Agencies, distribution and franchise agreements

There are various ways to market products and services. Often, businesses start small, with the entrepreneur themselves selling their products or providing services. As sales grow and when entering a new (foreign) market, a choice must be made for the right sales channels. The correct classification of sales channels is very important in determining which legal framework applies to the sales agreement.

Sales agreements

Sales and distribution channels come in all shapes and sizes. Commonly used agreements for the qualification of sales channels are agency agreements, distribution agreements and franchise agreements. Each sales channel has different agreements and arrangements for sales.

What legal form is appropriate for sales?

Not only the nature of the business, the type of product or service, the type of customer and the (online) sales opportunities determine the choice and classification of a sales channel, but the legal form in which the sale takes place is also an important factor. Consider also arranging useful clauses, such as a relationship clause or non-competition clause and a possible penalty clause.

The advantages and disadvantages of the contractual agreements with sellers are of great importance. Once the parties have made a choice and the contract has been concluded, they cannot simply part ways. To make the differences more transparent, the characteristics and differences between an agency agreement, a distribution agreement and a franchise agreement are listed below.

The agency agreement

An agency is an agreement between a commercial agent and the principal. The agency agreement specifies what the agent may and may not do, the conditions under which he may approach buyers, and whether he is authorised to conclude contracts on behalf of the principal. If so, the agent does so in the name and on behalf of the principal. It is also possible that the commercial agent is not authorised, or only to a limited extent, to act on behalf of the principal.

Simply passing on customers without the agent’s involvement is also a form of agency. It is important for customers to check the agent’s authority before concluding purchase agreements or placing orders through an agent. To do so, they can contact the supplier or ask the agent for proof of their authority to represent the principal.

Protection of the commercial agent

For their work, commercial agents receive a commission, which often depends on the turnover they have generated for the principal. In principle, the method of remuneration is free, but agency is a contract regulated by law, whereby the position of the commercial agent is protected. In the EU Member States, the European Directive on self-employed commercial agents applies. Articles 7:428 (up to and including 7:445) of the Civil Code apply to commercial agency agreements in the Netherlands. These rules are “mandatory” and the parties cannot deviate from them in the agreement to the detriment of the agent. Any deviating provisions are “void” or “voidable”.

For example, the principal must ensure that the commercial agent can perform his work properly. To this end, he must provide the commercial agent with sufficient documentation about the products and services. In addition, the principal must keep the agent informed of agreements or orders and warn him if there are problems or disappointing results. At the end of each month, the agent is entitled to a written statement of the commission due for the past month.

Certain requirements also apply to the termination of the agency agreement. For example, there is a minimum notice period depending on the duration of the contract.

Goodwill or customer compensation at the end of the agency

Upon termination of the agency agreement, the agent is entitled to so-called goodwill or customer compensation. He receives remuneration for the financial benefit that the principal continues to enjoy from the customers that the agent has brought in.

The idea behind this is that it is not reasonable for the commercial agent to receive no income whatsoever after termination of the agreement for customers who continue to place orders. Barring exceptions, the commercial agent is entitled to compensation of up to the average annual commission he received during the five years prior to the termination of the agreement.

It is important for parties considering working with a commercial agent to realise that a “severance payment” is due at the end of the relationship. Especially if the agent has been successful, the goodwill compensation can be high.

Am I entitled to compensation upon termination of an agency agreement?

Yes, in many cases. According to the Civil Code, upon termination of the agency agreement, a commercial agent is entitled to a so-called customer compensation if he has brought in new customers or significantly expanded the customer base. This compensation is intended to compensate for the future benefits that the principal retains after the agent’s departure. In addition, the agent may be entitled to damages in the event of irregular termination. However, the right to compensation lapses if the agent himself terminates the agreement without good reason or seriously fails in his duties. A commercial solicitor will assess whether the conditions have been met and help to calculate the amount of compensation.

