands (for the Kingdom in Europe and Aruba), and Portugal.

The scope of the 1983 Geneva Convention is limited to agency in the international sale of goods. The Convention contains provisions aimed at regulating the creation and determination of the scope of the agent's authority, the legal consequences of actions performed by the agent (including those without authority or exceeding it), and partially regulates the consequences of the termination of the agent's authority relevant to third parties.

The 1983 Geneva Convention is aimed exclusively at regulating commercial agency, and its scope is limited to contracts for the international sale of goods. This convention applies equally to the activities of an agent acting on behalf of the principal or in their own name (Article 1). A decisive factor for resolving the relationship between the principal and a third party is the third party's awareness that the agent is acting in that capacity. Agency relations under the Convention cover not only the conclusion of sales contracts by the agent on the principal's instructions but also any other actions aimed at concluding or executing sales contracts for the principal (i.e., actions of a factual nature).

In the absence of international treaties containing unified substantive legal norms regulating agency relations in international commercial turnover, non-state regulatory norms implemented in the form of acts acquire special significance. These acts include:

• UNIDROIT Principles of International Commercial Contracts;
• Model Rules of European Private Law;
• The CENTRAL List of Principles, Rules, and Requirements of lex mercatoria.

Additionally, standard contract forms and pro formas should be highlighted:

• The International Chamber of Commerce (ICC) Model Commercial Agency Contract. ICC model contracts are drafts used as templates for drafting individual contracts. They can be completely modified and adapted to a specific situation. Unlike standard forms developed by organizations representing specific categories of participants (agents, distributors, etc.), which by nature aim to satisfy only one party's interests, ICC model contracts are developed to maintain a balance of interests for both parties. These are balanced documents that do not favor one side, as various participants of international commerce are represented in the ICC.
• The International Trade Centre (ITC) Model International Commercial Agency Contract. This model contract was created specifically for small and medium-sized enterprises that do not have access to legal advice. [5]
• The General Agency Agreement of the Baltic and International Maritime Council (BIMCO) and the Federation of National Associations of Ship Brokers and Agents (FONASBA).

Such sets of rules and standard pro formas are constantly supplemented and updated in response to international trade demands.

How is the Agency Agreement Applied in International Trade?

Since an agency agreement differs from other types of intermediary agreements (guarantee, commission) in that the agent acts specifically on behalf of the principal rather than their own, it creates a special level of trust and responsibility, as all deals concluded by the agent directly bind the principal with third parties. [6]

In international trade, agency agreements allow companies wishing to enter specific foreign markets to use the services of local specialists who, unlike the FEA participant, possess the necessary knowledge and contacts. Thanks to the agency agreement, companies can reduce costs and avoid risks associated with ignorance of local legislation and business practices. [7]

Working through an agent is a rational way to import goods, for example:

• The company plans to carry out a trial shipment of goods to assess the economic feasibility of further deliveries; [8]
• The import transaction is one-off, and the company does not plan to import goods from foreign suppliers in the future; [9]
• The company does not have its own resources for conducting FEA, and attracting them is economically impractical. [10]

Working under an FEA agency agreement is a smart tool for reducing risks and expenses, provided it is used competently. At the same time, a foreign trade supply scheme involving an intermediary carries significant risks that must be considered. To assess such risks, it is necessary to understand how the FEA agency scheme works.

An agency agreement implies the presence of two parties: the principal and the agent. The principal is the person who instructs another person — the agent — to perform certain actions related to their business interests. The principal can be either a legal entity (company) or an individual entrepreneur. The agent, in turn, performs the assigned actions on behalf of and at the expense of the principal. [11] Agents can also be legal entities or individual entrepreneurs who possess the necessary authority and resources to fulfill their duties. It is important that the agent has sufficient experience and knowledge to perform their functions effectively.

One of the most common schemes for agency import of goods involves an import supply of goods involving three parties:

• The seller (foreign supplier of goods);
• The buyer (customer, principal);
• The agent.

