What is an Agent?

We often find that clients are confused about what constitutes an agent. Essentially, an agent is an intermediary involved in the making of a contract between one party, known as the principal and that principal's customer.

Under English law, an agent in the most extensive sense has the power to bind his principal to contracts with third parties. The word "agent" may also be used in a more limited sense. For example, a marketing agent may have authority to promote the sale of the principal's products, and perhaps to make representations about the characteristics of the products, but no authority to conclude binding contracts

Clients also sometimes use the term agent when in fact they are describing a distributor. The distinguishing feature between the two is the position, or status, of the intermediary in relation to the principal/supplier and in relation to the end customer.

An agent acts on behalf of his principal, and creates a contract between the principal and the end customer. An agent is usually not a party to the contract between the principal and the end customer. The end customers are the customers of the principal, not the agent. Unlike an agent, a distributor buys goods in its own right from the supplier. The distributor then sells the goods to end customers. The end customers are customers of the distributor, not the supplier.

It is important to be clear about which arrangement is being used and also be aware that it is possible for a party to be both an agent and distributor of different products under the same agreement. For example, a party could be selling computer products as a distributor but could also be acting as an agent in respect of software relating to such products.

From a legal perspective, the key disadvantage of an agency arrangement is the right to lump sums payments on the termination of an agency agreement under the Commercial Agent (Council Directive) Regulations 1993 (the ‘Regulations’). The Regulations impose various duties on both parties but it is the rights and duties on termination that we find cause the most problems for clients, particularly as many are not aware of such rights and duties until after the agency agreement has been terminated.

Under the Regulations, an agent has the right to "compensation" or an "indemnity" on termination of the agency agreement in certain circumstances. The aim of this is to protect the agent, who is treated as the weaker party under the Regulations. The Regulations make no provision for compensation or indemnity for the principal if the agent terminates. However, damages for breach of contract may be available in the usual way.

If you are a principal looking to terminate an agency agreement, it is therefore important to consider what your obligations are under the Regulations. Similarly, if you are an agent, you need to make sure that you are going to receive what you are entitled to under the Regulations.

If you would like further advice on agency and distribution agreements, including rights to payments under the Regulations on the termination of an agency agreement, please contact our business team