The Art of the Sale: Understanding Sales Agency Agreements

If you are a manufacturer, supplier or seller of goods, you may have considered entering into a sales agency agreement with an independent sales agent to assist in the promotion, marketing and sales of your products in a designated sales territory. Sales agency agreements are typically drafted by either the supplier or the agent. The party drafting the agreement will include provisions that favour its own interests. While these agreements frequently use standard boilerplate language, parties should be careful to ensure the agreement accurately reflects and protects their respective interests.

Standard Clauses

Sales agency agreements will often include the following standard clauses:

1. Territory and Exclusivity: Typically, both the supplier and the sales agent will want to specify a specific territory. The sales agent will concentrate their sales efforts on that specific territory. Depending on the mutual interests of both the supplier and the agent, the sales agent’s appointment can be on an exclusive or non-exclusive basis. The supplier may not wish to grant the sales agent exclusivity in a particular territory, as this could limit the sales agent's overall sales potential. Likewise, a sales agent may prefer a non-exclusive arrangement to allow them to represent other suppliers, including competitors. When the agent drafts the agreement, they will likely want to include a non-circumvention clause to prevent the supplier from bypassing the agent to deal directly with customers the agent introduced. The supplier will likely push back on this clause to limit its scope to the contract’s term and only to customers for whom the agent has actively generated a sale.

2. Term: The agreement should clearly set out its length. Both parties will want to ensure they are not indefinitely locked into the agreement, which could restrict them from pursuing other favourable business opportunities.

3. Commission: The supplier and the agent will agree to a commission in writing. This agreement should clearly define both the method for the commission calculation and the payment schedule. The parties will want to account for circumstances in which the customer has made a significant but partial payment and for the effect any potential product returns will have on the payment of commissions. The agent may want a clause that clearly states they are entitled to commissions paid after the termination date if the sales were generated prior to the termination date.

4. Termination: Both parties will want to define their rights to terminate the agreement. A termination-for-convenience clause may be desirable, allowing either party to terminate the agreement at any time for any reason. The supplier and agent will want to ensure they have sufficient notice to secure other contracts.

5. Confidentiality: Both the supplier and the agent will want to include a clause in their agreement that protects the confidentiality of the materials accessed and developed throughout their working relationship. The supplier has an interest in keeping its pricing, trademark information, and contacts confidential. Similarly, the agent will want to keep their contact list confidential.

6. Assignment: This clause determines whether the rights and obligations under the agreement can be assigned to a third party. The choice of assignment depends on how both parties anticipate their working relationship to develop. For example, the supplier may wish to work exclusively with the agent they contracted with, rather than a potential successor. Conversely, the supplier may undergo restructuring at some point and may wish to assign the contract.

Key Areas of Negotiation

Several areas that often see pushback are the governing law and forum selection clause, especially where the contracting parties are resident in two different jurisdictions. Normally, each party prefers the law of their own country to govern the agreement, for convenience and familiarity. To overcome this potential impasse, the parties may agree to select a neutral jurisdiction with settled law that may be more advantageous.

Another area that often gets pushback is the indemnification provision. Indemnification clauses allocate the risk and expense to protect the indemnified party from losses incurred from one party’s breach. The party that drafts the agreement will often include a clause where only they are indemnified for specific breaches. The non-drafting party will want to make the indemnity clause mutual.

In international sales agency agreements, a primary concern is the inadvertent creation of an agency relationship. Suppliers are often wary of the law in this area, as principals are liable for their agents' actions. To avoid any ambiguity in this regard, the sales agency agreement will typically include a provision stating that the agent is an independent contractor, not an employee or agent of the supplier. While the label the parties give is not determinative of whether an agency relationship exists, Canadian courts will examine the degree of control the alleged principal has over the agent. Aside from the liability issues that can arise in an agency relationship, there are significant tax complications that can also arise. Under section 253 of the Income Tax Act (ITA),[1] a non-resident who solicits orders through an agent or servant is deemed to be carrying on business in Canada. Both parties should carefully review the agreement to ensure that the relationship created, in substance and effect, does not inadvertently give rise to an agency relationship.

Entering into these types of business relationships can be highly beneficial for both parties and generate significant revenue. However, as with any contract, the devil is in the details. Parties should ensure that their agreements accurately reflect their true intentions.

Thank you for taking the time to read. Have a nice day! - Stefania

[1] Income Tax Act, RSC 1985, c 1 (5th Supp).

Last Updated: December 9, 2025

Disclaimer: This article is intended for general information purposes only. It is not intended as legal advice. It does not create a lawyer-client relationship and may not address your specific circumstances. You should consult with a qualified lawyer.