Contents of an agency agreement

1. The parties and the nature and duration of the agreement

2. A description of the products or services

3. The territory in which the agent operates (whether exclusively or not)

4. Obligations and rights of the parties, such as power of representation

5. The method of remuneration and time of payment

6. The method of termination of the agreement and the notice periods for this

7. The consequences of termination, such as customer compensation and non-competition

8. The applicable law and the competent court

The distribution agreement

Distribution involves purchasing and selling by and at the distributor’s own risk. It is, in fact, a matter of resale or re-sale. Distribution agreements usually concern the sale of products. In many cases, the products are “protected” by an intellectual property right, such as copyright or a trademark. For this reason, conditions are also imposed on the manner in which the sale takes place, such as the prescribed use of the names of the brands and products and the reporting of infringements by third parties.

The manufacturer or supplier makes agreements with the distributor to this effect, which are laid down in a distribution agreement. This agreement sets out the conditions under which the distributor may purchase and sell the products. Distribution may be exclusive or non-exclusive.

Independent reseller

The distributor is a reseller who works independently and (in principle) sets his own prices. The distributor therefore has a different relationship with the manufacturer than the commercial agent has with his principal.

The protective legal provisions that the law grants to commercial agents do not apply to distributors. Distribution is not a legally designated agreement and, within the limits of the law, the parties are free to make agreements. However, case law does provide certain rules for terminating a distribution agreement. The termination of a distribution agreement is often the reason for legal proceedings. Because the legislation does not contain specific rules for distribution agreements, case law plays an important role.

Notice period for distribution agreements

Unilateral termination of a distribution agreement is generally not possible in the case of a fixed-term agreement, unless otherwise agreed. An agreement entered into for an indefinite period may be terminated unilaterally, subject to a reasonable notice period. The reasonableness of this notice period depends on the specific facts and circumstances of the case; the longer the relationship, the longer the notice period.

In addition to the duration of the distribution agreement, the investments made by the distributor are also important, as are the degree of dependence on the distributor, the reason for termination, and the consequences of termination. Notice periods vary from several months to a year.

If the contractual notice periods are unreasonable under the circumstances, the court may determine that a longer period should be applied. The court may also award the distributor compensation for investments made with a view to the continuation of the agreement. Examples include the costs of an advertising campaign or the recruitment of staff, of which the supplier was aware, while the agreement was terminated shortly afterwards.

What happens if a distribution agreement is terminated prematurely?

Premature termination of a distribution agreement can have legal and commercial consequences, especially if no clear agreements have been made. Because Dutch law does not have specific rules for distribution, the content of the agreement or the rules laid down in the law on agreements are decisive. If there is no termination clause or reasonable notice period, the termination may be unlawful and give rise to a right to compensation. A commercial solicitor will assess whether the termination is legally valid and help to limit or obtain compensation for damages.

Contents of a distribution agreement

1. The parties and the nature and duration of the agreement

2. A description of the products or services

3. The distribution area and the degree of exclusivity (possibly a relationship clause or non-competition clause)

4. Turnover targets to be met by the distributor

5. Marketing agreements and intellectual property rights (licences)

6. Obligations and rights of the parties

7. Terms of payment and terms of delivery

8. The consequences of termination (what to do with remaining stock)

9. Applicable law and competent court

The franchise agreement

Franchising is a form of cooperation between two independent companies, often based on specific franchise formulas. Franchising is widely used in the retail sector (e.g. supermarkets) and in the service industry. The franchisee and the franchisor enter into a long-term partnership, whereby the franchisor provides certain know-how and/or products that are marketed by the franchisee. The terms and conditions and obligations of the partnership are laid down in a franchise agreement.

The franchisor supports and facilitates the franchisee in the operation of the franchise formula. For the franchisor, a uniform image towards the market is important. The product range, the interior design, the company clothing and the advertising are the same everywhere, and the customer recognises the products and the company.

Dutch Franchise Code

Franchise agreements (like distribution agreements) are not legally binding as such. However, legislation is also very important here. Examples include rental agreements (when renting premises to a franchisee) and, for example, trademark law, because the use of the franchise formula’s trademark is subject to strict rules.

Certain rules do apply to franchising, however. These rules are derived from the European Code of Ethics for Franchising. Model contracts have been drawn up on this basis and there is also a Dutch Franchise Code. These are “self-regulatory rules of conduct”. They are not legislation, but if the content of the agreements complies with the code, a court will consider them to be validly agreed.

