Estimated reading time: 6 minutes
Whether the initiative comes from the principal or supplier, or from the agent or distributor itself, the commercial logic for appointing sub-agents or sub-distributors is usually clear enough: scale, coverage, growth. What is less obvious is how legal risk can accumulate once part of the relationship is pushed downstream.
Such risks can surface at the point of appointment. More often they crystallise when performance disappoints, strategy changes, or relationships unwind.
Agency arrangements and the pressure of scale
In an agency relationship, the commercial objective is meaningful coverage. An agent will typically seek an extensive territory, wide product range, or specific customer groups – or any two from three if not the whole three. But as the relationship continues the principal may start to question whether the agent can genuinely service what has been granted.
Sub-agency is one way to make scale workable. By appointing a sub-agent to cover a defined scope, the agent can improve reach and responsiveness and protect its position. Properly structured, this can benefit everyone: improved performance for the principal, better coverage for customers, and a commercial opportunity for the sub-agent.
Authority to appoint: a threshold issue
But an agent does not automatically have the right to appoint a sub-agent.
Under English law, agency is generally treated as a personal relationship. Unless the agency agreement provides otherwise, the agent is expected to perform its obligations itself. There is no general implied authority to delegate.
Authority to appoint a sub-agent therefore needs to be set out in the agency agreement, possibly with limits or conditions, such as principal’s consent or restrictions by territory or function. In contrast implied authority is difficult to establish and will usually only arise where delegation is genuinely necessary or customary in the relevant trade. Even then, the courts are cautious, particularly where personal skill or discretion is central to the appointment.
As a result the appointment of an unauthorised sub-agency can amount to a breach of contract and justify termination.
Even where the agent is authorised to appoint a sub-agent it can be expected that the agent will be fully responsible to the principal for everything the sub-agent does. The sub-agent, meanwhile, acquires no rights against the principal.
Where risk concentrates for sub-agents
For the sub-agent, legal risk tends to concentrate at sub-agent level.
The agent will usually seek to mirror its own obligations to the principal in the sub-agency agreement. That helps, but it does not eliminate risk. Decisions taken upstream can still unravel the commercial assumptions on which the sub-agency was built. The sub-agent has no contract with the principal. Any deterioration in the principal–agent relationship is likely to cascade downwards. Termination, commission reductions, or changes to customer allocation can all undermine the sub-agent’s business overnight, regardless of performance.
Limited statutory protection
In Light v TY Europe Ltd the Court of Appeal confirmed that a sub-agent has no direct claim against the principal under the Commercial Agents Regulations. That includes compensation or indemnity on termination of the agency agreement between principal and agent, statutory notice, and post-termination commission.
The Court accepted that a sub-agent might be entitled to a share of any statutory compensation or indemnity recovered by the head agent. In practice, that offers limited comfort. Any recovery depends entirely on the agent. Commercial realities often mean it does not.
A cautious shift in approach
At an EU level the position may be edging forward. In NY v Herios (Case C-593/21), the European Court decided that goodwill generated by a sub-agent can be taken into account when assessing a head agent’s entitlement to indemnity under Article 17 of the EU Agents Directive. The Court also accepted that it may be equitable for a sub-agent to receive a share of that indemnity, depending on the circumstances.
However, post-Brexit, Herios is at best persuasive authority so far as the English courts are concerned.
Strategic risks at termination
Risk peaks where a principal wishes to terminate the head agent but retain the sub-agent. In this situation the issue will turn on whether there is a post-termination restriction in the sub-agency agreement.
If so, the sub-agent will need to obtain the consent of the agent that the sub-agent may act for the principal. But consent may be commercially unrealistic, particularly where the head agent sees the sub-agent as a potential replacement.
As a result a sub-agent can easily be caught in the crossfire between principal and agent.
Sub-distribution: a different risk profile
Sub-distribution raises a different set of issues. Even where the supplier is not directly involved, downstream appointments can materially alter the legal risk profile of the supply arrangement.
Characterisation and control
Suppliers typically appoint distributors for specific reasons depending on the particular market. At the top of the list is the value to the supplier of relinquishing some control as the distributor will be responsible for a particular market which commercially does not justify direct involvement by the supplier – whether this is addressed as capability, infrastructure, credit strength, or market knowledge. But sub-distribution can dilute that rationale.
Authority and breach
As for agents, so for distributors – does the agreement authorise the appointment of a sub-distributor? English courts have consistently treated unauthorised delegation of core obligations as a breach, even where performance standards are maintained.
Competition and pricing risk
Competition law risk also increases once restrictions are pushed downstream. Territorial, customer, or online sales restrictions that are lawful at one level may become unlawful at another. The approach in Consten and Grundig and Pierre Fabre underlines the focus on protecting intra-brand competition.
Pricing risk also increases. Recommended prices can harden into fixed prices as they move downstream. The Competition & Markets Authority and its peers in the EU and elsewhere around the world will look at economic reality, not contractual distance. The reasoning in CMA v Ping Europe Ltd illustrates how indirect pressure can be enough to establish infringement.
IP, termination and insolvency
Sub-distribution can also complicate brand control.
Unauthorised sub-licensing of trade marks and marketing materials can dilute brand value and make enforcement harder.
When the distribution agreement ends, a sub-distributor typically loses its route to market overnight. It may be performing well, investing in stock, marketing the brand, and servicing customers, but legally it sits downstream of the distributor. Once the distribution agreement ends, it is often left with inventory, staff, and customer relationships but no right to continue selling.
Further insolvency at distributor level can leave goods and customers tied up downstream, exposing suppliers to unexpected loss.
Final thought
Sub-agency and sub-distribution are effective scaling tools. But authority, control, and risk allocation need to be addressed expressly and early. Left unchecked, downstream arrangements may blur legal characterisation, create regulatory exposure, weaken brand protection, and turn termination into a multi-party problem.