The buyer concludes an agency agreement with the agent, and the agent then concludes a foreign trade contract for the supply of goods with the seller. The buyer pays the agent, who, in turn, pays the seller in the currency of the contract (payment). The agent takes all necessary actions to deliver the goods to the buyer.

In such an import scheme, the agent acts as the contract holder. Confirmation of import shipment expenses under the agency agreement is provided by the agent through a report in a prescribed form.

Advantages and Disadvantages of the Agency Scheme

The main advantages of working under an agency agreement are:

• Delegation of tasks for finding counterparties, concluding deals with them, and customs declaration;
• Minimization of risks due to the agent's professional experience (e.g., choosing the most reliable supplier, the ability to organize cargo inspections before shipment).

Conversely, key disadvantages include:

• High costs for transaction execution compared to working under a direct supply contract;
• Risk of issues in determining the person responsible for contract execution (e.g., in foreign jurisdictions, disputes often arise over who should sue the foreign supplier for poor-quality goods: the agent who directly concluded the deal or the principal on whose instructions the deal was made);
• Risks regarding the unhindered receipt of goods and potential losses due to the agent's actions.

International trade is inherently a high-risk activity, and it is impossible to avoid all commercial and administrative risks. However, thorough individual drafting of contracts allows for the minimization of potential risks.

What to Include in an International Agency Agreement?

The subject matter of the agency agreement consists of the services the agent undertakes to provide to the principal. These services may include searching for new clients, concluding deals, conducting marketing research, organizing logistics, and other actions aimed at promoting and selling the principal's goods or services in a specific market.

It is vital to describe the subject matter clearly and in detail to avoid misinterpretations and disputes. For example, the contract can specify that the agent undertakes to attract new clients in a specific region and conclude deals on conditions agreed upon with the principal.

Equally important are the rights and obligations of the parties. It is recommended to include obligations such as acting in good faith and in the interest of the principal, providing reports on work performed, maintaining confidentiality of information received, and not entering into deals that conflict with the principal's interests. The principal, in turn, undertakes to provide the agent with all necessary information and resources, pay remuneration on time, and reimburse expenses incurred by the agent within the scope of the agreement. A clear definition of rights and obligations helps avoid conflicts and ensures transparency.

One of the agent's primary duties is providing a report to the principal. The agent's report includes information on deals concluded or those where the agent acted as a factual intermediary; data on money and property received; and the calculation of the agency remuneration. Evidence of the agent's fulfillment of obligations includes any written documents that allow for the reliable establishment of the fact that legal and factual actions were performed in the principal's interests. These may be, for example, reconciliation reports signed by both parties or the agent's contracts with third parties that have already been executed.

The agent's report serves as proof of the performance of their obligations. When considering a case, the Arbitration Court of the West Siberian District rejected the principal's arguments regarding the lack of proof of the agent's performance, noting that the agent's report "contains a full and detailed list of services rendered and expenses incurred with references to all supporting primary accounting documents, including: payment orders for counterparty services; currency transfer orders for goods, delivery, and customs payments, without which it is impossible to carry out customs clearance and release goods into free circulation". [12]

In another case, the courts conversely established that unilateral agent reports and handover certificates were not evidence of services rendered because "the reports were prepared in violation of the agency agreement terms, are not monthly reports, and do not contain information on the actions performed by the plaintiff." [13] Furthermore, the presented correspondence "does not reveal the nature of the plaintiff's actions as an agent and does not contain specific negotiations regarding the agreement of all issues related to the deal". [14]

The duration of the agency agreement is determined by the parties and can be fixed or indefinite. The contract must specify the start and end dates, as well as conditions for extension or early termination. For example: "The agreement may be concluded for one year with the possibility of automatic extension unless one party notifies the other of its intent to terminate 30 days before its expiration." Conditions for early termination, such as failure to perform duties, a significant change in circumstances, or reaching specific goals, can also be included.

When concluding agency agreements with foreign counterparties, one should consider that legal regulation of agency relations varies by country. Some countries have special rules regarding agency activities, such as registration requirements for agents or restrictions on the types of activities an agent can perform.