What is the importance of the Franchise Code in a franchise agreement?

The Franchise Code sets out what constitutes reasonable and balanced agreements between franchisor and franchisee. Since the introduction of the Franchise Act in 2021, various parts of this code have been enshrined in law. The code offers franchisees better protection against unilateral decisions by the franchisor and promotes a more equal partnership. These principles must be taken into account in a franchise agreement in order to comply with the law and prevent conflicts.

Duty of care

A franchisor is not obliged to provide a (future) franchisee with turnover or profit forecasts. If such information is requested and the franchisor provides it, it must be accurate. It can be tempting to persuade future franchisees to enter into a franchise agreement by providing them with rosy information.

Although this is not laid down in law, case law shows that a franchisor may have a duty of care to provide franchisees with advice and support if the projected turnover is not achieved because the forecasts were incorrect. A franchisor would be well advised to exercise restraint when raising expectations.

Manual

If the parties reach an agreement, the formula used will be an important part of the relationship. The way in which the formula is used is set out in a manual. This manual describes in detail the rules and conditions to which the franchisee is bound. Failure to comply with these rules and conditions may be grounds for early termination of the franchise agreement due to breach of contract.

Despite the often strict conditions to which the franchisee must adhere, the parties remain independent entrepreneurs. In the case of “hard franchising”, there is little or no room for input or deviation. In the case of “soft franchising”, on the other hand, there is much more leeway for the franchisee.

Another element that often occurs in franchising is business succession. Agency agreements are often personal, and distribution agreements are shorter in duration. Some franchisees continue from generation to generation, which is precisely why business succession or business transfer is provided for. Given the element of cooperation, the content of the franchise agreement is different in nature from that of agency and distribution agreements.

Contents of a franchise agreement

1. The parties and the nature and duration of the agreement

2. A detailed description of the formula + manual

3. Conditions for selling products or services

4. Independence of the franchisee

5. The distribution area and the degree of exclusivity (possibly a relationship clause or non-competition clause)

6. Strict marketing conditions that the distributor must comply with

7. Control powers of the franchisor

8. Obligations and rights of the parties

9. Payment terms and delivery terms

10. The consequences of termination, business succession and transfer

11. The applicable law and the competent court or a dispute resolution/arbitration clause

Qualification of sales channels and competition law

Regardless of the choice of a particular sales channel and the agreements made in this regard, the parties must always take competition law into account. Making agreements about prices or market distribution may be in violation of competition law. In this respect, there is a clear limit to what may and may not be agreed in sales agreements. Coordinating mutual conduct is also in violation of competition law.

What is the difference between an agency agreement, a distribution agreement and a franchise agreement?

These three agreements all regulate cooperation between entrepreneurs, but differ greatly in form and legal position. In an agency agreement, the agent acts on behalf of and for the account of the principal. The agent mediates in the sale of products or services and receives commission for this. A distributor, on the other hand, purchases products themselves and sells them in their own name and at their own risk. The profit here comes from reselling. In a franchise agreement, the franchisee takes over a complete business concept, including brand, working methods and support, in exchange for a fee. The legal protection and obligations differ depending on the type of agreement, and making the right choice prevents conflicts and misunderstandings.

What protection do these agreements offer?

The protection lies in the agreements that clearly define the risks and responsibilities. Agents have legal protection: they are entitled to commission, notice periods apply and often a goodwill payment is due at the end of the collaboration. Franchisees are protected by the Franchise Act, which requires clear information in advance, rights of consent in the event of changes and reasonable notice periods. Distributors have less legal protection. In this case, it is the agreement itself that offers protection—for example, through agreements on exclusivity, notice periods or stock obligations. In all cases, a good contract prevents imbalances and provides legal certainty in the event of conflicts or termination.

Have your sales agreements checked

Regardless of the chosen method of sale, the applicable laws and regulations in a broad sense must always be taken into account when trading products. Product liability, privacy legislation, regulations for online sales (distance selling), consumer purchases, etc. are by definition mandatory in nature.

The solicitors at Fruytier Lawyers in Business can help you choose and qualify your sales channels, as well as with related agreements, and advise you on the laws and regulations involved. For more information, please contact one of our corporate law solicitors.