Commercial Agency Contracts in Mexico

The agency agreement is not a regulated contract under Mexican law, Therefore, such agreement is governed by: (i) the general rules of contract law; (ii) the provisions agreed to by the parties; and (iii) the rules of the agreement with which results the most analogous.

Pursuant to business practice and Mexican doctrine the agency agreement defines the relationship between a principal and an agent by which the agent assumes the obligation to promote or close commercial transactions for the principal in exchange for a commission or an agreed price. It is a continuous and stable relationship where the agent, whether an individual or a legal entity, is an independent intermediary with its own business structure and without subordination to the principal.

It is of commercial nature since it shall be concluded between independent traders and as mentioned above there is no subordination between the agent and the principal.

Commercial agents

Commercial agents are individuals or entities that carry out the business of one or more principals in an independent manner. Usually, they are self-employed intermediaries authorized to negotiate the sale and purchase of goods on behalf of another person, and/or to negotiate and conclude such operations on behalf of and in the name of the principal.
Commercial agents may or may not have the authority to represent and act on behalf of the principal. Most agents do not have the implied authority to represent the principal. In addition, commercial agents may or may not be exclusive, depending on the terms of the agreement.
Commercial agents shall promote or conclude businesses in the interest of the principal. Therefore, they undertake instrumental activities to motivate third parties to enter into such agreements with his principal.

There are some other kinds of “agents” which activities or obligations are similar to those of the commercial agents, such as sales agents, proxy, distributors and employees.

Sales agent

Sales agent are professionals whose role within a company is to sell the product or service that they provide. The sales agents are entitled to a commission for the sales of the principal’s goods or services, generated by the sales agent from all sales made in the sales agent’s territory. Typically, the services of a sales agent are limited to a certain territory.

Proxy (Mandate)

The proxy or representative as a general rule commits to enter into agreements on behalf of its principal. Thereby, rights and obligations deriving from the acts concluded by the proxy oblige its principal.

Distributor

While the commercial agent does not take ownership of goods, distributors purchase goods and resell them to local retailers or consumers. Generally speaking, agents are paid through a commission scheme based on the sales value generated, while distributors add a margin on top of the products’ prices.

Employee

The subordination and economic dependence of the employee with respect to its employer do not exist in the agency agreement. This difference is essential to avoid the agent from claiming the principal the protective status of an employee.

There are no mandatory formalities, registration requirements and/or social security’s formalities for the agreement to be legally valid and binding. Most oral agency agreements are legally binding; the law does not require that they are formalized in writing. In practice, it is advisable to conclude agency agreement in writing to set forth specific rights and duties and prevent contingencies upon termination of the contractual relationship.

Since the autonomy of will and freedom of contract applies, the parties are free to negotiate the terms of the agency agreement. Mexican courts will generally enforce the terms the parties have agreed upon, except when such terms are against the law, where they would be deemed invalid. Mexican law does not require specific terms to be included in this kind of agreement.

This agreement can be considered validly existing by a simple exchange of letters, emails. Any means to evidence this agreement are admissible, e.g. invoices or third-party statements. That is why; it becomes advisable to conclude agreements in writing.

Mexican courts must respect choice of law clauses, since such is allowed by Mexican law in most cases, with the following exceptions: (i) if the parties in the agreement artfully evaded fundamental Mexican law principles (fraudulent intent of the parties); and (ii) when the provisions of the foreign law or its application resulted contrary to fundamental Mexican public policy principles or institutions.

Therefore, it is possible to set forth foreign law as applicable law, in order to elect another forum (e.g. that of their domiciles, or in which they have to perform any obligation or where the object of the agreement is located), and courts must observe those clauses.
The parties' agreement on this selection must be express or, in the event that there is no express agreement, must be evident from the parties' behaviour and from the clauses of the agreement, considered as a whole.

Parties are free to choose arbitration or courts, except in certain matters, provided that the following conditions are met:

• There is a point of contact with the elected governing law (either in respect to the agreement or the parties).
• Their choice is clearly specified in writing.
• The parties waive clearly any right to seek protection under any other jurisdiction that may otherwise have competence on the dispute, due to their domiciles or the place where the obligation has to be executed.

