The appointment and use of commercial agents and distributors to develop markets, both domestic and overseas, and to increase sales of goods and/or services is a well-established commercial practice. But what are the distinctions between, and the respective advantages and disadvantages of appointing, agents and distributors?
Agency – In broad terms, under English law an agent has the power to bind the party appointing the agent (the ‘principal’) to contracts with third parties. As such, the agent needs to have appropriate authority to do so, usually by way of a contract.
There are three different types of authority that a principal can grant an agent:
- Actual – where the agent and his principal have agreed, expressly or impliedly, that the agent has the relevant authority to act on the principal’s behalf.
- Ostensible or Apparent – this is the authority of the agent as it appears to third parties – essentially, the principal represents (in words or by conduct) to a third party that the agent has the relevant authority.
- By ratification – where the principal subsequently ratifies the agent’s actions in circumstances where the agent did not have the relevant authority at the time of his actions.
With a commercial agency, one party (the principal) appoints another party (the agent) to introduce business and/or customers to the principal and/or to promote sales of the principal’s goods or services.
It is possible to have a ‘disclosed’ or an ‘undisclosed’ agency. A ‘disclosed agency’ arises where the third party is aware that the agent is acting on behalf of another person whereas an ‘undisclosed agency’ occurs where the third party does not know that the agent is acting on behalf of another person.
Under common law, a number of duties are imposed on the agent, including duties to comply with the principal’s instructions; to act within the scope and limits of the agent’s authority; to account to the principal for money and profits; and not to make a secret profit or accept bribes.
There are different types of agency:
- Exclusive – the principal agrees that it will not actively seeking sales in the agent’s territory and will refrain from appointing other agents or distributors in that territory, but the principal may reserve some rights, for example, to continue to supply certain identified customers or classes of customers in the territory.
- Sole – the principal agrees not to appoint another agent or resellers for the agent’s territory but reserves the right for itself to actively seek sales in the territory.
- Non-exclusive – the principal is able to appoint other agents and resellers to and may itself actively to seek sales in the territory.
The Commercial Agents (Council Directive) Regulations 1993 (the CARs) impose certain requirements on commercial agents and those appointing them but, in broad terms, the agent acts as an extension of the principal – in other words, the agent normally introduces customers to the principal and the principal contracts directly with those customers.
The principal is, in effect, responsible for the actions of the agent, which makes it essential for the principal to have a written contract in place with the agent that clearly sets out the scope of the agent’s authority, including any limitations.
Distribution – In contrast to agency, with a distribution arrangement a manufacturer, importer or supplier will appoint a distributor to re-sell their goods and/or services.
The distributor purchases the goods from the manufacturer, importer or supplier, taking the risk in those goods, and then re-sells them to customers. In other words, the distributor contracts directly with the customer.
Unlike agency, in the UK there are no specific laws imposed on distributors, but distributors will be subject to and have to comply with general commercial contract and competition laws as well as common law rules.
Key Considerations with Agents
The agent will usually be paid a commission calculated by reference to the volume of goods sold/amount of business generated and/or invoiced as a result of the agent’s activities.
The agent may or may not be authorised by the principal to negotiate contract terms and/or to conclude contracts with customers on the principal’s behalf. Often, the agent will only be appointed to introduce customers or orders to the principal who then contracts directly with the customer – here the agent is known as an ‘introducing agent’.
From a legal perspective, the agent will be an extension of the principal – this is an important distinction for competition law purposes as the principal and agent are viewed, at law, as one and the same person (subject to some limited exceptions), which means competition law issues do not generally impact on an agency arrangements.
Key Considerations with Distributors
With a distribution arrangement, the distributor will commonly receive a discount on the price of the goods it purchases from the supplier. The level of discount may well increase with the quantity of goods the distributor buys, which acts as an incentive for the distributor to increase sales.
The distributor buys the goods in his own right and takes the risk in them – unlike an agent, the distributor does contract directly with the customer.
From a competition law perspective, the supplier must not influence the distributor’s selling prices for the goods – the distributor must be free to set those prices as it determines. Any influencing by the supplier of the distributor’s resale prices is a serious competition law breach.
A distributor may be appointed on an ‘exclusive’ or a ‘non-exclusive’ basis. Where a distributor is the only distributor appointed and with rights to sell into a given geographical territory, that distributor will be an exclusive distributor. If other distributors can generally sell into the same territory, the arrangement will be non-exclusive.
