What are the issues to be borne in mind in respect of agency and distributorship agreements at a time of low economic growth and stable – although relatively high – inflation?
This is of particular relevance after a period of high inflation (see here). To be more specific, how should the parties to agency and distributorship agreements act when the ideal relationship between principal and agent and supplier and distributor should be a symbiotic one?
Performance is key
For the principal or supplier, does the agency or distributorship agreement allow for steps to be taken to try and improve the performance of the agent or distributor? Critical to considering this issue are the terms of the agency and distributorship agreements.
If in writing, what are the terms of the agreement?
- Do they, for example, provide for the types of customers, geographical territory, and products in respect of which the agent or distributor is appointed to be varied?
- If so, what is the process to be followed in order to make the changes desired by the principal or supplier?
Following the correct procedures, in order to make the changes, is important. This was borne out in recent court judgments concerning a supply agreement (see here) and a franchise agreement (see here).
Alternatively, even if it is thought that the performance of the agent or distributor cannot be improved and that the answer lies in varying the agreement, it is important to be aware of what the provisions in the agreement mean. Acting without knowledge can result in it being claimed by the agent or distributor that there has been a serious breach of their agreement which will enable either the termination of the agreement or a claim for damages or both (see below). Simply apologising for misunderstanding the agreement will not suffice as an excuse!!
So, what are the buttons to be pushed?
The most important button is the grant or appointment clause. Often the agent or distributor is appointed on an exclusive basis. But what that means is often dependent on the other provisions found in the grant or appointment clause. For example, the appointment as exclusive distributor for customers listed in the schedule to the agreement will be dependent on the customers named or types of customers defined in the schedule.
Customers not named or defined will, by definition, fall outside of the terms of the exclusivity granted to the distributor. Or will they?
The question is asked because there can be a disconnect between the exclusive right granted to the distributor and what is reserved to the supplier. Put another way, it should not be automatically assumed that everything which is not granted to the distributor is then held by the supplier. It depends on the words used in the clause.
Each of the territory and products can be substituted for customers in terms of whether they enable the principal or supplier to act.
It is also important to consider whether the agreement sets out particular duties on the agent or distributor, which if not performed may give the principal or supplier the ability to exert pressure and possibly act without changing the terms of the agreement in question.
It can be expected that some types of duties will be common to both agency and distributorship agreements. For example, the requirement to be in contact with customers and provide reports to the principal and supplier respectively. But how specific are these reports and do they allow for more detail or, put another way, greater performance?
Other duties can be expected to be specific to either agent or distributor. This is reflective of the differences in their roles. Whilst both are intermediaries, the contract “achieved” by the agent will be between principal and customer – the agent being dependent usually on the contract being performed so that commission becomes payable. In contrast, the remuneration of the distributor comes from the difference between the price at which it buys and the price at which it sells to its customers.
As such, whilst the agent can be required to purchase samples, the distributor can be required to keep in stock certain quantities of spare parts.
Why is all this important?
Put simply, a failure to properly understand the agreement in place with agent or distributor can result in a claim that the agreement has been breached by the principal or supplier.
If the breach is serious, this can lead to the agent or distributor claiming that:
- the agreement has been terminated. In this situation, there will usually be a potential claim for damages.
In the case of the agent, this will be by reference to the specific entitlements enjoyed by commercial agents as a matter of statute law (for example, the Commercial Agents Regulations and the EU Agents Directive, see, for example, here and here).
Whilst distributors do not have the benefit of corresponding laws, it is the case that:
- They can claim damages which may be assessed in a way comparable to compensation under the Regulations or the Directive.
- The laws of specific EU member states as well as other countries outside of the EU may specifically protect distributors (see, for example, here).
Another way for the agent or distributor to proceed is to affirm the agreement which has been the subject of a serious breach. In this way, the agreement continues (subject to the breach) but the agent or distributor is entitled to damages for the loss caused by the breach!
All doom and gloom?
No.
Exercising the rights given by the provisions of an agency or distributorship agreement and the roles that apply (including in the case of a distributorship agreement, the possibility of applying a duty of good faith on the distributor) should enable principal or supplier to achieve an improvement in the performance of the agent or distributor. Alternatively, if improvement is not an option, the possibility may arise of:
- putting in place a new agency or distributorship agreement; or
- appointing an additional agent or distributor; or
- being able to terminate the agency or distributorship agreement and avoid or minimise exposure to damages.
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