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Agents and distributors

Introduction

Agents

  Commercial agents

Distributors

Introduction

Manufacturers and other suppliers of goods and (perhaps less frequently) services may employ an agent or a distributor to sell to a wider range of customers than the supplier is willing or able to reach. Typically an agent or distributor will have local knowledge and/or contacts and will be able to find purchasers for the supplier. This applies particularly in the export trade when the supplier may lack knowledge and experience of local regulations, customs and preferences.

Although the distinction is sometimes blurred by ignorance or use of wrong terminology, an agent is legally distinct from a distributor because an agent's function is to generate sales on behalf of his principal by promoting the latter's goods or services, with a view to the principal effecting sales to customers directly. By contrast, a distributor acts as a principal himself, and will purchase the goods or services himself from the supplier and re-sell these to customers.

In English law, the relationship between a supplier and his agent or distributor has traditionally been entirely a matter of contract between the parties. However, there is EU legislation whichapplies to contracts between suppliers of most types of goods (but not services) and their commercial agent. In some cases, the rules are mandatory (see Agents below).

In the case of a UK supplier appointing an agent or distributor to act in a foreign country, local legal advice will usually be required because the law of that country may impose ceratin requirements or give certain rights to the agent or distributor, even if the contract is subect to English law.

Within the EU, the law on commercial agents has been harmonised by the EC Directive 86/653 on the coordination of the laws of the member states relating to self-employed commercial agents. In principle therefore, though not always in practice, the law applying to commercial agencies should be the same throughout the EU.

The law applicable to distributors is not however harmonised in the EU. The law of other EU states may therefore impact upon a contract for the appointment of a distributor. For example, in Belgium there is a law of 1961 on unilateral termination of exclusive and quasi-unilateral distribution agreements concluded for an indefinite term.

Agents

Under English common law, the rights and duties arising out of the relation of principal and agent are to be ascertained by reference to the contract, express or implied, which subsists between them. This is qualified however by the Commercial Agents (Council Directive) Regulations 1993 which apply to contracts for certain types of commercial agency.

A contract of agency, being in the nature of a contract for personal services, will not be specifically enforced at the suit of either party, but an injunction may be granted to restrain a breach of such a contract.

The relationship of agency is of a fiduciary nature, so that where property or money has been placed in the hands of the agent for a specific purpose, the agent becomes a trustee for his principal. In all cases, the agent owes duties of a fiduciary character to the principal, for example to keep accounts, to disclose any conflict of interest5 and not to receive any secret commission or bribe.

An agent will usually disclose the fact of his agency and the name of his principal. If he does not do so, he may be liable personally to the other party, who may choose in the event of a dispute to sue either the agent or the principal.

An agent may or may not have express or implied authority to contract or incur obligations in the name of his principal. However, even if the agent does not have such authority, if the principal 'held out' the agent as having authority, the principal will be bound by the act of the agent.

An agent who guarantees to his principal that the third party buyer with whom he is dealing is known as a 'del credere' agent.

What's new? on this topic [go to What's new page or archive]

04/07/2014: Exillon Energy must pay Edmond de Rothschild success fee


Edmond De Rothschild Securities (UK) Ltd v Exillon Energy Plc
[2014] EWHC 2165 (Comm) Hearing Date: 2 July 2014

There is a general principle in contracts of agency that, subject to any special terms or other indications in the contract, an agent's commission on a transaction to be brought about is dependent on the agent being an effective cause of the transaction.

The claimant Edmond De Rothschild Securities (UK) Ltd ("Rothschild") is an English company which provides corporate advisory services. The defendant Exillon Energy Plc is an energy company registered in the Isle of Man and listed on the London Stock Exchange. It has oil producing interests in Russia.

Commercial agents

The freedom of contract as between principal and agent is to some extent restricted in the case of commercial agents. The Commercial Agents (Council Directive) Regulations 1993 (the Regulations) implement EC Directive 86/653 on the coordination of the laws of the member states relating to self-employed commercial agents (the Directive).

What is a commercial agent?

For this purpose 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 the sale and purchase of goods on behalf of and in the name of that principal4. This definition does not, however, include:

* a person who, in his capacity as an officer of a company or association, is empowered to enter into commitments binding on that company or association;

* a partner who is lawfully authorised to enter into commitments binding on his partners; or

* a person who acts as an insolvency practitioner or the equivalent in any other jurisdiction.

The Regulations also do not apply to persons whose activities as commercial agents are to be considered secondary or to:

* commercial agents whose activities are unpaid;

* commercial agents when they operate on commodity exchanges or in the commodity market; and

* the Crown Agents for Overseas Governments and Administrations or its subsidiaries.

The Regulations, like the European Directive they implement, apply where an agent's operations take effect within the European Union on behalf of a principal situated outside the European Union. This cannot be overridden by a choice of law purporting to choose the law of a non-EU jurisdiction.

