Both agency agreements and distributor agreements play a key role in many different kinds of industries and operationally, there can be certain things that cause issues along the way. In this article, our business dispute solicitors will cover the main points you need to know about agency and distributor disputes, including the common causes of them, how they can be prevented, legal obligations to be aware of, how to make a claim and remedies if you’re successful in making a claim.
Contents:
- What’s the difference between agency and distribution?
- Why would a business need an agent or a distributor?
- What are the common causes of agency and distributor disputes?
- How can businesses prevent disputes within their agency and distributor relationships?
- What legal obligations should both parties be aware of in agency and distributor agreements?
- How to make a claim against your agent or distributor
- Remedies if you’re successful in your claim
- Summary
What’s the difference between agency and distribution?
An agent is a third party who completes sales in the name of your business. They’re usually paid commission on these sales and they aren’t legally a part of the contract between you and the customer who buys your goods or services – they’re simply an intermediary.
A distributor purchases goods or services from your business before selling them on, in their own name, to another business.
Why would a business need an agent or a distributor?
Agents often cover a specific geographical area where a company doesn’t have a physical presence (for example, your business might be based in the north of England with your customers dotted all over the United Kingdom and/or possibly overseas, so you need agents to cover defined regions that take into account the locations relevant for your customer base). This makes commercial sense because your business isn’t likely to need, or possibly doesn’t have the resources for, a permanent person looking after your customers in each of these areas, so an agent brings the benefits of being someone with local knowledge and contacts that can in turn be valuable for your business.
The same can be said when it comes to distributors, having distributors grants your company wider access to various other markets without the need to set up your own operation.
What’s the extent of an agent’s authority?
When it comes to working with an agent, having a basic knowledge of how it works in the eyes of the law when it comes to the extent of their authority is crucial before you begin your business relationship. This is because there are two main ways in which an agent can hold authority to act on your behalf in relation to third parties. These are:
Actual authority: This is where there is an express or implied agreement between you and the agent for them to act on your behalf, which covers what the agent can and can’t do.
Ostensible authority (also known as apparent authority): This is where the agent is held out by virtue of their position and how they behave in such a way as to legally bind you with a third party, i.e. the customer or buyer of your goods. It allows you and your customer to interact on the assumption that the agent has the authority to create legally binding commitments between the two of you.
What are the common causes of agency and distributor disputes?
There are several common causes of agency and distributor disputes that our business disputes solicitors see regularly. These include:
- Misrepresentation: Problems can arise if your agent makes an untrue statement or statements to your customer that influences them into entering a contract with your business. This could potentially give rise to your customer making a claim against you providing the agent was acting within their authority.
- Diversion of business opportunities: Agents might divert opportunities away from your business to benefit themselves or another party. Because agents are considered by the law as having a fiduciary duty to you (a legal or ethical relationship of trust or confidence where they’re obliged to act in your best interests), this is treated seriously in the eyes of the law.
- Misuse of intellectual property rights: When working with an agent or distributor to grow your business, your intellectual property (IP) rights may be misused in the course of selling your products or services. This means that having carefully drafted intellectual property clauses in your commercial contracts is key to protect your rights.
- Termination rights: If there aren’t well-drafted termination provisions in your contract with the agent or distributor around fixed periods or automatic termination, or in the absence of reasonable notice of termination being given, this can lead to conflict.
- Compensation for termination: Ideally this should be covered clearly in your contracts to prevent challenges from your agents or distributors about the amount of compensation upon the contract being terminated.
- Calculation of remuneration: If the remuneration calculation isn’t made transparent right at the start of the business relationship, this can be a common cause of disputes that our lawyers see.
- Assessment of performance criteria: Without regular assessments of their performance, underlined by easily understandable criteria so your agent or distributor knows what you expect of them, the relationship can quickly sour and break down.
- Acting on behalf of the business outside the agreed geographic area: It can be damaging for your business’s reputation if an agent tries to make sales outside of their defined territory and cause issues with other agents properly representing your company within the area that’s been strayed into.
How can businesses prevent disputes within their agency and distributor relationships?
