Agency agreements and Distributions agreements

On the basis that all businesses want to increase their sales and profits, it is fairly common for a business to appoint an agent or a distributor.

Although agency and distribution are often labels used interchangeably, they entail fundamentally different legal concepts with separate legal rules and consequences. In general terms:

  • An agency agreement is an agreement where one party (the agent) has the authority to create a contract with a third party on behalf of a principal, often for a percentage commission on the sale price. Sometimes, however, the agent will act merely in an introductory capacity i.e. no authority to conclude or negotiate contracts. Agents may be appointed on an exclusive or non-exclusive basis.
  • A distribution agreement is an agreement where one party (the distributor) will act on their own account and buy and resell goods from a supplier. The money a distributor makes will be from the profits on the resell price rather than a commission.

It is important to appreciate that quite apart from any written agency agreement or distribution agreement, the law will imply certain rights and obligations. For example:

  • Under an agency agreement there is an implied fiduciary duty of an agent not to place himself in a position of conflict with his principal;
  • A party may be deemed a commercial agent under the Commercial Agency Regulations 1993, and if so will have a right to "compensation" or an "indemnity" on termination of the agency agreement in certain circumstances. Under the regulations, the compensation alternative is the default rule.
  • Under a distribution agreement, there are complicated competition rules to consider.

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