Rawlison Butler
A Brief
Guide to
Agency and
Distribution
“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”
Introduction
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.
In this guide we consider the
distinctions between, and the respective
advantages and disadvantages of
appointing, agents and distributors.
The basics
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 – the agent and his principal
have agreed (expressly or impliedly)
that the agent has authority to act on
the principal’s behalf
• Ostensible or apparent – the
authority of the agent is as it
appears to third parties – that is, the
principal represents to a third party
by words or conduct that the agent
has authority to act
• 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.
Rawlison Butler Agency and Distribution
There are different types of agency:
• Exclusive - the principal agrees
that it will not actively seek sales
in the agent’s territory and will
refrain from appointing other
agents, distributors or resellers 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
• Non-exclusive - the principal
is able to appoint other agents,
distributors and resellers, and may
itself actively to seek sales in the
territory
• Sole – the principal agrees not to
appoint another agent, distributor
or reseller for the agent’s territory
but reserves the right for itself to
actively seek sales in the territory.
“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”
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.
A distributor can be appointed on
an exclusive, non-exclusive, sole
or selective basis.
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
arrangement.
Rawlison Butler Agency and Distribution
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.
“A selective distribution arrangement
is one in which a supplier appoints
only approved distributors who
meet specified minimum criteria”
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. However,
the supplier can set maximum selling
prices provided that does not have the
effect of fixing the selling prices.
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 (eg,
high value watches, jewellery and highend fashion) and technical products (eg,
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.
CARs
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. Under
English law, the CARs do not apply
to the provision of services but the
position may be different elsewhere in
the EU.
Rawlison Butler Agency and Distribution
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.
“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”
Termination
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.
The basis of calculation differs for the
indemnity and for the compensation.
(a) 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
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’.
(b) Compensation
There are very few exceptions to
the agent’s right to receive an
indemnity or compensation payment
on termination. One exception is where
the agent is genuinely in breach of
agreement.
• 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.
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’
Rawlison Butler Agency and Distribution
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.
“It is necessary to consider where
the agent performs its contractual
obligations. The CARs only apply to
Great Britain”
Distribution
Unlike agency, there are no
particular provisions under English
law (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
restrictions
choice of law and jurisdiction.
Choice of law and jurisdiction
Agency
As noted, the CARs (and their local
equivalents throughout the EEA) are
mandatory.
It is necessary to consider where
the agent performs its contractual
obligations. The CARs only apply to
Great Britain.
A governing law clause (assuming
there is one in the agreement)
determines which law applies in the
event of any dispute and a jurisdiction
clause which country’s courts have
jurisdiction to hear and determine any
dispute. Clearly, it will be advantageous
to address these points in the agency
agreement.
Depending on where the agent actually
performs his activities, and what the
contract states about governing law
and jurisdiction, either (i) the CARs
will apply (ii) the local equivalent of
the CARs will apply or (iii) neither will
apply.
Rawlison Butler Agency and Distribution
The position will need to be checked
carefully in each case – even where
the law of a non-EEA country is
chosen as the governing law of
an agency contract, if the agent
performs its obligations in Great
Britain, the mandatory aspects of the
CARs will apply.
Distribution
Here, the choice of law and
jurisdiction is a matter for the parties
to agree contractually.
Where there is no any contractual
agreement, the Rome and Brussels
Conventions may apply to determine
the choice of law and jurisdiction
within the EEA. If the distributor is
operating outside of the EEA, then
the position may be significantly
more complex.
It is therefore advisable to include
an explicit contractual provision
determining choice of law and
jurisdiction.
How RB can help
Our team has substantial experience in supporting businesses with their agency and
distribution relationships and agreements, both internationally and domestically.
For further information on your agency and distribution matters, please contact:
Mark O’Shea
Partner, Commercial
E [email protected]
T +44 (0)1293 558523
Lisa Downs
Partner, Commercial
E [email protected]
T +44 (0)1293 558593
Disclaimer: This document 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 document.
Rawlison Butler LLP is a Limited Liability Partnership registered in England (number OC318343) and is authorised and
regulated by the Solicitors Regulation Authority. 11/15