Both agency agreements and distribution agreements are widespread in business, but the law surrounding them can be incredibly complex. Read our agency and distribution agreement FAQs to learn more.
Jump to individual agency and distribution agreement FAQs:
- What’s the difference between agency agreements and distribution agreements?
- Agency Agreements
- What is an agency agreement?
- What is the governing law or legislation for agency agreements in the UK?
- What format should an agency agreement be in? Should it be in writing?
- What happens if there is no agency agreement in place?
- Are there different agency agreement types?
- What should be in the agency agreement?
- What is an exclusive agency agreement?
- What is an agency agreement with sole rights?
- What is an agency agreement with non-exclusive rights?
- How are agency agreements terminated? Is there a clause or cancellation letter?
- Distribution Agreements
The intermediary between the principal and the customer, who will sell or promote the business’ products or services on the business’ behalf – usually in exchange for commission. An agent may have specialist knowledge of a particular geographical area or market with which the principal may not be familiar. When a contract is created with the end user (the customer) who has bought the principal’s product or service through the agent, then that contract is between the principal and the end customer. The agent will not have title in the goods as they pass from the principal to the end customer.
The reseller of the principal business’ products. Its basic function is to resell the principal’s products to the end customer. The contract of sale is between the end customer and the distributor – not the principal. The distributor will have title in the goods before it passes to the end customer, as it will buy them outright from the principal.
This term is usually used as an alternative for ‘distributor’ although it is sometimes the case that a distributor has greater power than a reseller, and possibly the ability to appoint a further tier of resellers.
What’s the difference between agency agreements and distribution agreements?
An agent acts as an intermediary and is often granted authority (or ‘agency’) to negotiate and enter into contracts and/or sales on behalf of the principal. An agent’s liability for bad debts is limited on the basis that it is for the principal to assess the credit risk of a particular customer. When products or services are purchased, there is only one contract – between the principal and the end customer. The agent doesn’t own the products or services in the course of passing them to the end customer. It will, however, get paid a commission from the principal (an agreed percentage of the price), and compensation may be payable upon termination of the agreement.
Distribution agreements, on the other hand, do not give the distributor the authority to negotiate or conclude sales on behalf of the principal. The distributor buys the products outright from the principal and resells them to the end customer – meaning the distributor will own those goods in the interim. When products are purchased, there are two sales contracts: one when the distributor buys the products from the principal, and one when the end customer buys the products from the distributor. With a distribution agreement, the distributor makes a profit from the margin on the sale of the goods to the end customer.
What is an agency agreement?
An agency agreement is a contract. It’s formed when two parties, the principal business with products/services to sell, and the agent who will sell them on the principal’s behalf, agree to work together. A ‘fiduciary’ relationship is created where the agent holds a position of trust with the principal, to act as if it were the principal when selling the principal’s goods or services.
What is the governing law or legislation for agency agreements in the UK?
The main laws that apply to agency agreements within the UK are:
- Commercial Agents Regulations 1993, which implement the EU directive, Council Directive 86/653/EEC
- Article 101 of the Treaty on the Functioning of the European Union
- Common law
Not all agency agreements are affected by the Regulations. In order for them to apply to an agency agreement in the UK, the commercial agent must:
- be self-employed
- operate in England, Wales or Scotland
- have a continuing authority from the principal
- have authority to negotiate (and/or conclude) the sale or purchase of goods on the principal’s behalf
- market the principal’s goods as its full-time primary business activity
This means the Regulations don’t apply to those agents who only source customers, or who don’t negotiate on behalf of the principal, or if they are in some way employed by the principal.
The EU Directive is, of course, implemented across the European Union in slightly differing ways. Whilst it is not possible to opt out of the Directive, the parties can agree that the laws of a state in the EEA other than the UK apply which could mean that a different version of the Directive would apply to the agreement. Rules about governing laws and legal jurisdictions are incredibly complex and it is not possible to summarise here the impact of such an agreement between the parties.
What format should an agency agreement be in? Should it be in writing?
