Agency and Distribution Agreements
As you look to expand your business you may consider appointing agents to assist in promoting sales of your products and increasing your geographical customer base.
Broadly, you as the principal appoint an agent as an intermediary to act on your behalf in making a contract between you as principal and your customer. Title to the product passes direct from you to the customer and the agent is generally paid a commission based upon such sales.
You may appoint the agent as an exclusive, non-exclusive or sole agent in a defined territory. An exclusive agent will have the exclusive right actively to seek the sales of your products in the territory and you as principal will not be able to sell products into such territory (unless you expressly reserve certain rights).
A sole agent may prevent you as principal from appointing another agent for the territory but you will remain able to sell products direct into the territory. A non-exclusive agent has the right to seek sales in the territory but since he will be non-exclusive it leaves you as principal free to appoint other agents and also yourself actively to seek sales in the territory.
A well drafted agency agreement will not only set out whether the agent is exclusive, non-exclusive or sole but will also set out the duties of the agent to act upon your instructions and within the limits of his authority. Generally, most agents will be paid a commission on sales but some element of fixed payment may sometimes be used.
Crucially, the agreement will also set out any compensation payable to the agent upon termination of the agreement. European Union law, as adopted in the UK via the Commercial Agents (Council Directive) Regulations 1993, does provide for compensatory payments to agents upon the termination or expiry of their contracts. We have extensive experience of advising both principals and agents in connection with such compensations.
You may consider that an agency arrangement is preferable to a distributorship if you as principal wish to retain greater control of the terms of the sale of the products, particularly as to price, if you wish to restrict the agents freedom to choose the customers with whom you deal and where direct contract between you as supplier and your customer and/or where close control over the methods of marketing is important.
Typically, the commission paid to an agent is lower than the margin which a distributor will earn (since the distributor is taking a greater financial risk). An agency will therefore, at least in every day terms, probably cost less than a distributorship.
Distribution agreements are typically used as a low risk means of expanding business into new markets or territories. Under a distribution agreement, the supplier or manufacturer sells his products to the distributor who then sells the products on to his customers having a margin to cover his own costs and profits. In purchasing and reselling the products, the distributor contracts both with the supplier and with his customer and title to the products in question will pass to and from him. There is thus a significant difference between distribution and agency where the only contract for sale of the products is made between the principal and the customer and where the agent generally has no contractual liability to the customer.
As with agency agreements, distributors will generally be appointed to a particular territory on either an exclusive, non-exclusive or sole basis. Care needs to be taken when appointing exclusive distributors as European Union Competition Law as applied in the UK in the Competition Act, does prohibit certain arrangements between manufacture/suppliers and distributors which prevent, restrict or distort competition unless they fall within certain boundaries, covered by so called “block exemptions”.
We have extensive experience of drafting agreements to comply with the terms of the block exemptions. It is extremely important to obtain professional advice in this area as the consequences of infringement can be severe. They include the restriction itself being unenforceable but can also include fines and potential damages claims from affected third parties.
Distribution of goods via the Internet has become a particularly important topic of late and we are increasingly asked to advise upon the extent to which restrictions can be placed on such “Internet Traders”.