What is a Sales Agency Agreement?
Appointing an agent or distributor can be a good way for businesses to develop new markets. A written agency agreement is important in making sure the business relationship works.
Sales Agent or Distributor?
The terms 'agent' and 'distributor' tend to be used interchangeable, but there are distinct legal differences. An agent is someone who has been appointed to act on behalf of another and can assume contractual obligations on that other's behalf. An agent’s job is to provide a service to the supplier (the Principal): either by introducing new customers to the supplier or concluding contract’s on behalf of the supplier. A distributor, on the other hand, buys goods from the supplier and resells to his customer base. An agent earns commission on sales and a distributor aims to make a profit by reselling the suppliers goods.
Whether appointing an agent or a distributor it's important that the terms of the relationship are clearly set out in a legally binding agreement that both parties sign. There are, at least, two approaches to drafting an appropriate contract: a bespoke legal document drafted by a solicitor or a pre-drafted solution such as our agency agreement template. A template solution is likely to be much cheaper than a bespoke document drafted by a lawyer but, if in doubt, it's always best to seek legal advice.
What should a Sales Agency Agreement Include?
An agency agreement sets out the terms whereby one party (the Agent) sells products or services on behalf of another (the Principal) in return for commission. An agent can be appointed to sell services but the more usual case is for an agent to sell physical goods. An exclusive agent is an agent who is the only representative allowed to sell within a specific geographic area. A non-exclusive agency agreement allows the supplier to appoint other agents to sell within the same region and also for the Principal to sell directly to customers in the region. A well-drafted agency agreement will include clauses covering:
- Agent's responsibilities – The Agent is, typically, be required to: market the Principal’s goods/services, act in good faith, to protect the supplier’s intellectual property, not to sell outside the specified territory or to sell competing goods, not to give unauthorised warranties or guarantees, to keep proper sales records and supply appropriate reports, comply with relevant laws, and to pass orders to the supplier in a timely manner.
- Principal's responsibilities – Among the Principal’s responsibilities are to: support the Agent with promotion and advertising, provide up-to-date information about the products, supply the products as per the orders generated by the Agent, inform the Agent of any refused orders, provide after-sales service to customers, to act in good faith and comply with relevant laws.
- Products – The agreement needs to clearly specify which of the Principal’s products the Agent will be appointed to sell. If the Principal has a wide and/or diversified range then an Agent might be appointed to sell only part of the Principal’s product range.
- Territory – The geographic area in which the Agent is appointed to sell and whether or not the Agent is an 'exclusive' agent needs to be unambiguously specified. The agreement may be drafted such that the Agent can ‘earn’ further territory by achieving certain sales targets.
- Distribution channels – The sales channels the Agent be allowed to use should be specified, including whether or not the Agent can sell to customers in their territory via the internet.
- Commission –The commission rate (a percentage of each sale) needs to be clearly specified and the method of calculation e.g. net of sales costs such as postage and packaging. If the Principal does not accept the sale then the Agent will usually not earn any commission.
- Term – An agent will typically be appointed for a number of months or years. The Agency Agreement may provide for the right to renew the agreement if the agent reaches specified sales targets.
- Termination – Typically, an agency agreement will run for a minimum period, after which either party can terminate giving notice. Provision is usually made for either party to terminate if the other party breaches the agreement or becomes unable to carry out business (i.e. goes into liquidation or is wound up).
- Termination consequences – When the appointment ends the agreement should set out what happens to any product samples, sales materials, company manuals etc. in the Agent’s possession. Agents operating within the EU may be able to claim compensation on termination of an agency contract as set out in the Commercial Agents (Council Directive) Regulations 1993.
- Sales targets – Exclusive agents may be given sales targets that must be achieved in order to retain 'exclusive' status.
- Confidentiality – An Agent will have access to commercially sensitive information about the supplier and agency agreement should include a clause requiring the agent to treat such information as confidential.