Home » Expertise » Corporate law » Agency agreements, distribution agreements and franchise agreements

Agency agreements, distribution agreements and franchise agreements

Agreements when selling

There are various ways to market products and services. The initial set-up is often small-scale and the entrepreneur himself takes care of the sale of his products or the delivery of his services. When sales are growing and when entering a new (foreign) market, you have to choose the right sales channels. Sales and outlet channels come in all shapes and sizes, but commonly used forms are agencies, distribution and franchises. Each sales channel is characterised by different arrangements and agreements.

What legal form?

Not only the nature of the company, the type of product or service, the type of customer and the (online) sales possibilities determine the choice of a sales channel, but the legal form in which the sale is made is an important factor as well.  Remember also to arrange useful clauses such as a customer-protection or non-compete clause and a possible penalty clause. The advantages and disadvantages of contractual agreements with sellers are of great importance. Once the parties have made a choice and the contract has been concluded, there is always the risk of a dispute. To make the differences more transparent, the characteristics and differences of agency agreements, distribution agreements and franchise agreements are set out below.

Agency

An agency involves an agreement between a commercial agent and the principal. The agency agreement states what the agent can and cannot do and under what conditions he can approach buyers and also 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 agent has no or limited authority to act on behalf of the principal. The mere passing on of customers without interference from the agent is also a form of an agency relationship. Before concluding purchase agreements or placing orders through an agent, buyers need to check how their authority is arranged. To this end, the buyer can contact the supplier, or the agent himself can be asked to provide proof of his power of representation. The agent receives a commission or fee for his work, which often depends on the sales he has generated for the principal. The method of compensation is, in principle, free but an agency agreement is a contract regulated by law, in which the position of the commercial agent is protected. The European Directive on self-employed commercial agents applies in the EU member states. Articles 7:428 to 445 of the Dutch Civil Code pertain to commercial agency agreements in the Netherlands. These rules are “mandatory law” and the parties cannot deviate from these in the agreement to the disadvantage of the agent. This is because deviating provisions are “void” or “voidable”. For example, the principal must ensure that the commercial agent can properly perform his duties. To this end, he must provide the commercial agent with sufficient documentation about his products and services. In addition, the principal must keep the agent informed of agreements or orders and warn in the event of 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. Furthermore, certain requirements apply to the termination of the agency agreement. For example, a minimum notice period depending on the contract duration.

Goodwill or clientele compensation at the end of the agency agreement

Upon termination of the agency agreement, the agent is entitled to so-called goodwill or clientele compensation. The agent is compensated for the financial benefit that the principal continues to enjoy from the customers introduced by the agent. The thought behind this is that it is not reasonable that the agent would no longer receive any income for customers who continue to place orders after the termination of the agreement. Bar exceptions, the commercial agent is entitled to compensation of up to the average annual commission received during the five years prior to the termination of the agreement. It is important for parties who are considering doing business with a commercial agent to realise that a ‘redemption sum’ is due at the end of the relationship. Especially if the agent has been successful, the goodwill payment can be high. Content of the agency agreement Topics covered in the agreement include:

  1. The parties and the nature and term of the agreement;
  2. A description of products or services;
  3. The territory in which the agent operates (exclusively or not);
  4. Obligations and rights of the parties, such as the power of representation;
  5. The method of compensation and time of payment;
  6. The manner of termination of the agreement and the applicable terms to do so;
  7. The consequences of termination, such as clientele compensation and the non-compete clause;
  8. Applicable law and competent court.

Distribution

Distribution involves purchasing and selling by the distributor at his own risk. This is, in fact, a form of resale. Distribution agreements usually involve the sale of products. In many cases, the products are ‘protected’ by an intellectual property right, such as copyright or a trademark. This is also why conditions are imposed on how the sale takes place, such as the prescribed use of the names of the brands and products and the reporting of third-party infringements. To this end, the producer or supplier makes agreements with the distributor, which are recorded in a distribution agreement. This specifies the conditions under which the distributor may purchase and sell the products. A distinction is made between exclusive or non-exclusive distribution. The distributor is a reseller who works independently and who (in principle) sets his own prices. The distributor therefore has a different relationship with the producer than that of the commercial agent with his principal (see above). The protective legal provisions the law assigns to the commercial agent do not apply to the distributor. This is because distribution is not a legally distinguished agreement and the parties are free to make agreements within the limits of the law. Certain rules are known from case law for cancelling a distribution agreement. This is because the termination of a distribution agreement is often the reason for legal action. Since the law does not contain specific rules for distribution agreements, case law plays an important role. Unilateral cancellation of a distribution agreement is generally not possible in the event of a fixed-term agreement, unless otherwise agreed. An agreement entered into for an indefinite period of time can 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 term of the distribution agreement, any investments made by the distributor are also important, as is the degree of dependence of the distributor, the reason for termination and the consequences of the termination. Notice periods can vary from a few months to a year. If under certain circumstances the contractual notice periods are unreasonable, the court may determine that a longer period must be applied. The court may also award damages to the distributor as compensation for investments made that presupposed the continuation of the agreement. Consider, for example, the costs of an advertising campaign or the recruitment of personnel, which the supplier was aware of when the agreement was terminated shortly afterwards. Content of the distribution agreement Topics covered in the agreement include:

  1. The parties and the nature and term of the agreement;
  2. A description of products or services;
  3. The distribution area and the degree of exclusivity (possibly a customer-protection or non-compete clause);
  4. Sales targets that the distributor must meet;
  5. Marketing agreements and intellectual property rights (licences);
  6. Obligations and rights of the parties;
  7. Terms of payment and delivery;
  8. The consequences of termination (what to do with any residual stock);
  9. Applicable law and competent court.

Franchise

Franchising is a form of cooperation between two independent companies, often working according to certain franchise formulas. Franchising is widely used in retail (such as supermarkets) and in services. The franchisee and the franchiser enter into a partnership for a longer period, in which the franchiser makes certain know-how and/or products available that are marketed by the franchisee. The franchiser supports and facilitates the franchisee in the exploitation of the franchise formula. A uniform appearance towards the market is important for the franchiser. The range, set-up, staff clothing and advertising are the same everywhere and the customer recognizes the products and the company. Franchise agreements (like distribution agreements) are not laid down by law. Yet here too, legislation is of great importance. Examples are rental agreements (when letting a property to a franchisee) and, for example, trademark law, as use of the brand and franchise formula is bound by strict rules. Certain rules do still apply to franchising. These stem from the European Code of Practice on Franchising. Model contracts are drawn up on this basis and there is also a Dutch Franchise Code. This concerns ‘self-regulating rules of conduct’. Not legislation as such, therefore, but if the content of the agreements complies with the code, it will be considered legally valid by the courts. Duty of care A franchiser is under no obligation to provide a (future) franchisee with sales or profit forecasts. If such a request is made and the franchiser provides such information, the information given must be correct. It can be tempting to persuade future franchisees to enter into a franchise agreement by painting a rosy picture. Although this has not been laid down by law, it follows from case law that a franchiser may have a duty of care to provide the franchisee with advice and support when the expected sales figures are not achieved on account of incorrect forecasts. A franchiser is advised to exercise restraint in raising expectations. Manual If it comes to an agreement, the formula applied will be an important part of the relationship. How the formula is used is set out in a manual. The manual provides a detailed description of the rules and conditions that bind the franchisee. If he fails to comply with them, it may be a reason for early termination due to breach of contract. Despite the often strict conditions that the franchisee must adhere to, the parties each remain independent entrepreneurs. Incidentally, in the case of a ‘hard franchise’, little or no participation or deviation is possible. A ‘soft franchise’, on the other hand, offers much more freedom for the franchisee. Another element that often occurs in a franchise is business succession. Agency agreements are often personal and distribution agreements do not last as long. Some franchises are passed on from generation to generation and it is precisely for that reason that the agreement provides for a business succession or business transfer. Given the element of cooperation, the content of the franchise agreement is different in nature from agency agreements and distribution agreements.

Content of the franchise agreement

Topics covered in the agreement include:

  1. The parties and the nature and term of the agreement;
  2. An extensive description of the formula + manual;
  3. Conditions for being able to sell products or services;
  4. Independence of the franchisee;
  5. The distribution area and the degree of exclusivity (possibly a customer-protection or non-compete clause);
  6. Strict marketing conditions that the franchisee must meet;
  7. Franchiser’s control of powers;
  8. Obligations and rights of the parties;
  9. Terms of payment and delivery;
  10. The consequences of termination, business succession and transfer;
  11. Applicable law and competent court or a dispute settlement procedure / arbitration.

If you want to have a franchise agreement drawn up, checked, terminated or dissolved, Fruytier Lawyers in Business can advise you on this.

Competition

Regardless of the choice of a particular sales channel and the agreements about it, the parties must always take into account competition law. Making agreements about prices or division of the market may be contrary to competition law. In that respect, there is a clear limit as to what can and cannot be agreed upon. Coordination of mutual conduct is also contrary to competition law.

General

Regardless of the chosen method of sale, when trading products, the applicable laws and regulations must always be taken into account in a broad sense. Product liability, privacy legislation, regulations for online sales (distance selling), consumer purchases, etc. are all mandatory by definition. Fruytier Lawyers in Business can assist you in choosing your sales channel, but also with affiliated agreements and advise you on the relevant laws and regulations.

    « Back to corporate law
    Send us a message

    If you have questions, please use the form below. We will contact you as soon as possible.