It is important to detail the responsibility of the parties for failure to perform or improper performance of obligations. For example, the agent is responsible for losses caused to the principal resulting from their unlawful actions or omissions. The contract may provide for penalties and conditions for loss compensation. The principal is also responsible for timely payment and providing necessary information. Clear definitions of responsibility help minimize risks and protect the interests of both the agent and the principal.

A crucial legal condition is the protection of confidential information. The contract should contain obligations for non-disclosure of trade secrets and other confidential data. A non-compete clause may also be included, prohibiting the agent from working with the principal's competitors for a specific period after the contract ends. These measures protect the principal's commercial interests and prevent losses from information leaks.

Another important element is the dispute resolution procedure. Usually, conditions for negotiations for an amicable settlement are included, as well as the designation of an arbitration or court if an agreement cannot be reached.

Depending on the deal's specifics, the agreement may include additional sections. For example, a sub-agency section if the agent is allowed to hire third parties. Conditions for advertising support, insurance obligations, and other provisions deemed necessary for effective cooperation may also be included. [15]

Such an approach allows for the most accurate consideration of the parties' interests and the creation of a document that meets all legal and commercial requirements.

Using model contracts can save time, but without adaptation, they may prove ineffective. Model contracts often fail to consider business specifics, regional features, and individual deal terms. This can lead to legal and financial risks. Therefore, even if using a model contract as a base, adapt it to your specific conditions.

How to Determine Agency Remuneration in an International Agency Agreement?

In accordance with Article 1006 of the CC RF, the principal is obliged to pay the agent remuneration in the amount and manner established in the agency agreement. The remuneration condition is not an essential condition of the agency agreement; thus, it may not be directly specified. In that case, the amount is determined based on similar contracts with similar conditions. [16]

In such a situation, the agent, as the interested party, determines the remuneration amount. They are responsible for proving that the sum corresponds to rates for similar transactions if the principal disagrees. [17]

Forms of agent remuneration provided for by the contract may vary:

• Percentage of the deal, where the agent receives a certain percentage of the transaction amount;
• Fixed sum, where the agent receives a pre-agreed fixed amount. This is convenient when the volume of work and its results are predictable;
• Combined form, where the agent receives a fixed fee plus a percentage of the deals;
• Other forms. [18]

The conditions and terms of payment must also be clearly stated. This could be monthly, quarterly, or another form depending on the activity specifics and agreements.

By default, in the absence of payment terms in the contract, the principal must pay the remuneration within a week from the moment the agent submits a report for the past period, unless otherwise follows from the nature of the contract or business customs.

Parties may provide for the following payment procedure:

• The agent has the right to withhold the remuneration amount from sums received from buyers or sums intended as payment for the principal's services. This is guided by rules for the termination of obligations by set-off (Articles 410, 997, 1011 CC RF);
• The remuneration amount can be paid as a separate payment.

It is necessary to distinguish the agent's remuneration from funds transferred to them for fulfilling instructions and from their expenses. Since mandate and commission rules apply to agency agreements, the principal must reimburse the agent for expenses related to performance and provide funds for performance (Articles 975, 1001, 1011 CC RF). Payment orders should refer to the fact that funds are transferred in connection with the execution of the agency agreement.

Necessary evidence of expenses incurred by the agent must be attached to the agent's report (Article 1008 CC RF). The agent must return to the principal any surplus funds received for execution, unless provided otherwise by the contract.

The Model Agency Contract in International Practice

The ICC Model Commercial Agency Contract (the "Model Agency Contract") contains an introduction, 28 articles, and 7 appendices. The introduction highlights important points for FEA participants, specifically mentioning the need to comply with antitrust laws and mandatory national legislation. [19]

The scope of the Model Agency Contract is limited to international contracts with independent agents — those who do not receive a salary and do not have an employment contract with their principal — acting in the sale of goods. Note that these provisions do not apply to agents assisting in the purchase of goods on behalf of a buyer or to service agents. Furthermore, the Model Agency Contract does not cover goods consignment. This document can be used for domestic turnover "only after determining what supplements may be required to match local conditions." The Model Contract regulates relations only if it is included in the text of the agreement.