It’s advisable for an agency agreement to be in writing, because it is a contract between the two parties. While there is no legal requirement for the agreement to be in writing, the Commercial Agents Regulations 1993 provide that the agent has a right to request a written statement of terms. Also, to be enforceable, restraint of trade clauses must be in writing.
At any rate, it is always advisable to have a written agreement in place (ideally drafted and checked by a business solicitor) so that each party is clear as to its rights, duties, activities and restrictions, and which will include any provisions in relation to termination of the agreement.
What happens if there is no agency agreement in place?
If you don’t have a written agency agreement in place, then the positions and duties of each party are not clearly defined – leaving room for dispute. With no written agreement, there is likely to be less control, accountability and protection for both parties. So, whether you are an agent or a principal, it is wise to have a written agency agreement drafted with legal advice.
In addition, a principal with no written agreement may discover that its agent has substantial rights under the Commercial Agents Regulations which can sometimes be modified and limited in a written agreement. In particular, in a written agreement the principal can opt to pay an indemnity on termination (reflecting the value brought to the principal’s business by the agent) which is capped at one year’s remuneration. If the principal doesn’t opt to pay this indemnity, then compensation may be payable on termination and there is no cap on compensation.
Are there different agency agreement types?
Yes, there are many different variations, but the main ones are:
- Introduction agency agreements: the agent introduces clients to the principal, in return for being paid commission. Also called a referral agreement, commission agreement, or finder’s fee agreement.
- Cross-border sales agency agreements: usually an exclusive sales agent is authorised to do business on the principal’s behalf in other jurisdictions and territories.
- Sales of services: any kind of sales agent who either sells the principal’s services or engages suppliers of services on behalf of the principal’s business.
- Sales of goods: negotiating the sale of goods on the behalf of the principal’s business.
- Marketing agency: advertising or marketing the principal’s products or services, but with no authority to enter into the actual sale.
What should be in the agency agreement?
As there is no legal requirement to have an agency agreement in writing, there is no legal requirement as to what they should contain. However, there are of course many standard agreements in use by the business law profession, so a business solicitor can adapt these for each unique situation. Broadly, the terms and conditions should cover these elements:
- Details of both parties: the agent and the principal
- Interpretation and definitions
- Duties and responsibilities of the agent and the principal
- Details of compensation, indemnity and commission payments, including amounts, when and how they will be paid
- The terms of agency, for example the level of authority to enter into sales agreements
- Details of the geographic territory or region in which the agent will be operating
- The duration of the agreement, breaches of contract and termination
- Any performance targets to be met
- Protection of intellectual property, trade secrets and other confidential information
- Anti-bribery conditions
- Any exclusive, sole or non-exclusive rights
- Details of any non-compete agreements
- Governing law and jurisdiction
What is an exclusive agency agreement?
‘Exclusive’ is not a ‘term of art’ and the parties should define what it means to them in their agreement. So, an exclusive agency agreement is usually where the agent and principal agree that the principal won’t appoint other agents (ie competitors) in the agent’s territory, nor actively seek sales itself. It also prevents the agent from making similar deals with the principal’s competitors. Sometimes the principal reserves the right to contact named companies directly.
What is an agency agreement with sole rights?
Sole rights are usually similar to exclusive rights, except that the principal can actively seek sales itself in the agent’s territory. However, the principal agrees not to appoint other agents (and possibly distributors) in the agent’s territory.
What is an agency agreement with non-exclusive rights?
This means that the principal is able to engage other agents within the agent’s territory and to seek sales itself.
How are agency agreements terminated? Is there a clause or cancellation letter?
The conditions for termination of the agreement should form part of the agreement. The termination clause should set out:
- The fixed time period (if any) for which the agreement applies, after which it may automatically terminate or continue until terminated by either party
- Each party’s duties
- The agent’s right to compensation, indemnity and/or damages in the case of the agreement’s termination
- Upon what grounds, and when, the agreement may be terminated, for example for breach of contract
- How breaches of contract will be handled
- What will happen if either party becomes insolvent
- Any restraints on the agent’s trade or activities after the end of the agreement
Termination clauses are also affected by whether the agreement is subject to the Commercial Agents Regulations 1993 (see question: What is the governing law or legislation for agency agreements in the UK? ). If it is, termination rights and consequences may be dictated by those Regulations.
