29 FAQs about agents and distributors
- What is the difference between an agent and a distributor?
- Which is better - an agent or a distributor?
- How can I make sure the relationship works how I want it to?
- Can someone become my agent without an explicit agreement?
- What are the key elements of an agency agreement?
- If I use someone as an agent, how can I make sure they will not be considered an employee?
- Can I give an agent exclusive rights to a particular territory?
- Can I stop an agent selling outside their territory?
- Can I stop an agent acting for a competitor as well?
- How much control do I have over what my agent does?
- Am I responsible for what an agent does when working on my behalf?
- What rights does an agent have if I fail to fulfil my obligations?
- What rights do I have if the agent does something that damages my business?
- Do I have any responsibility to an agent who fails to earn as much as expected?
- Do I have to pay an agent commission if the customer fails to pay?
- What restrictions are there on terminating an agency relationship?
- Will I have to pay an agent compensation if I terminate the relationship?
- Can I control what a former agent does after the relationship is terminated?
- What are the key elements of a distribution agreement?
- Can I give a distributor exclusive rights to a particular territory?
- Can I refuse to supply a potential distributor?
- Can I stop a distributor selling outside their territory?
- Can I stop a distributor selling competing products?
- Can I control the prices a distributor charges their customers for my products?
- Can I control the way a distributor sells and promotes my products?
- How can I protect my intellectual property and confidential information?
- Am I responsible for what a distributor does when selling my product?
- What are my obligations to a distributor?
- What restrictions are there on terminating a distribution agreement?
1. What is the difference between an agent and a distributor?
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 either be an employee or self-employed.
A distributor is a customer of yours. The distributor then sells the product on to their own customers.
2. Which is better - an agent or a distributor?
It depends on the circumstances and what you are trying to achieve. Considerations include:
- Which agents or distributors have access to your target customers.
- What your existing operations are, and how the new intermediary fits with them. For example, if you want to keep an existing sales operation (such as a sales force, telesales team or online sales), you will need someone who is happy to work alongside that.
- What rights and responsibilities you want to be included in your agreement with the intermediary.
- How closely you want to be involved in the sales process. It can be easier to have more control over how an agent handles sales.
- What type of relationship you want to have with the end user. Using a distributor may distance you from the ultimate customer.
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 personally deliver.
Distributors, such as wholesalers, are often used for making lower-value sales of relatively straightforward products.
3. How can I make sure the relationship works how I want it to?
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 that the agreement will achieve your aims and that you will not be made party to any unexpected obligations or restrictions.
Put 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 damage suffered by the agent or distributor.
Finally, 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.
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4. Can someone become my agent without an explicit agreement?
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 rights or authority you did not intend to give.
Note that self-employed agents (ie an agent who isn't your employee) in the EU acting in relation to goods have certain statutory rights. Some of these can be contracted out of, some cannot, but all of them need to be considered.
5. What are the key elements of an agency agreement?
Key issues include:
- whether you require the agent to be an employee or self-employed (see 6);
- what territory they cover, and whether they have exclusive rights to that territory;
- which of your products or services they can sell;
- what authority they have to act on your behalf;
- any restrictions on the agent's other activities;
- what each of your responsibilities are in terms of promoting your product, making sales and fulfilling orders;
- the agent's rights and restrictions in relation to your intellectual property;
- restrictions on disclosure of confidential information;
- how the agent is paid and whether you will meet certain expenses;
- what rate of commission will be paid to the agent and whether that will differ from product to product or customer to customer;
- the arrangements for terminating the relationship.
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).
6. If I use someone as an agent, how can I make sure they will not be considered an employee?
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:
- have a degree of control over what they do (eg making their own decisions on how to approach customers and arranging meetings independently);
- bear an element of risk (eg using their own equipment and meeting their own expenses);
- have more than one customer (eg by acting as agent for other businesses as well).
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 compensation (see 17).
7. Can I give an agent exclusive rights to a particular territory?
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.
8. Can I stop an agent selling outside their territory?
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.
9. Can I stop an agent acting for a competitor as well?
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.
10. How much control do I have over what my agent does?
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.
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.
11. Am I responsible for what an agent does when working on my behalf?
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 to secure 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.
12. What rights does an agent have if I fail to fulfil my obligations?
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.
13. What rights do I have if the agent does something that damages my business?
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.
14. Do I have any responsibility to an agent who fails to earn as much as expected?
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 had 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.
15. Do I have to pay an agent commission if the customer fails to pay?
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 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 fails through no fault of your own - for example, where a customer refuses to pay for the goods (or services) for no good reason.
16. What restrictions are there on terminating an agency relationship?
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.
17. Will I have to pay an agent compensation if I terminate the relationship?
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, commissions on future sales to customers the agent introduced to you.
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 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.
Legal advice should be sought, both at the time of drafting the agreement and when calculating or agreeing any payments.
18. Can I control what a former agent does after the relationship is terminated?
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.
19. What are the key elements of a distribution agreement?
Key issues include:
- what territory they cover and whether they have exclusive rights to that territory;
- which of your products the agreement relates to;
- any restrictions on their sale of competing products;
- what each of your responsibilities are in terms of promoting your product, making sales and fulfilling orders;
- rights and restrictions in relation to your intellectual property;
- terms and conditions of sale, and when ownership and risk in relation to products will pass from you to the distributor;
- restrictions on disclosure of confidential information;
- what will happen if you or they wish to terminate the relationship.
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. These vary depending on the territory covered by the agreement.
20. Can I give a distributor exclusive rights to a particular territory?
21. Can I refuse to supply a potential distributor?
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.
22. Can I stop a distributor selling outside their territory?
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 attracts customers outside their territory through their website.
23. Can I stop a distributor selling competing products?
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.
24. Can I control the prices a distributor charges their customers for my products?
No - that would be a breach of competition law.
25. Can I control the way a distributor sells and promotes my products?
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 could also negotiate a minimum sales target.
26. How can I protect my intellectual property and confidential information?
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 also need to cover how it will be protected after the distribution relationship is terminated.
27. Am I responsible for what a distributor does when selling my product?
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.
28. What are my obligations to a distributor?
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 deliveries will be made. The terms should include the point at which the distributor will assume ownership of the products.
29. What restrictions are there on terminating a distribution agreement?
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 are obliged to buy it back from them.