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29 FAQs about agents and distributors
An agent is someone who acts on your behalf. Although an agent may arrange a sale, the sale contract will be between you and the customer. An agent may be either an employee or self-employed.
A distributor is a customer of yours. The distributor then sells the product on to their own customers.
It depends on the circumstances and what you are trying to achieve. Considerations include:
Agents are often preferable for making high value, complex or bespoke sales. You will also need to use an agent if you want to sell a service you must deliver. Distributors, such as wholesalers, are often used for making lower-value sales of relatively straightforward products.
From the outset, ensure that both sides have a clear understanding of what is expected. A written contract covering all the key terms will reduce the likelihood of misunderstandings and disputes (see 5 for agency agreements and 19 for distributors). Take legal advice to check the agreement will achieve your aims and that you will not suffer any unexpected obligations or restrictions.
Put the right systems in place to help you fulfil your responsibilities. Practical problems, for example, with payments or delivery of stock, can put a serious strain on the relationship and could make you liable for any damage suffered by the agent or distributor.
Communicate regularly. This helps you identify potential problems at an early stage, making it more likely you will resolve them before the consequences become serious.
Yes, there are a number of ways in which this can happen. For example, if you allow someone to act as if they are your agent, you may well create an agency relationship even without an explicit agreement.
The safest option in such circumstances is to create a written agreement. This will clarify what the relationship is and what each party's rights and responsibilities are. Otherwise, you might find that you have unwittingly given the agent various rights or the authority to act for you in ways you did not intend.
Note that self-employed agents (ie any agent who isn't your employee) performing their duties within the EU in relation to goods (not just services) have certain statutory rights. Some of these can be contracted out of, some of them cannot (but it may be appropriate to address them in other ways) and all of them need to be considered.
Key issues include:
The agreement needs to be carefully drafted to take into account possible legal consequences, such as your responsibility for the agent's actions (see 11). In the case of self-employed agents, the agreement also needs to take into account your obligation to notify them of any expected shortfall in their earnings (see 14) and the rules regarding termination of the agency (see 16) and compensation payments (see 17).
There are two major areas of concern: the potential tax implications; and whether the individual has any employment rights.
One practical step is to require the individual to produce confirmation from HM Revenue & Customs (HMRC) that they are self-employed. By itself, however, this is not enough to guarantee they will not be considered an employee of yours. It is, for example, possible for an individual to be self-employed for other business activities but still be your employee.
An individual is likely to be considered self-employed if they:
If in doubt, ask for guidance from HMRC or take legal advice.
Be aware that even if an individual is self-employed, UK and European law gives agents certain rights. In particular, you may find that you have in effect guaranteed a certain level of earnings (see 14) and that you cannot terminate the relationship without paying some form of compensation (see 17).
Yes. An agent may well want to negotiate exclusive rights to the territory.
If you wish to sell through other channels as well, you will need to ensure your agreement with the agent allows this, for example, if you wish to sell through your website or via mail order. You will also need to address what sales in that territory the agent will receive commission for.
Yes, provided it is a genuine agency relationship, your agreement can limit the territory within which the agent has the right to sell or the customers the agent is allowed to approach. Your lawyer will be able to advise if it is a genuine agency relationship.
Yes, provided it is a genuine agency relationship, you can negotiate this as part of your agreement with the agent. Your lawyer will be able to advise if it is a genuine agency relationship.
The degree of control you have will depend on what has been agreed. For example, you can agree what products can be offered, what contract terms will be offered to customers and so on. You can also agree how the agent should approach customers. However, if you exert too much control in this way, you may find you inadvertently create an employment relationship with the agent (see 6).
Your agreement should clearly spell out the extent of the authority the agent has to act on your behalf. Be aware, however, that if the agent exceeds that authority, but you go along with it, you may well have effectively given the agent authority to act in that way in future. For example, if the agent arranges a sale without authority, and you agree to fulfil the sale contract.
If the agent is acting within the authority you have given, you are bound by the agent's actions (see 10). For example, if the agent has the right to negotiate sales on your behalf, you will be obliged to fulfil the contracts.
You may also be liable, if, for example, your agent injures someone or damages someone's property or if the agent makes misleading claims about your product as part of winning a sale. The law regarding your liability for your agent's wrongful acts is complicated and legal advice should always be sought. You may, of course, be able to bring a claim against your agent for breach of the agency agreement if such liability arises.
If you fail to fulfil your obligations, they will have the right to terminate the agreement. They may also be able to sue you for breach of contract and claim damages for any losses they have suffered.
For example, if an agent loses sales because you are unable to fulfil them, you might have to pay commission in any case.
If the agent breaches the terms of the agreement, you may be able to take action against them for any losses you suffer. You will also be able to terminate the agency agreement without notice or compensation but only where the breach would justify such an immediate termination. Usually this means that the agent's conduct or breach must amount to gross misconduct.
If the shortfall is caused by your failure to fulfil your obligations under the agreement, the agent may have a basis for a claim against you, for example, if you fail to provide products you were committed to supplying.
In the case of self-employed agents, under UK and European law you are also required to notify the agent if you anticipate that sales will be lower than the agent could reasonably expect. Failure to do this could make you liable to cover any shortfall in the agent's income.
Your agreement with the agent should specify the payment arrangements, including when payments will become due. If the agreement does not, it will be assumed that normal practice applies.
Typically, the agent's commission becomes due either when you have received payment or when you supply the goods (or services) to the customer.
If the agent is self-employed and your agreement says nothing to the contrary, the commission does not have to be paid if the sales agreement with the customer will not be executed through no fault of your own, for example, where a customer refuses to pay for the goods (or services) for no good reason.
You can agree an agency relationship either for a fixed term or indefinitely.
