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Understanding agency and distributor agreements

Agency agreements and distribution agreements are a necessary part of business operations but they can be confused with one another. In this article, we explain the legal differences between agency and distributor agreements and look at what you should include as part of each agreement to protect your business.

Before entering into an agency or distribution agreement it is important that you considered the key legal, commercial and competition law aspects of the proposed arrangement. Our team of friendly, experienced commercial solicitors can help explain, negotiate and draft suitable terms to help facilitate a successful relationship.

What is an agent?

An agent is an intermediary between the principal and the customer. The principal is the business owner with products or services to sell and who needs a third party to sell on their behalf. The agent sells or promotes the principal’s goods or services, usually in exchange for a commission. An agent may have specialist knowledge of a particular geographical area or market with which the principal may not be familiar.

When a sale is negotiated by the agent the contract for sale is between the business and the customer. The agent is not a party to the agreement and they do not acquire title to the goods as they pass from the principal to the end customer.

What is a distributor?

A distributor resells 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 business. The distributor obtains title to the goods before they pass to the end customer as, unlike in an agency agreement, the distributor buys the goods from the principal business.

You may also see a reference to ‘reseller’ as an alternative for ‘distributor’. Some distributors have greater powers than a reseller, such as the authority to appoint a further tier of resellers.

The difference between agency and distributor 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 business. The key points about an agency arrangement are:

  • An agent’s liability for bad debts is limited as the business assesses the credit risk of the customer
  • When products or services are purchased, there is only one contract between the principal and the end customer as the agent does not own the goods during the agency
  • The agent gets paid through a commission from the principal (normally an agreed percentage of the price)

Distribution agreements do not give a distributor the authority to negotiate or conclude sales on behalf of the principal business. Instead, the distributor buys the products outright from the principal and resells them to trade or an end consumer. The distributor owns the goods bought from the principal and there are two sales contracts:

  1. The distributor buys the products from the principal business and
  2. The end customer buys the products from the distributor

In distributor agreements, it is all about margins as the distributor makes their 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 between:

  • The principal business owner with products or services to sell and
  • The agent who is selling the goods on behalf of the principal

A ‘fiduciary’ relationship is created as the agent holds a position of trust, namely, to act as if the agent were the principal business owner when selling the principal’s goods or services.

Does an agency agreement need to be in writing?

It is advisable for an agency agreement to be in writing because it is a contract between two parties and both parties should be clear on their rights and duties to reduce the risk of disputes.

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. 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 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 the termination of the agency agreement and there is no cap or limit on compensation.

Different types of agency agreements

The main types of agency agreements are:

  • Introduction agency agreements - the agent introduces customers to the business and the agent is paid a commission by the principal. This type of agreement is also called a referral agreement, commission agreement, or finder’s fee agreement
  • Cross-border sales agency agreements – these agreements are usually exclusive sales agency agreements where the agent is authorised to carry out business on the principal’s behalf in specified jurisdictions and territories
  • Sales of services – covering the scenario where a sales agent either sells the principal’s services or engages suppliers of services on behalf of the business
  • Sales of goods – involving negotiating the sale of goods on the behalf of the principal’s business
  • Marketing agency – providing for the agent to advertise or market the principal’s products or services but the agent has no authority to enter into the sale of the goods or services.

The key provisions in an agency agreement

Although English law does not require an agency agreement to be in writing or to include specific provisions, experienced commercial solicitors recommend key clauses (which should be adapted depending on the business sector and goals) are included:

  • The parties - the agent and the business
  • Interpretation and definitions
  • Duties and responsibilities of the agent and the principal
  • Payment - details of compensation, indemnity, and commission payments, including the amounts and time of payments
  • Terms of agency- for example, the level of authority to enter into sales agreements
  • Details of the agent’s territory – this could be a region or country in which the agent has the authority to operate
  • Duration of the agreement
  • Performance targets to be met
  • Protection of intellectual property, trade secrets, and other confidential information
  • Anti-bribery conditions
  • Non-compete agreements and any exclusive, sole, or non-exclusive rights
  • Penalties for breaches of contract
  • Termination clauses detailing how the agency agreement can be terminated
  • Governing law and jurisdiction

What is an exclusive agency agreement?

An exclusive agency agreement is where the agent and principal agree the principal will not appoint other agents in the agent’s agreed territory and nor will the principal business owner actively sell their products. However, sometimes the principal will reserve the right to contact named companies directly. An exclusive agency agreement can also be used to 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 similar to one with exclusive rights save that the principal can actively sell in the agent’s territory, but 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 can engage other agents within the agent’s territory and make direct sales of its goods or services.

How are agency agreements terminated?

It is crucial that conditions for termination form part of the agency agreement as often it is when a contract 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 the termination clauses set out:

  • The fixed 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
  • The duties of each party on termination
  • The agent’s right to compensation, indemnity, and/or damages on contract termination
  • The grounds for termination. For example, breach of contract
  • Termination for breach of the contract and how disputes will be handled and resolved
  • Any restraints on the agent’s trade or activities after the end of the agreement

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 giving ‘reasonable notice’. If the agreement is not subject to Commercial Agents Regulations and the notice period has not been agreed in advance then legal advice from commercial solicitors should be taken on what would amount to ‘reasonable notice’.

What is a distributor agreement?

distribution agreement enables a 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 of the principal’s products as the distributor buys the goods from the business and then sells them to their customer. The principal may be a manufacturer, supplier, or even a distributor looking for someone to take on some of its sales responsibilities.

For more information read our article on distribution and reseller agreements.

How does a distributor agreement work?

A distribution agreement is normally vertical in nature, namely between two businesses at different levels in the same supply chain. The key benefits of using distribution agreements are:

  • The principal can pass on the risk and liability associated with the products to the distributor. For example, overseas currency fluctuations, inflationary pressures, failure to sell, bad debts, or imports and logistics issues
  • The principal is not liable for the acts of the distributor
  • In the UK there is no requirement to pay compensation on termination of the agreement to reimburse the distributor for the value the distributor has brought to the principal’s business

The key provisions in a distributor agreement

Distributor agreements should include similar key provisions to an agency agreement, such as the term of the agreement, price, territory, and termination. However, a commercial solicitor will focus on distributor-specific and industry-specific considerations,  such as whether the distributor is allowed to ‘add value’ to the product in some way to increase their profit margin on the sale to their customer. For example, by offering an after-sales service.

For further reading you may find it useful to look at our article on Horizontal and Vertical Agreements.

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