While forum selection clauses are recognized in Mexican law, they are subject to certain limitations.
As a general rule, jurisdiction is determined by the domicile of the defendant. Therefore, the parties of an agreement may choose to waive the forum designated by law and select a different forum. For instance, parties which waive forum may have their cases heard in courts where any party has a domicile, where the performance of some obligation takes place, or where the goods under consideration are located.
If the parties do not expressly choose a forum, jurisdiction shall be established pursuant to the following forum selection rules, in order of preference:

a) The place designated by the debtor to be judicially required for payment;
b) The place designated in the agreement for the performance of obligations.

If the parties have not made the designations in a) or b):

c) The place of domicile of the debtor, and if the debtor has various domiciles, the one chosen by the creditor;
d) If there is no fixed domicile, it shall depend on the type of action: if it is personal (in personam), the court shall be that of the place in which the agreement was enforced, and if it is a real (in rem) action, that of the place of the location of the property; and
e) If the subject matter of the real action is located in different domiciles, the competent court will be that of the place in which the plaintiff initiated the action.

The termination clause is usually considered as one of the most important clauses in agency agreements. This type of agreement establishes certain circumstances which will give rise to termination.

• Natural termination of the agreement. The agency as a continuous performance agreement seeks a steady and permanent relationship between the parties. The agency agreement may be for a fixed term or an indefinite term. If the agreement has a fixed term, the contractual relation extinguishes when such period concludes.
  If the agreement has an indefinite term, each party may terminate the agreement at any time, provided that a written notice is given in advance. If the agreement does not specify a term for the compliance of the obligations, provided the reasonable and necessary time for the fulfilment of the obligation has elapsed, such obligations have to be satisfied.
• Unilateral termination. By general rule, the principal cannot terminate the agreement unilaterally, if said termination scheme was not agreed. The principal that unilaterally terminates the agreement must indemnify the agent, according to Article 2596 of the Civil Code, applied by analogy (payment of damages and loss of profits).
• The resignation of the agent. In the mandate agreement, the resignation of the agent is set as to cause of termination (Article 2595 subsection I of the Civil Code). In some agency agreements, it is common practice to agree that the agent may resign at any time and terminate the agreement, without the obligation to indemnify the principal.
• Death or inability of the agent. Since an intuitu personae relation creates the agency agreement, the death of the agent is a contractual cause of termination.
  

As a general rule, termination for cause is only available in the event of default by any of the parties. In such a case, the remedies available to the non-defaulting party are: (a) the termination of the agreement, and the payment of damages and loss of profits; (b) the specific performance of the contract, and the payment of damages and loss of profits.

The agreement may include a late penalty in case the obligations are not satisfied on time. If the agreement includes a penalty for the breach of the whole contract (penalty clause), then the non-defaulting party may request either the fulfilment of the contract or the payment of such penalty. It is common practice to include a liquidated damages clause in order to avoid the quantification of the damages or civil liability in court.

The agent is located between different figures of business collaboration; however, its main characteristics are the following:

• Independence of the agent, e.g. own business structure, premises, personal;
• A continuous and stable relationship between principal and agent;
• The agent must promote commercial transactions on behalf of and in the name of the principal;
• Not assumption of risks.

The agent has to perform its duty alone and may not delegate its responsibilities without the principal’s authorization. The agent may hire employees for the performance of the agreement at its sole responsibility.

Under certain requirements, exclusivity arrangements are allowed, thus, the principal may grant agent exclusivity for its goods within a certain territory. This may come with the obligation that the agent does not promote other competing goods.

It is common practice to establish a non-compete clause in the agency agreements, in order to prevent the agent from benefiting from prior businesses engaged in the name of the principal. Either it can be inserted as one of the clauses or it can form a stand-alone agreement. A non-compete clause could restrict the agent from acting as an agent for competing products during the course of the agreement and for a reasonable time after termination of the agreement.
In order to minimize the risk that either an individual or entity may successfully claim that it has an additional entitlement to a given compensation upon termination of a contractual relationship, it is advisable to always have in place a signed agency agreement, irrespective of the nature of the intermediary.