Agency agreements and distribution agreements are a necessary part of business, both in the UK and worldwide. Somewhat related, and often confused, it's important for business owners to understand the differences between the two and how each should be carefully executed to benefit your company. In this article we start with the basics definitions right through to the provisions you should include as part of each agreement, and how EU law may also come into play.
Jump to individual FAQs:
- What is the definition of an agent?
- What is the definition of a distributor?
- What’s the difference between agency agreements and distribution agreements?
- What is an agency agreement?
- What is the law on agency agreements in the UK?
- Does an agency agreement need to be in writing?
- What are the different types of agency agreement?
- What are the key provisions in an agency agreement?
- What is an exclusive agency agreement?
- What is an agency agreement with sole rights or non-exclusive rights?
- How are agency agreements terminated?
- What is a distribution agreement?
- How does a distribution agreement work?
- What are the key provisions in a distribution agreement?
- How does competition law apply to distribution agreements?
- How will Brexit affect the law on agency and distribution agreements?
What is the definition of an agent?
From a legal perspective it is important to understand the definition of an agent. An agent is the intermediary between the principal and the customer. The principal is the business owner or organisation who has products or services to sell and needs someone to do it on its behalf.
The agent will sell or promote the principal’s products or services, 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 entered into to purchase the goods or services the contract is between the business owner and the end user, the customer. Despite the agent’s involvement the contractual relationship is between the seller and buyer and the agent doesn’t have title in the goods as they pass from the principal to the end customer.
What is the definition of a distributor?
A distributor resells the goods or services made by the principal business owner. The contract of sale is between the end customer and the distributor and does not involve the principal who manufactured the goods or created the service. The distributor will have title in the goods before they pass to the end customer. That is because a distributor buys the goods from the principal, unlike with an agency agreement.
You may also hear reference to ‘resellers’. This term is usually used as an alternative for a ‘distributor’ although sometimes 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 or sales on behalf of the principal. The principal isthe business or organisation who has products or services to sell and needs someone to do it on its behalf, usually in an unfamiliar territory.
The key points about an agency arrangement are:
- 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.
- The agent gets paid a commission from the principal (normally an agreed percentage of the price).
Distribution agreements, on the other hand, don’t give the distributor the authority to negotiate or conclude sales on behalf of the principal business. The distributor buys the products outright from the principal and resells them to the end customer. That means that the distributor own the goods bought from the principal and there are two sales contracts:
- Firstly, when the distributor buys the products from the principal and
- Secondly, 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 between:
- The principal business owner with products or services to sell and
- The agent who will sell the goods or services on the principal’s behalf.
A ‘fiduciary’ relationship is created where the agent holds a position of trust with the principal, to act as if the agent were the principal business owner when selling the principal’s goods or services.
What is the law on agency agreements in the UK?
The main laws that apply to agency agreements within the UK are:
- Commercial Agents Regulations 1993 implementing 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 1993 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 business owner.
- Have authority to negotiate (and/or conclude) the sale or purchase of goods on the principal’s behalf.
- Market the principal’s goods as their full-time primary business activity.
This means the Regulations don’t apply to those agents who:
- Only source customers.
- Don’t negotiate on behalf of the principal.
- If they are employed by the principal.
The EU Directive is implemented across the EU 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. That 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.
A major consideration with commercial contracts is whether existing agency contracts or distribution agreements will be affected by Brexit. Read our guidance below.
Does an agency agreement need to be in writing?
Commercial solicitors say that it is always advisable for an agency agreement to be in writing, because it is a contract between two parties and it is vital that both parties are clear as to their rights and duties. Without a clear written agency agreement in place there is greater risk of disputes, leading to commercial litigation.
Whilst there is no legal requirement for the agreement to be in writing, the Commercial Agents Regulations 1993 provide that an agent has a right to request a written statement of terms. Also, to be enforceable, restraint of trade clauses must be in writing.
A business owner or principal with no written agreement with their agent may discover that their agent has substantial rights under the Commercial Agents Regulations. With an agency agreement these can sometimes be modified and limited. In particular, in a written agreement the principal business owner 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 of the agency agreement and there is no cap or limit on compensation.
What are the different types of agency agreement?
There are many different types of agency agreement but in essence the main types are:
- Introduction agency agreements - the agent introduces clients or customers to the principal business owner. In return the agent is paid commission by the principal. This type of agency agreement can also be referred to as a referral agreement, commission agreement, or finder’s fee agreement.
- Cross-border sales agency agreements – this type of agency agreement is usually an exclusive sales agency agreement where the agent is authorised to carry out business on the principal’s behalf in specified jurisdictions and territories.
- Sales of services – this agency agreement covers the scenario where a sales agent either sells the principal’s services or engages suppliers of services on behalf of the principal’s business.