There are a few ways you can prevent or at least minimise the risk of disputes within your agency and distributor relationships. These include:
- Conducting a full due diligence exercise (this can be outsourced to an independent body) on any agents or distributors you’re thinking about working with at the outset. It’s wise to be as certain as possible that they can meet your commercial objectives in the ways you want them to and so this will likely include credit and reference checks, reputational assessment, quality accreditation, searching public documents and the internet and inspecting business registrations. This is particularly important when dealing with overseas agents.
- Ensuring that your contracts are governed by English law and English jurisdiction if your agent or distributor is based overseas because if a dispute does arise, it’s more straightforward for you for it to be dealt with by the English courts.
- Committing to keeping track of your agent or distributor by way of regular and open communication with them; ensuring that you support them in their sales efforts and viewing it as a partnership where you’re working together with them. Conducting quarterly reviews, for example, can prove helpful for these purposes.
What legal obligations should both parties be aware of in agency and distributor agreements?
The following points provide an indication of what legal obligations both parties should know about in relation to agency and distributor agreements:
- What jurisdiction and governing law applies: Clarity about which country’s law and jurisdiction is applicable to the agreement and relevant for any disputes is vital.
- Regulations governing compensation for termination: There’s an important set of regulations known as the Commercial Agents Regulations 1993 (as amended) that govern the relationship between commercial agents and their principals in certain territories (which would mean your business) – these make it clear that unless your agreement provides for it, an agent will be entitled to compensation for termination.
- Limitation periods: The time limit for bringing a claim in an agency or distributor dispute will largely depend on which country’s law governs the contract but if it’s within England and Wales, it will generally be six years.
- Performance related terms e.g., minimum sales targets: Building performance-related terms such as minimum sales targets into your contracts with an agent or distributor is wise, including defining targets and thresholds properly and setting out the consequences of not meeting these (including rights of termination).
- Exclusivity: It’s key to build in and define geographical areas into your contracts for exclusivity purposes when working with an agent. This is particularly important when you have different agents covering different territories so that both you and your agents know who’s covering where.
- Circumstances in which the agency or distributor relationship can be brought to an end: Incorporating clear terms on how and when the agreement can be brought to a close (often known as a break clause) is also advisable when it comes to starting a working relationship with a new agent or distributor. This should make it easier, and clearer, for you to end the relationship if things don’t work out as planned.
- Criminal liability: Knowing that a company can be held criminally liable for acts of bribery committed by its agents intending to obtain or retain business or a business advantage for the business is vital. The importance of carrying out the checks we’ve outlined above in relation to due diligence before working with a new agent is again to be highlighted here – especially when you’re working with an overseas agent.
- Reputational risks: If an agent or distributor doesn’t behave in a professional manner, e.g., if they fail to follow up on or properly deal with complaints from customers about defects with your goods, this can potentially have a very serious effect on your company’s reputation. Safeguarding against this in your contracts as far as is possible is a good idea so that both you and your agents and distributors know what’s acceptable and what standards are expected.
How to make a claim against your agent or distributor
Agency and distributor disputes can be complex – this is even more likely if they’re based overseas. The basis of any claim will usually be in contract law, but how the claim will be made and run will very much depend on the nature of the dispute, who’s involved (because there can be multiple parties) and the governing law as defined in the contract. Taking advice from an business disputes solicitor around which options will suit your situation is recommended: this can often include exploring alternative dispute resolution methods if appropriate, or litigation through the courts if necessary.
Remedies if you’re successful in your claim
Remedies for claims against agents or distributors can vary depending on the nature of the dispute but more often than not, financial compensation (damages) is commonly the outcome. On other occasions it may be more appropriate for goods to be replaced if it’s reasonably an option and depending on the circumstances, this can be in addition to a financial award. In more extreme cases, an injunction may be required to compel a party to comply with its contractual obligations to your business or to prevent them from doing something in particular. Often its also a case of agreeing terms for ending the relationship.
Summary
Agency and distributor agreements can be notoriously complicated to navigate if things go wrong and this can be due to any one or more of the many factors we’ve discussed in this article. Our team of business disputes lawyers are well versed in dealing with companies who are faced with agency or distributor disputes and have an extensive breadth of commercial know-how to assist you in finding effective legal and practical solutions to your problem.
About our expert
