Commerical Agreements

Distribution and Agency Agreements

When you set up a relationship with an intermediary such as an agent or distributor, you are essentially sub-contracting the marketing and sales function of your business. You may choose to do this to take advantage of an agent’s or distributor’s local knowledge and established trade connections in a particular geographical region, or to save time and expense in establishing your own sales and marketing operation.

The labels “agent” and “distributor” are commonly used interchangeably which can become confusing. An agent acts on your behalf when seeking, negotiating and concluding contracts with the ultimate purchaser of the goods. The agent is generally not a party to the contract between you and your customer and will not have rights or obligations under it. The agent’s acts are generally treated as those of its principal. A distributor on the other hand buys goods from you and then sells them on to its customers. When you supply goods to the distributor you enter into a relationship of seller and buyer, and when the distributor resells to the public it does so on its own behalf so that it will be liable to customers for performance of the contract of sale. Although the relationship between the parties is close, it does not amount to one of agency. Contrast this with the agency position where the only contract for sale of the goods is between you and the customer. The agent generally has no contractual liability to your customer. It is important to distinguish between agency and distributor relationships as there are a number of practical consequences at law depending on the type of relationship.

These include:-

  • responsibility for defective products
  • determination of the parties’ rights and duties
  • impact of the insolvency of the agent/distributor
  • potential for contravention of competition law, especially if the agreement contains provisions which restrict competition

Once you have taken the decision to use an intermediary, your business objectives will determine which of an agency or distributorship arrangement is most appropriate.

Whichever type of intermediary arrangement you decide to opt for, it is prudent to set out the terms of the arrangement in a written agreement. A written agency agreement will define the authority and duties of the agent and set out the agent’s rights. The structure of a distribution agreement will be different to reflect the fact that the distributor buys goods outright. In addition you are likely to want to impose restrictions on competition.

Distribution Agreements

As with any other commercial agreement, it is important to have a well drafted distribution agreement to set out the rights and obligations of the parties in detail. If there is no written agreement, or if the written agreement is not drafted properly, then certain terms may be implied by law which may be contrary in the intention of the parties.

It is also important to appreciate that, at law, distribution agreements contravene competition law by virtue of the restrictions normally undertaken by the parties to them. Under EU and UK competition rules, there is a specific framework for assessment of distribution agreements and provided that the criteria are met, a distribution agreement will benefit from an automatic exemption afforded to such agreements. It is therefore crucial that the agreement is drafted by a solicitor experienced in preparing distribution agreements so that you can, where appropriate, take advantage of the various exemptions available and avoid falling foul of competition law.

The Advantages and Disadvantages

In order to decide whether to appoint a distributor as opposed to an agent, it is essential that you have some understanding of the perceived advantages and disadvantages of distributorship. The advantages can include:-

  • you may be able to pass on a large degree of any risk associated with the products
  • a distributor should be highly motivated to sell the products it purchases from you, since it takes on greater risk of failing to sell
  • you will not be liable for any acts of the distributor
  • it may be more efficient from a tax and administration point of view if you do not need to establish a place of business within the proposed territory
  • in the UK, no compensation or indemnity is payable to a distributor on termination of the distribution agreement

The potential disadvantages can include:-

  • you will have less control over the activities of the distributor than you would over an agent
  • a distribution agreement is more likely to be at risk from competition law problems than an agency agreement

Agency Agreements

As with any other commercial agreement, the primary source of the parties’ rights and obligations is their written agreement. However, the law gives an agent certain rights and imposes on him extensive duties because of the nature of the agency relationship. In addition many agency agreements will now be subject to the Commercial Agents (Council) Directive Regulations 1993. The main impact of these Regulations is to give agents more extensive rights than they would otherwise enjoy, particularly on termination of the relationship. 

Where you wish to appoint a person to act as your agent, you should enter into a written agreement to regulate your relationship and to take into account the requirements of the Commercial Agents Regulations and the possible impact of competition law.

The Advantages and Disadvantages

An agency arrangement may be preferable to a distributorship for the following reasons:-

  • by selling through an agent, you can validly retain the freedom to fix resale prices without contravening UK and EU competition law
  • generally, fewer competition law issues will arise with agency arrangements and in particular you will be able to restrict the agent’s freedom to choose the customers with whom the agent will deal

The potential disadvantages include:-

  • the agent has a right to lump sum payments under the Commercial Agents Regulations on termination of the agency agreement, regardless of any breach of the contract by the agent
  • the agent’s actions, whilst acting in its capacity as agent, are attributed to you as principal and any contract made by the agent on your behalf are treated in law as your contracts and are directly enforceable against you

How Can Lanyon Bowdler Help?

The commercial law team at Lanyon Bowdler are experts in the fields of distribution and agency agreements and have experience in drafting and advising on such agreements operating both within the UK and overseas. We can help you make the decision as to whether to appoint a distributor or an agent, including advice on the commercial considerations when selecting a potential distributor or agent, the proposed territory and the implications of appointing a distributor or an agent within a foreign country.

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