If the agreement is not subject to the Regulations, then termination will be governed by the contractual relationship as set out in the agreement. Any termination clause must take account of the Regulations if they apply.
If there is no written agency agreement, or one exists but there is no termination clause in it, then the agreement can be terminated by either party with ‘reasonable notice’. If the agreement isn’t subject to the Commercial Agents Regulations, and the notice period hasn’t been agreed in advance then ‘reasonable notice’ is very much up for debate, and independent legal advice should be sought to determine this. For agreements subject to the Regulations, reasonable notice is set by the Regulations.
What is a distribution agreement?
A distribution agreement is an agreement between a principal and distributor for the distributor to sell the principal’s products in a market or territory, usually one in which the principal does not have a presence. The distributor is essentially a reseller for the principal’s products. The principal may be a manufacturer or a supplier, or even a distributor itself looking for someone to take on some of its sales responsibilities.
There will be two contracts of sale: one between the distributor and the end customer, and one between the distributor and the principal, as the goods will be bought outright by the distributor from the principal.
Why use a distribution agreement? How do they work?
A distribution agreement is especially useful if a principal wants to sell its products into a market or territory where it doesn’t currently operate. They are usually vertical in nature, that is – between two businesses at different levels in the same supply chain. The key benefits of using distribution agreements are that:
- the principal can pass on risk and liability associated with the products, from expansion into new markets, overseas currencies, failure to sell, and bad debts; to warehousing and logistics
- there may be tax efficiencies for the principal in not expanding into new territories
- the principal isn’t liable for the acts of the distributor
- distribution agreements aren’t subject to the Commercial Agents Regulations, so in the UK there won’t be any requirement to pay compensation upon termination of the agreement to reflect the value that the distributor has brought to the business of the principal.
What are the key terms and conditions to include in a distribution agreement?
Terms and conditions to include in a distribution agreement are:
- Definition and interpretation
- Appointment, including scope and duration
- Distributor’s and principal’s obligations
- Supply of products/conditions of sale
- Prices and payment
- VAT and taxes
- Advertising and promotion
- Compliance with laws and policies
- Anti-bribery compliance
- Trade marks and any other intellectual property rights
- Limitation of liability
- Commencement, duration and termination
- Consequences of termination
- Governing law and jurisdiction
How does competition law apply to distribution agreements (and other legal issues)?
Competition law has implications for distribution agreements, under both EU and UK law. In the UK, anti-competitive behaviour which affects UK trade is prohibited by both the Competition Act 1998, and the Enterprise Act 2002.
If the anti-competitive behaviour affects trade in or between other EU member states, then Articles 81 and 82 of the EC Treaty will apply.
Competition law is designed to stop:
1. Anti-competitive agreements, which distort, restrict or prevent competition for example by:
- Granting exclusive territories
- Price fixing
- Limiting production
- Discriminating between customers (in price paid or terms offered) who are being supplied with the same thing
2. Abuse of a dominant position in a market, where a business is in a position to behave independently of pressures from competitors, such as by:
- Limiting production
- Charging much higher prices than competitors
- Charging different customers different prices for the same product
- Not supplying a long-standing customer without a good reason
Whilst it is possible to ask the applicable competition authorities for a specific exemption for an agreement under competition laws, most vertical distribution agreements (between businesses at different levels of the same supply chain) can be drafted to fall within the vertical agreements block exemption (VABE) such that they are automatically exempted, as long as:
- The principal’s market share is less than 30%, and
- The agreements don’t contain any ‘hardcore’ restrictions
‘Hardcore’ restrictions include things like setting minimum or fixed resale prices for the distributor to sell on the products, or restrictions on the territories or customers to which the distributor may sell passively (for example, general and non-targeted marketing or advertising on the Internet). By contrast, a restriction on ‘active sales’ is permitted under the VABE in respect of a particular territory if there is already another exclusive agreement in place with another distributor in that territory or if it is reserved for the principal itself.