Many UK companies selling abroad will be unaware of the risks posed by some agent and distribution agreements. In many countries, including the EU, certain countries in the Middle East and South East Asia, an agency or distribution agreement cannot be terminated without paying compensation and protected under local law by rights that cannot be contracted out of. Simon Portman, Associate, Marks & Clerk, explains.
Businesses that don’t have the expertise, profile or resources to target any given market sector or territory often appoint agents or distributors to help them. There is a distinction between the two. In a nutshell:
There are different advantages and disadvantages to each scenario. The main consideration is that the principal has less control over a distributor but, on the other hand, is one step removed from the customers (not being the one who ultimately sells to them) so is compartmentalised from much of the liability. As with licensees of intellectual property, agents and distributors may be allocated different territories and/or markets and their rights in those may be exclusive (ie. they will be the only party with those rights) or non-exclusive (in which case others may be operating in the same space).
Both arrangements can work well but they also share a particular risk. In many countries, agents and distributors are protected under local law by rights which cannot be contracted out of. These may include the right to compensation if the agreement is terminated and the right, if the agreement is terminated without justification, to claim for wrongful termination. In such circumstances the agent or distributor could claim for damages and, if entered on the relevant country’s register at the Trade Ministry (or equivalent), block de-registration.
This would make it impossible for the principal to appoint a replacement while the dispute was unresolved and it might therefore be forced to capitulate. Agents and distributors may also benefit from minimum notice periods if the agreement is terminated and the right to revenue on sales received after termination.
Agents meeting the relevant criteria in the EU are entitled to compensation, calculated as a percentage of past commission, in the event of termination of the agreement other than for breach. This right cannot be excluded, although it can be limited by careful drafting.
In the UK this and other rights are contained in the Commercial Agents (Council Directive) Regulations 1993. Companies need to be aware of their provisions and of how they have been interpreted in recent case law. Other Member States have implemented equivalent measures and may also impose additional ones under national law. The EU introduced these measures because agents were often very reliant on principals as a source of work but had no protection under law equivalent to the rights afforded to employees.
Companies appointing agents in the EU therefore need to take legal advice before doing so, both on whether the agent in question is covered by the relevant regulations and, if it is, on how liability on termination can be capped. Inserting the necessary language to limit liability means alluding to these regulations which could mean alerting the agent to rights it may not otherwise have realised it had. Principals may therefore be tempted to keep quiet on the issue. However, most agents in the EU now know their rights and will not hesitate to invoke them if they think that they are being short-changed. Even sole traders with limited resources can rely on organisations like ACAS to assist them in a claim. Of course, that claim may be weak if the agent has under-performed. For example, if the agent has generated little sales revenue, it cannot demand significant compensation. Principals should therefore be aware of their obligations but not feel obliged to roll over without justification.
Other countries, particularly in South East Asia and the Middle East, give agents and distributors similar or even more far reaching rights. Not only may they be able to claim compensation in the event of termination without cause, they may also, as was mentioned above, be able to block their de-registration at the local Trade Ministry, making it impossible to replace them until the dispute has been resolved. As has been said, it may not be possible to exclude these rights, whatever the contract says. Making the agreement subject to English law and jurisdiction therefore may not be enough.
Furthermore, in some states, agents and distributors have different rights but the distinction between them can become blurred, so one should always look carefully at both the wording of the contract and how it is implemented locally in order to be certain of the nature of the relationship.
Notable examples of states in which such rights exist are as follows:
There are many others. In numerous other states, on the other hand, these issues don’t arise. In Hong Kong, for instance, agents have no statutory right of compensation.
Seeking local legal advice in such circumstances is therefore always advisable if one does not wish to sleepwalk into unanticipated liability and, at worst, litigation in foreign courts under a foreign legal system. Even if this doesn’t happen, agency and distribution agreements which do not take into account and minimise potential liability under local law can also be a deterrent to potential buyers or investors in a business.
In conclusion, companies may have to face up to the fact that terminating an arrangement with an agent or distributor, even an under-performing one, may be impossible without paying some sort of compensation.
A practical way of getting round this may be to appoint only non-exclusive agents or distributors. That way, under-performing agents needn’t be subjected to termination because the company will have alternatives. Of course, this solution won’t always work; in some sectors agents and distributors aren’t interested in taking on the job unless they can be guaranteed exclusivity and local law may automatically confer it anyway.
Moreover, if the principal seeks to marginalise the agent by refusing to accept or fulfil orders (thereby terminating the arrangement in fact if not on paper), it should check first that this will not put it in breach of its supply obligations under the contract. Again, legal advice should always be sought on what the best option might be and what the potential risks are, both when the contract is drafted and negotiated and when either side seeks to invoke its legal and contractual rights.
This article first appeard in the spring issue of Innovation into Success, UKSPA's journal