An agent with authority to contract, as opposed to authority to negotiate, is only a commercial agent for the purpose of Directive 86/653 if he has authority to contract, and does contract, in the name of the principal as well as on its behalf: Sagal (t/a Bunz UK) v Atelier Bunz GMBH [2009] EWCA Civ 700, [2009] 4 All ER 1253.

Goods not services

The agency must relate to the sale of goods and not e.g. services. The Court of Appeal in England has decided that the sale of software by purely electronic means, as distinct from a physical medium, does not amount to the sale of 'goods' for the purposes of the Commer cial Agents Regulations. See What's new - below.

Indemnity or compensation

The Regulations provide among other things for a commercial agent’s right to either compensation or an indemnity, on termination of the agency contract. Unless the contract provides otherwise, the agent has the right to compensation.

The Regulations do not provide how compensation is to be calculated. However, following the decision of the House of Lords in Lonsdale v Howard & Hallam [2007] 1 WLR 2055
compensation is calculated by reference to the value of the agency depending on the circumstances actually existing at the time of termination, including what its earning prospects had been and what people would have been prepared to pay for it.

The concept of an indemnity was developed in French law. The Regulations provide that an indemnity is capped at an amount equivalent to the agent’s average annual commission income over the last five years of his agency.

In some cases, a commercial agent may be entitled both to compensation for loss of the agency and to common law damages for breach of contract, e.g. if the principal terminated the agency on less than the contractual period of notice. See e.g.:

Alan Ramsay Sales & Marketing Limited v Typhoo Tea Limited [2016] EWHC 486 (Comm)

Further reading: many leading law firms have published notes on this topic.

What’s new item on this topic [see What’s new page or archive for full item]:

11/04/2018 Court of Appeal rules that software delivered electronically is not ‘goods’

Computer Associates UK Ltd v Software Incubator Ltd  [2018] EWCA Civ 518

Court of Appeal; Hearing dates 21-22/11/2017

The case concerned a dispute concerning the termination of an agency agreement relating to the sale of specialist commercial software. The central issue was whether the sale of software delivered electronically, rather than by a tangible medium such as a disk, could be treated as a sale of ‘goods’ for the purposes of reg. 2(1) of the Commercial Agents (Council Directive) Regulations 1993 [SI 1993/3053] (the Regulations), which derived from Council Directive (EEC) 86/653. The Regulations apply to commercial agents for the sale of goods and provide for agents to be compensated on termination of the agency.

The Court of Appeal overturned a decision of the High Court and ruled that goods" within the context of the Regulations must involve tangible property. Therefore software which was supplied to customers electronically and not on any tangible medium could not be classified as ‘goods’ within the meaning of Regulation 2(1).

[Original text of the case report supplied by BAILII gratefully acknowledged. Crown copyright: contains public sector information licensed under the Open Government Licence v3.0
Legaleze is solely responsible for the above text which is a summary only and the full report should be read.]

Comment: the lead judge in the Court of Appeal acknowledged that their analysis posed challenges and was concerned that such an approach might appear to be out-moded in light of technological advances. However, the court felt bound by the weight of authority (i.e. prior case law and text book commentary) on the issue.

Clearly the law is struggling to catch up with technological developments in this field. It is strongly arguable that the choice of medium, e.g. disk or download, should not determine the legal nature of what is essentially a supply of the same thing

23/01/2014: Agency agreement overridden by Commercial Agents Regulations

Charles Shearman (trading as Charles Shearman Agencies) v Hunter Boot Ltd
[2014] EWHC 47 (QB)  Hearing Date: 22 January 2014


In this case, the commercial agency contract, drafted by the principal, provided for the agent to be paid the lower in value of an indemnity or compensation payment. The agent argued that the exception provided for in reg 17(2) of the Regulations, 'except where the contract provides otherwise', did not apply, and that he was therefore entitled to be compensated rather than indemnified. The principal argued that the exception provided for in reg 17(2) gave the parties a contractual discretion to provide for circumstances on termination of a contract where the agent would receive an indemnity rather than compensation.


The London Mercantile Court (part of the High Court) ruled that the purpose of the Directive, which the Regulations must implement, was to protect and improve the position of commercial agents. That was particularly emphasised by reg 19 which stated: 'The parties may not derogate from regulations 17 and 18 to the detriment of the commercial agent before the agency contract expires.' Therefore clause 14 of the contract could not have the effect that the agent received an indemnity, unless compensation would be lower in which case he got compensation. The wording of clause 14 was not consistent with or permitted by the Regulation. The entire clause therefore fell away so that, if the claimant was entitled to anything, it was to compensation not an indemnity.

Distributors

Unlike an agent, a distributor acts as a principal in buying goods from the supplier and selling them to buyers. The relationship is governed by the contract. No special common law principles or statutory regulations apply.

However, if the contract is not subject to English law, or the governing law of the contract is not clear, it should be noted that some foreign jurisdictions, notably Belgium and, to a lesser extent France, do give protection to distributors.

[Page updated: 13/04/2018]

 

 

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