The Model Agency Contract contains provisions defining the territory and goods, the agent's functions, sub-agency rules, the principal's order acceptance procedure, sales organization, and advertising (including via the Internet); it secures information rights, agent's financial responsibility, trademark usage rules, non-compete restrictions, commission rights, and calculation methods; it regulates duration, early termination, and alternative provisions for indemnity for goodwill upon termination.

The ICC Guide to Drafting Commercial Agency Contracts (the "Guide"), developed prior to the Model Agency Contract, facilitates its more fruitful use by providing detailed comments on various issues. [20]

The parties must clearly define the territory where the agent is authorized to act. The Guide notes that lack of precision can lead to disputes between the agent and the principal's other agents. If the agent does not have the right to solicit orders from buyers for goods intended for consumption outside the designated territory, this must be clearly stated.

Under the Model Agency Contract, the agent's functions are limited to collecting orders. Unless otherwise agreed, the agent cannot conclude contracts on the principal's behalf or bind the principal to third parties. Granting the agent the right to conclude contracts is not standard in international trade but can be provided if parties have specific reasons. [21]

The Guide recommends that parties clearly formulate the agent's authority to bind the principal. Generally, agents are not given such authority unless they possess the principal's goods. If circumstances or customs dictate otherwise, this expanded authority must be explicitly stated.

The agent must inform the principal about their activities, market conditions, competition, and local laws. They are also responsible for sales organization and, if necessary, after-sales service. Parties may agree on annual sales volumes or a guaranteed minimum sales quota.

Without prior written permission, the agent may not represent, produce, or place competing goods during the contract term. They must also refrain from representing non-competing goods of the principal's competitor if reasonably requested. The Guide mentions the possibility of a post-contractual non-compete clause, which must be limited in time and space and specify the restricted activities. The contract may also provide for compensation for such restrictions.

The basis for commission calculation and its amount must be clear. It can be based on net or gross invoice amounts. If net, the contract must list deductible expenses (freight, insurance, taxes, etc.). It is recommended to specify the place of payment, currency, and the exchange rate used.

The Guide also covers additional periodic payments (guaranteed minimum income) if the agent waives other agency relationships to work primarily for the principal.

Significant attention is paid to early termination conditions in case of a material breach or exceptional circumstances (e.g., bankruptcy, liquidation). A material breach is a failure to perform that results in damage depriving the other party of what it was entitled to expect under the contract.

If the contract is for an indefinite term, it should state that it can be terminated at any time with prior notice.

The Guide notes that parties should always agree on the governing law, although a governing law clause cannot exclude mandatory provisions of the agent's country. As a reminder, under Article 1211 of the CC RF, if the law is not chosen, the law of the agent's country applies.

However, national law is not applied to the Model Agency Contract; relations are regulated by the contract itself and the principles of law generally accepted in international trade (lex mercatoria). ICC developers note that excluding national law was a primary motive for creating model contracts. [22]

Originally, the Model Agency Contract designated only the ICC International Court of Arbitration for dispute resolution. It now includes an alternative—a national court chosen by the parties. If no choice is made, ICC arbitration applies automatically. ICC arbitration is particularly recommended when lex mercatoria principles are used, as these may be unfamiliar to national courts.

While the Guide and Model Agency Contract are optional, they are widely used in international trade practice.

Tax Accounting and Taxation for Agency Agreements

When paying for a foreign agent's services, the place of supply is not considered the territory of the Russian Federation; therefore, the services are not subject to VAT in the RF. [23]

According to subparagraph 1 of paragraph 1 of Article 146 of the Tax Code of the Russian Federation (hereinafter – "TC RF"), VAT applies to the sale of goods/services on RF territory.