A selective distribution arrangement is one in which a supplier appoints only approved distributors who meet specified minimum criteria, and the distributors agree only to supply products to end users/customers and other distributors within the authorised network. This type of arrangement is commonly used with luxury goods (e.g., high value watches, jewellery and high-end fashion) and technical products (e.g., motor cars, motorcycles and high-end consumer electronic products). Special competition law rules apply to selective distribution agreements.
All types of distribution arrangements are subject to different treatments from a competition law perspective, and so it is again important to ensure that there is a proper written distribution agreement in place and that appropriate legal advice is sought.
The CARs have their roots in German Agency law. Each member state implemented its own regulations based on the Commercial Agents Directive (86/653/EC) and, in the UK, the CARs were implemented.
The CARs apply to commercial agents – a commercial agent is a self-employed intermediary who has continuing authority to negotiate the sale or purchase of goods on behalf of another person (the principal), or to negotiate and conclude the sale or purchase of goods on behalf of and in the name of that principal.
In other words, there are two types of commercial agent – one who only has authority to negotiate with the customer and one who has authority to negotiate and conclude the contract with the customer.
Essentially, the CARs lay down certain mandatory requirements, including the need for a written agency contract, rules on commission payments and notice requirements and, most significantly, provide for indemnity or compensation payments on termination – see below.
A number of the CARs are mandatory and cannot be contracted out of at all or only where they are in the agent’s favour.
Agency – Under the Commercial Agents Directive, member states could choose to implement the indemnity or compensation remedies available on termination of the agency agreement.
In the UK, the CARs provide for both options and it is up to the contracting parties (usually the principal) to determine which of the two remedies is to apply. In the absence of any express choice, the compensation remedy applies in default.
There are very few exceptions to the agent’s right to receive an indemnity or compensation payment on termination.
The basis of calculation differs for the indemnity and for the compensation.
Indemnity – Regulation 17(3) of the CARs provides that an agent is entitled to an indemnity on termination of the agency if and to the extent that:
- the agent has brought in new customers or significantly increased the principal’s business with existing customers, and substantial benefits continue to be derived by the principal from those customers; and
- the payment of an indemnity is ‘equitable’ in all the circumstances and in particular with regard to the commission lost by the agent on the principal’s business with those customers.
As mentioned, under English law the parties must expressly agree the indemnity basis of calculation in order for it to apply, otherwise the compensation basis applies in default.
The indemnity is capped at ‘a figure equivalent to an indemnity for one year calculated from the commercial agent’s average annual remuneration over the preceding five years and if the contract goes back less than five years the indemnity shall be calculated on the average for the period in question’.
Compensation – Regulations 17(6) and (7) provide that an agent is entitled to be compensated ‘for the damage he suffers as a result of the termination of his relations with his principal’ and that such damage is deemed to occur particularly where termination takes place in circumstances which either:
- deprive the agent of the commission which proper performance of the agency contract would have generated, while providing the principal with substantial benefits linked to the activities of the agent; or
- have not enabled the agent to amortise the costs and expenses that it had incurred in the performance of the agency contract on the advice of the principal.
Unlike with the indemnity, there is no cap on the compensation payable.
Distribution – Unlike agency, there are no particular provisions (equivalent to the CARs or otherwise) that apply to distributors on termination of their distribution agreement.
Therefore, unless there is some contractual right to receive a termination payment of some sort and/or there has been an unlawful termination such that a damages claim for breach of contract may arise, then the distributor will receive nothing for the loss of the distributorship and the supplier will have no liability to make any termination payment.
A word of caution – some EEA countries have implemented laws akin to those applicable to agents in relation to distributors. Others have, by analogy, extended the application of the local equivalent of the CARs to distribution arrangements. Therefore, it is essential to consider local laws when appointing overseas distributors.
Key contractual terms
With any agency or distribution agreement, it is essential to address key contractual terms such as those dealing with:
- exclusivity of appointment
- remuneration, commission and discount structures
- product liability
- limitation of liability and insurance
- termination – including indemnity or compensation with agency agreements
- choice of law and jurisdiction
How we can help
Our team has substantial experience in supporting businesses with their agency and distribution relationships and agreements, both internationally and domestically, and can advise you on all aspects of agency and distribution. For further information on your agency and distribution matters, please contact us.
Disclaimer: This article is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from taking any action as a result of the contents of this article.