The benefits of using agents or distributors are well known – not least in respect of agents who the principal can avoid paying employment tax (employer’s NIC), says Stephen Sidkin. But it is also necessary to recognise that agents – and to some extent distributors – do have special legal rights, and that these need to be limited …
There are three broad ways of minimising claims by agents and distributors – by agreement, by law, and by practice. Whether dealing with an agency agreement or a distributorship agreement, it is important to specify what is expected of the agent or distributor so as to enable the principal or supplier to terminate the agreement for good reason and so avoid a claim.
When dealing with an overseas agent or distributor, a failure to state that the agreement is governed by English law, with the English courts determining dispute between the parties, is borderline negligence. It amounts to a failure to take advantage of forcing the agent or distributor to contend with a foreign law and play away from home in the English courts with attendant difficulties of language and practice, let alone costs.
In respect of agents, it is important to take account of the protections afforded to them by the Commercial Agents Regulation. These can be summarised as being: uncapped compensation or a capped indemnity (if an election for an indemnity is made by the parties); an entitlement to post-termination commission, unless this entitlement has been expressively excluded by the agency agreement; and a claim for commission on unfulfilled orders where the non-fulfilment is due to the action of the principal.
Corresponding limitations on the exposure to an agent do not arise so readily in respect of distributorship agreements, except where the distributor is outside the UK and the local law protects distributors.
Limiting a claim by an agent or distributor in practice means knowing about their resources. The results of a Companies House search may reveal how likely it is that the terminated agent or distributor can see litigation through to trial. There is also a wealth of other public information available in the UK and many other countries which should be obtained.
In one case, a Trade Mark Registry search revealed that the agent had registered a trade mark which was clearly intended to allow the agent to compete against the principal. That agent soon became a terminated agent!
Sometimes, however, agreements can be too well drafted. In the case of Shearman versus Hunter Boot, the clause at the centre of the court hearing provided, in brief, that on termination the agent could receive an indemnity under the regulations, unless compensation would result in a lower amount being paid to the terminated agent.
“In one case, a Trade Mark Registry search revealed that the agent had registered a trade mark which was clearly intended to allow the agent to compete against the principal. That agent soon became a terminated agent!”
So far, so good – except that the regulations make clear that the parties have to choose indemnity if they want it, and that the parties cannot before an agency agreement has terminated provide for the agent to receive less than he would otherwise receive on termination. This had been spelt out in decisions of the European Court and the Scottish courts.
In another case the distributorship agreement provided five different events of termination which could be relied on by the supplier – all well and good, except that the drafting was such as to result in the likelihood that a court would interpret the clause against the supplier!
Equally scary is a recent decision of the European Court that sometimes a distributorship agreement can exist almost by stealth. As a result, a supplier of goods may find that: it has an unexpected distributor; and the distributor’s local law protects the distributor on termination.
There is a need to be clear when supplying goods as to whether or not the reseller is acting as a distributor. To leave it to chance is likely to be as painful as sitting aside a fence!
Stephen Sidkin is a partner at corporate law firm Fox Williams LLP. He established and leads Fox Williams’ agentlaw team – this article is a summary of the issues discussed at last year’s annual agentlaw seminar. This article was published in the January issue of Furniture News magazine.