If the agreement is for a fixed term, it will normally be terminated at the end of that period. However, if you allow the agent to continue to act for you after the term expires, you will have effectively entered into an indefinite arrangement.
For an indefinite arrangement, the agreement should state what notice period there will be if either you or the agent wish to terminate the relationship. In practice, if the agent wishes to terminate the relationship, you may wish them to immediately cease acting for you. You may, however, be obliged to pay the agent some compensation to cover this.
For self-employed agents, under UK and European law you must give a minimum notice period to terminate the relationship: one month in the first year; two months in the second year; and three months thereafter. The notice period can be longer if agreed, but the agent can't be required to give more notice than you.
You can terminate an agency relationship without notice if the agent breaches the contract with you, for example, if the agent fails to provide you with the information you need to fulfil sales.
Most agreements will include arrangements for either 'indemnity' or 'compensation'.
Under UK and European law, self-employed agents are legally entitled to either indemnity or compensation arrangements. If an indemnity is agreed, it can be limited to one year's average earnings but will not necessarily rule out the possibility of the agent claiming compensation as well.
With an indemnity agreement, you pay an amount reflecting the value of the work the agent has done in building up your sales, for example, the agent's efforts to identify customers and build relationships with them.
With a compensation agreement, you pay an amount reflecting the value of what the agent has done and the agent's loss of future earnings, for example, future sales to customers the agent introduced to you.
They are calculated by reference to the value of the agency if it had continued (ie the agent's prospect of earning future commissions from it). The way in which this future income stream is valued is by looking at the amount a hypothetical purchaser of the agency would pay for it (eg by reference to the potential net earnings that the purchaser could generate and whether income from it was increasing or decreasing). So a successful agent, acting on behalf of a successful business, may be entitled to significant compensation, while an unsuccessful agent acting on behalf of a business that has ceased trading will be entitled to very little - nothing at all in some circumstances. The old rule that an agent's compensation payment should be roughly two years' gross average commission is now obsolete.
If the agent is self-employed, you will be required to pay an indemnity or compensation even if the agent dies or retires.
If you terminate the relationship because the agent defaulted on the agreement, compensation is not due. For self-employed agents, however, you will be required to pay compensation or an indemnity unless the agent was guilty of gross misconduct. If the agent is self-employed, you will be required to pay an indemnity or compensation even if the agent dies or retires.
The statutory provisions are complex and cannot be contracted out of, so legal advice should be sought both at the time of drafting the agreement and when calculating or agreeing any such payments. The law is complex and you can end up paying significant sums.
Any restrictions must be agreed in advance, in writing.
To be effective, the agreement must relate to the customers, territory or type of goods in relation to which the agent was acting for you. Restrictions can in no case last more than two years and must be seen to be reasonable.
Key issues include:
The agreement must be carefully drafted to take into account what you are trying to achieve and the implications of competition law and other regulations that can have very severe penalties. These vary depending on the territory covered by the agreement and the choice of law in the agreement.
Yes, you can. However, under competition law you may not be able to give the distributor exclusive rights and at the same time prevent the distributor from selling competing products (see 21).
You can refuse to supply a potential distributor for normal commercial reasons, for example, if you cannot agree the price or the terms and conditions of your supply contract with them.
However, if you deliberately limit the number of distributors, or require distributors to meet particular qualifying criteria, you will have created 'selective distribution'. This has implications under competition law. In particular, it is illegal to prevent selective distributors from selling competing products.
Unless you have a market share of more than 30%, your agreement can prevent the distributor from actively selling outside the territory or to customers who have been allocated to another distributor.
However, the agreement cannot restrict passive sales, for example, if a customer approaches the distributor or if the distributor sells outside the territory through their website.
Yes you can, unless you have 'selective distribution' (see 21) or have a market share of more than 30%. However, the restriction on selling competing products must not be indefinite or last more than five years.
No - that would be a breach of competition law.
You can negotiate this in the agreement. For example, the agreement could give you control over what advertisements and point of sale material are used. It could require the distributor to run particular marketing campaigns or spend a specified amount of money on them. The agreement could also require the distributor to maintain an adequate stock of your products.
The distributor might negotiate for you to provide them with marketing support or a contribution to their marketing costs.
If the distributor wants exclusive rights to a territory, you might also aim to negotiate a minimum sales target.
Your agreement should spell out what use the distributor is allowed to make of your trade marks and other intellectual property. For example, the agreement might include that the distributor is prohibited from altering your product packaging.
Intellectual property can be a complex area. Unless your agreement is carefully drafted, there can be unintended consequences, for example, the distributor may become entitled to some of the value of the intellectual property.
Confidential information can be protected with suitable terms in the agreement. These need to include how confidential information will be protected after the distribution relationship is terminated.
Not in general. However, you are liable for your product. The distributor may also want to negotiate an indemnity where you take responsibility for any claims made against the distributor for faulty products.
Terms limiting your liability need to be carefully drafted to be effective.
Your obligations will be as set out in the agreement. Normally, you would be expected to use reasonable efforts to supply the distributor with your product (but not to continue making the product if you do not wish to).
The agreement should clearly set out the terms of trade, including who will be responsible for transport and insurance and where delivery will be made. The terms should include the point at which the distributor will assume ownership of the products.
The arrangements for terminating the agreement can be agreed between you and the distributor, and should be clearly stated in the written agreement. The agreement should state which terms (eg confidentiality) will continue after the termination.
The agreement should also deal with how the distributor's remaining stock of your product will be handled: for example, whether they will be allowed to continue selling it for a specified time, or whether you must buy it back from them.
The article above was written with considerations from Corporate Law tutors in Lancaster and Commercial Law advisors based in Wigan. In relation to the article above our solicitors who serve areas such as Southport, are able to offer expert legal advice on this subject.
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