- Sales of goods – this agency agreement involvesnegotiating the sale of goods on the behalf of the principal’s business.
- Marketing agency – a marketing agency agreement provides for the agent to advertise or marketing the principal’s products or services, but the agent has no authority to enter into the sale of the business owner’s goods or services.
What are the key provisions in an agency agreement?
Although the law doesn’t require an agency agreement to be in writing or to specify what should be included in an agency agreement experienced commercial solicitors recommend that key provisions are covered in the agency agreement to reduce the risk of disputes between business owner and agent. The key provisions, which need to be adapted depending on business sector and goals, are:
- 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 the 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 or country in which the agent has the authority to operate
- The duration of the agreement
- 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
- Non-compete agreements
- The penalties for breaches of contract
- The circumstances in which the agency agreement can be terminated
- Governing law and jurisdiction
What is an exclusive agency agreement?
An exclusive agency agreement is usually where the agent and principal agree that the principal won’t appoint other agents (i.e. competitors to the agent) in the agent’s agreed territory and nor will the principal business owner actively seek sales itself, although sometimes the principal reserves the right to contact named companies directly. An exclusive agency agreement can also prevent an agent from making similar agency deals with the principal’s competitor businesses.
What is an agency agreement with sole rights or non-exclusive rights?
An agency agreement with sole rights is usually similar to one with 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.
An agency agreement with non-exclusive rights means that the principal business owner is able to engage other agents within the agent’s territory and to seek direct sales of its goods or services.
How are agency agreements terminated?
It is crucial that the conditions for termination of the agency agreement should form part of the contract as often it is when an agreement is being brought to an end that the parties fall out. Without well drafted clear termination provisions this can lead to commercial litigation so it pays to ensure that your agency agreement covers all the key termination clause points.
The termination clause should set out:
- The fixed time period (if any) for which the agency agreement applies, after which the agreement may automatically terminate or continue until terminated by notice by either party.
- Each party’s duties on termination.
- 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. 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 agency agreement. Any termination clause must take account of the Regulations if they apply.
If there is no written agency agreement, or a written agreement 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. Independent legal advice should be sought from a commercial solicitor 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 allowing 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:
- Firstly, one between the distributor and the end customer and
- Secondly, one between the distributor and the principal. This second contract is necessary as the goods will have been bought by the distributor from the principal.
How does a distribution agreement work?
A distribution agreement is especially useful if a principal business owner wants to sell its products into a market or territory where it doesn’t currently operate. The agreements are usually vertical in nature, namely 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 isn’t a 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 provisions in a distribution agreement?
It is essential that your distribution agreement has terms and conditions to meet your business needs, including:
- Definition and interpretation
- Appointment, including scope and duration
- Distributor’s and principal’s obligations
- Supply of products and 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 of the agreement
- Consequences of termination and breaches of contract
- Governing law and jurisdiction
How does competition law apply to distribution agreements?
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. Furthermore, if the anti-competitive behaviour affects trade in or between EU member states, then Articles 81 and 82 of the EC Treaty will apply.
Competition law is designed to stop:
- Anti-competitive agreements that 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.
- 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 ‘hard core’ restrictions.
‘Hard core’ 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 online). 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.
How will Brexit affect the law on agency and distribution agreements?
The UK left the European Union on the 31st January 2020. The UK is in a transition period that is scheduled to end on the 31 December 2020. The transition period means it is business as usual for the time being but if you have any existing agency or distribution agreements you should get your commercial solicitor to review them for the reasons set out in this guide on Brexit and Commercial contracts.
For some commercial contracts there may be significant post Brexit impact, for example, a cross border agreement and the contract expires after the 31 December 2020. EU legislation will cease to be directly applicable in the UK at the end of the transition period, however, the UK government has enacted the European Union (Withdrawal Agreement) Act 2020 as part of the Brexit process. At the end of the transition period, the Act will convert existing EU law into domestic law ‘wherever practical’. The converted laws can then be repealed or amended at a later date. That means that contracting parties should review their existing commercial contracts to ensure that the contracts remain fit for purpose. For example, if the EU is included in the definitions section of the agreement this will no longer include the UK. Subject to the precise wording of the contract, this could have a major impact on one party to it.
The effect of Brexit on UK competition law after the end of the transition period is uncertain because at present the UK court must continue to interpret UK competition law consistently with EU law by the operation of section 60 of the Competition Act 1998. After the end of the transition period, this will change to a requirement to make sure there isn’t inconsistency with pre-Brexit EU competition case law, unless there is an appropriate reason to depart from that position.
At present no-one knows how quickly the UK will start to diverge from EU law or which EU introduced pieces of legislation will be a priority for change by the UK government. The bottom line is that there has never been a more important time to get expert commercial law advice on existing and planned agency and distribution agreements.