Under intermediary contracts, the place of supply for agent services is the place of activity of the service buyer if the agent attracts an organization or individual on behalf of the customer to provide services listed in Article 148 of the TC RF:

• Transfer/provision of patents, licenses, trademarks, copyrights;
• Software development, adaptation, and modification;
• Consulting, legal, accounting, auditing, engineering, advertising, marketing, and information processing services;
• Provision of staff (if they work at the buyer's place of activity);
• Leasing of movable property (with specific exceptions).

In other cases, the place of supply is determined by the place of the intermediary's activity.

Depending on the services provided by a non-resident agent, the place of supply will vary. For example, the sale of a Russian manufacturer's goods or intermediary services for money transfers are not subject to VAT; thus, the Russian organization is not a VAT tax agent.

Foreign organizations pay income tax when conducting activity in the RF through permanent establishments or receiving income from RF sources (Article 246 TC RF). Only income types listed in Article 309 TC RF are taxed at the source in the RF:

• Dividends;
• Profits from distribution or liquidation;
• Interest income from debt obligations;
• Intellectual property royalties;
• Income from RF real estate sales;
• Leasing income from RF-based property;
• International transport income;
• Income from services provided in the RF to a related party.

The list does not include, for example, income from sales to a Russian organization via an intermediary. Income from the sale of goods that does not create a permanent establishment under Article 306 TC RF is not taxed at the source.

Currency Control in Agency Schemes

Bank of Russia Instruction No. 181-I applies to contracts between residents and non-residents involving the export or import of goods and settlements through resident accounts, including agency agreements, commission, and mandate contracts.

To register an agency agreement with a non-resident, the obligation amount must equal or exceed the equivalent of 3 million rubles. If the threshold is met, the contract must be accounted for regardless of whether the sum covers remuneration or expense compensation.

Thus, the agency agreement is a key legal scheme for acquiring or promoting goods/services globally. It is not limited to legal actions, giving it an advantage over other intermediary contracts.

___________________________

References

1. Vlasova N.V., Agency Agreement in Russian Legislation and International Commercial Practice, Journal of Russian Law, 2013, No. 3.
2. Resolution of the Fifteenth Arbitration Court of Appeal dated 31.05.2019 in case No. A32-22704/2018.
3. Resolution of the Plenum of the Supreme Court of the Russian Federation dated 09.07.2019 No. 24 "On the application of private international law norms by the courts of the Russian Federation."
4. Vlasova N.V., Commercial Agency Contracts: ICC Recommendatory Acts, Journal of Russian Law, 2012, No. 2.
5. Information from the International Trade Centre website.
6. Agency Agreement Sample, "Digital FEA" website.
7. Agency Contract in the Sphere of FEA, "PravoVED" website.
8. Agency Agreement Sample, "Digital FEA" website.
9. Vlasova N.V., Agency Agreement in Russian Legislation and International Commercial Practice, Journal of Russian Law, 2013, No. 3.
10. Resolution of the Arbitration Court of the West Siberian District dated 08.10.2024 in case No. A45-38759/2023.
11. Resolution of the Arbitration Court of the Volga-Vyatka District dated 28.05.2021 in case No. A28-4143/2019.
12. Resolution of the Plenum of the Supreme Court of the RF No. 6, Plenum of the Supreme Arbitration Court of the RF No. 8 dated 01.07.1996 "On certain issues related to the application of Part One of the Civil Code of the Russian Federation."
13. Vlasova N.V., Agency Agreement in Russian Legislation and International Commercial Practice, Journal of Russian Law, 2013, No. 3.
14. Agency Remuneration: How to Calculate and Pay. 27.04.2024, "BuhExpert" website.
15. Information from the "LawRussia" website.
16. Vlasova N.V., Commercial Agency Contracts: ICC Recommendatory Acts, Journal of Russian Law, 2012, No. 2.
17. Letters of the Ministry of Finance of Russia dated 10.03.2023 No. 03-07-08/20624, dated 18.03.2013 No. 03-08-05/8179.