Argument (#03 March 2012)

Commercial Agency the Ukrainian Way

by Nataliya Y. Mykolska, Anzhela M. Makhinova

At a time when business is tending to get global, it is high time to think about the companys presence on the foreign markets.

The ways for expanding businesses changed profoundly and now companies are fortunate enough to use a whole variety of tools while entering foreign markets: from opening a representative office and/or establishing local subsidiaries to operating through distributors and franchisees. However, it goes without saying that companies have to proceed with caution when entering new markets, as lavish investing does not necessarily yield expected profits due to different high market risks. That is the reason why more and more businesses are looking for more affordable options to enter new markets at a low risk. One of the possible options usually considered is a commercial agency. The said market conquering tool may also be used for Ukraine. In the present article we will focus on a general overview of legal regulation of commercial agency in Ukraine.

Definition of commercial agency

Commercial agency in Ukraine received special regulations in 2004 when the new Civil and Commercial Codes of Ukraine (Civil Code and Commercial Code) were adopted. While the Civil Code offers only the general legislative framework applicable inter alia to agency agreements (e.g., freedom of contract, contract law, entitlement to rights and performance of obligations, breach of the agreement, liability etc.), the Commercial Code contains special provisions on commercial intermediation (agency relations) set out in Chapter 31.

The Commercial Code defines commercial intermediation (agency activity) as a business activity of the commercial agent providing its services to other business entity (principal) in the course of their commercial activity by way of intermediation on behalf, for the benefit, under control and at the expense of the principal. Needless to say, the key element of agency relations is that the agent acts on behalf and for the benefit of the principal, but not in its own name.

Nevertheless, the notion of the commercial agency under Ukrainian law is quite broad as it does not distinguish between true commercial agents and occasional intermediaries.

Agents authority to conclude agreements on behalf of principal

Under the general rule provided by the Commercial Code, agency relations arise out of the agreement authorizing the agent to act on behalf of the principal. However, agency relations may also come into existence when the principal approves the agreement concluded by the agent, even when the agent was not authorized to do so under the agency agreement or exceeded its authorities, while entering into the agreement with a third party. In the latter case the agreement concluded by the agent on behalf of the principal shall be valid unless the principal cancels the agents actions before the third party. Once such an agreement is approved by the principal, it shall be deemed valid starting from the date when it was concluded.

Form of commercial agency agreements

Under the Commercial Code the agency agreement shall be done in writing, i.e. by entering into a single document signed and sealed by the parties. At the same time, failure to comply with a written form requirement does not entail invalidity of the agency agreement. However, in case one of the parties rejects the fact of the agreement conclusion or contests some its parts, it shall prove its claims with written evidence, means of audio/video records and other evidence, except for witness statements. Moreover, the agency agreement may be notarized at the request of any party.

Essential conditions of commercial agency agreements

Notably, the Commercial Code provides for a quite extensive list of essential conditions to be agreed upon by the parties in order to make the agency agreement fully operational in Ukraine, namely:

sphere, nature and the procedure of the intermediary services to be provided by the agent. It is noteworthy that from the practical standpoint, first of all, taking into account the relevant Ukrainian tax authorities approaches, it is crucial to precisely identify in the agency agreement the services to be rendered, reporting forms to be filled in by the agent as well as documents confirming the actual provision of the services;

rights and obligations of parties;

terms and conditions as well as commission amount to be paid to agent;

agreement term;

penalties in case of agreement breach;

the territory limiting the agents authority to act under the agreement. If the parties fail to define the territorial limits in the agreement, the agent shall be authorized to act on the whole territory of Ukraine;

other terms and conditions agreed upon by the parties.

If the parties fail to agree on all listed essential conditions, pursuant to the Civil Code the agency agreement shall be deemed as non-concluded. Even though the consequences of the agreement being recognized as non-concluded are not directly stipulated either in Ukrainian law or case law, most probably they would be the same as for invalid agreements.

Agents right to commission

The Commercial Code offers the parties complete freedom to agree on a commission to be paid to the agent. That is, determining the amount, forms and terms of the commission. At the same time, the parties shall bear in mind that under the general rule provided the agents commission is payable once the third party makes the payment to the principal, if otherwise not agreed between the parties in an agency agreement.

At the same time, Ukrainian law does not distinguish between remuneration of agent with exclusive or non-exclusive status e.g. limitation that may be applied to remuneration. Ukrainian legislation is also silent as to right to commission on successive further sales to customers formerly acquired by the agent for similar transactions.

Del credere clause

Under the general rule provided, the agent does not guarantee the principal of the third parties performance under agreements concluded through the agents intermediation, unless otherwise provided for by the agency agreement.

However, the Commercial Code directly allows the parties to stipulate the respective agents obligation in the agency agreement to be additionally payable to the agent i.e. to agree upon the so-called del credere clause.

At the same time, it has to be pointed out that in general Ukrainian legislation treats a guarantee as a financial operation to be conducted in Ukraine only by the authorized financial institutions that obtained the respective license, e.g. banks, financial institutions, etc. Notably, both Ukrainian law and case law are silent as to how the said mandatory guarantee requirements correlate with the above agents guarantee obligations and, thus, whether the del credere clause agreed upon by the parties to the agency agreement possessing no status of the financial institutions, will be fully operational in Ukraine.

Exclusivity

Exclusivity issues in commercial agency relations are regulated very generally i.e. the principal is in a position to appoint other agents subject to notification of its previous agent, while the agent is allowed to represent other principals as well unless the interests of the principals represented by the same agent are not controversial.

It is worth emphasizing that available case law demonstrates that Ukrainian courts are evaluating the extent to which certain activities may be controversial. In one recent case1 the court considered certain insurance services provided by the agent on behalf of a number of insurers to be similar enough to the services rendered to the initial principal and, consequently, as being in conflict with the interests of that initial principal. Thus, the court confirmed that under the general rule the agent shall not act for competitors.

In case of exclusive agency relations the agent is not allowed to represent other principals within the limits of the agency agreement. Notably, the Commercial Code does not stipulate any limitations for the principal even in the course of exclusive agency relations.

At the same time, following the rule of freedom of contract, the parties are free to agree on the exclusive status of the agent and set forth all the details in the agreement limiting the principals right to appoint other agents as well as to stipulate all rights and obligations, any limitations applicable directly in the agreement.

Termination of the agency agreement

In order to ensure painless and smooth termination of the agency agreement, in addition to the equivocal provisions of Ukrainian law specifically addressing unilateral termination of and unilateral refusal from the agreement, the parties shall also bear in mind the following special grounds for agency agreement termination directly set out by the Commercial Code:

if the principal recalls the agents authority by giving one month prior notice, unless a longer term is set forth by the agreement;

agents refusal to further render intermediary services to the principal under agency agreement with an unidentified term;

in cases of death (for private individuals) or dissolution (for legal entities) of either party;

in case other circumstances terminating an agents or principals authorities arise.

Conclusions

Echoing the above, it is easy to see that Ukrainian legislation in the sphere of commercial agency is quite general and offers only framework regulations, leaving a lot of issues at the discretion of parties. Thus, in order to avoid any controversies and/or potential disputes in future, parties submitting their agency contract to Ukrainian law need to invest their time and resources in developing a contract that would reflect in detail the terms and conditions of their cooperation.

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