Agencies, distribution and franchise agreements

Sales agreements

There are several ways to market products and services. Often starting off ‘small’, the entrepreneur himself takes care of the sale of his products or the delivery of his services. When sales grow and on entry into a new (foreign) market, a choice must be made for 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 has different arrangements and agreements.

Which 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 pros and cons of the contractual arrangements 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 agencies, distribution and franchise agreements are listed below.

Agencies

An agency is 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 authorized to conclude contracts on behalf of the principal. If so, the agent does so in the name and on behalf of the principal. It may also be 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 agency. Before concluding purchase agreements or placing orders through an agent, buyers must check the agent’s authority. For this, the supplier can be contacted or the agent can be asked for proof of the representative authority. The agent receives a commission or fee for his work, which often depends on the sales he has generated for the principal. The manner of remuneration is in principle free, but agency is an agreement regulated by law, whereby the position of the commercial agent is protected. In the EU Member States, the European Directive on the self-employed commercial agent applies. Articles 7:428 to 445 of the Dutch Civil Code pertain to commercial agency agreements in the Netherlands. These rules fall under mandatory law and the parties cannot deviate from them in the agreement to the detriment of the agent. Deviating provisions are “null and void” or “voidable”. For example, the principal must ensure the commercial agent can perform his duties properly. To this end, he must provide the commercial agent with sufficient documentation about the products and services. The principal must also 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 fee owed for the past month. Certain requirements also apply to the termination of the agency agreement. For example, the parties are subject to a minimum notice period, depending on the contract period.

Goodwill or clientele compensation at the end of the agency

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 rationale behind this is that it would not be reasonable for the commercial agent to no longer receive any income for customers who continue to order after the agreement has been terminated. Subject to exceptions, the commercial agent is entitled to compensation of no more than the average annual fee received during the five years prior to the termination of the agreement. Parties who consider entering into business with a commercial agent need to understand that a ‘lump-sum payment’ is due at the end of the relationship. The goodwill compensation can be high, especially if the agent has been successful. Content of agency agreement The 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 is active (exclusively or otherwise);
4. Rights and obligations of the parties, such as representative authority;
5. The manner of remuneration and time of payment;
6. The manner of termination of the agreement and the relevant terms;
7. The consequences of termination, such as clientele compensation and non-competition;
8. Applicable law and competent court.

Distribution

Distribution involves purchasing and selling by the distributor at his own risk. Effectively, it is about 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. For that reason, conditions are also stipulated about how the sale takes place, such as the prescribed use of the names of the brands and products and the reporting of infringement by third parties. To this end, the producer or supplier makes arrangements with the distributor and these are documented in a distribution agreement. This lays down the conditions under which the distributor may purchase and sell the products. It may concern exclusive or non-exclusive distribution. The distributor is a reseller who operates 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, which the law assigns to the commercial agent, do not apply to the distributor. Distribution is not a legally defined agreement and the parties are free to make arrangements within the limits of the law. Certain rules are known from case law with regard to terminating a distribution agreement. The termination of a distribution agreement is often the reason for legal action. Because the law has no specific rules for distribution agreements, case law plays an important role. Unilateral termination of a distribution agreement is generally not possible with a fixed-term agreement, unless agreed otherwise. An open-ended agreement can be terminated unilaterally with due observance of 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 vary from a few months to a year. If the contractual notice periods are unreasonable under certain circumstances, the court may stipulate 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 recruiting staff, which the supplier was aware of, while the agreement is terminated shortly afterwards. Content of distribution agreement The 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 (a non-solicitation or non-competition clause, if applicable);
4. Sales targets to be met by the distributor;
5. Marketing agreements and intellectual property rights (licences);
6. Rights and obligations of the parties;
7. Payment terms and delivery conditions;
8. The consequences of termination (what to do with residual stock);
9. Applicable law and competent court.

Franchising

Franchising is a form of collaboration between two independent companies, often operating 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 long-term partnership, whereby the franchiser provides certain know-how and/or products that are marketed by the franchisee. The franchiser supports and facilitates the franchisee in operating the franchise formula. For the franchiser, a uniform image towards the market is important. 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) are not legally defined as such but legislation is again very important. Examples are lease agreements (when renting a property to a franchisee) and, for example, trademark law, because the use of the trademark of the franchise formula is subject to strict rules. Certain rules do 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’. So there is no legislation, but if the content of the arrangements complies with the code, this will be considered duly agreed by a court. Duty of care A franchiser has no obligation to provide a (future) franchisee with sales or profit forecasts. If it is requested though and the franchiser provides such information, then that information must be correct. It can be tempting to persuade future franchisees to enter into a franchise agreement with rosy information. Although this has not been laid down by law, it follows from case law that a franchiser may have a duty of care to assist the franchisee with advice and support if the suggested sales are not achieved because the forecasts were not sound. A franchiser would do well to exercise restraint when raising expectations. Manual If it comes to an agreement, the formula used will be an important part of the relationship. How the formula is used is incorporated into a manual. The manual provides a detailed description of the rules and conditions that bind the franchisee. If he does not comply with them, it may be a reason for early termination due to breach of contract. Despite the often strict conditions the franchisee must follow, the parties remain independent entrepreneurs. In the case of a hard franchise, little or no participation or deviation is possible. In the case of a soft franchise, the franchisee has a lot more freedom. Another element that often occurs in the case of a franchise is business succession. Agency, on the other hand, is often personal and distribution agreements do not last as long. Some franchisees pass on from generation to generation and this is exactly why business succession or business transfers are provided for. Given the collaboration element, the content of the franchise agreement is different in nature compared to agency and distribution.

Content of franchise agreement

The 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 (a non-solicitation or non-competition clause, if applicable);
6. Strict marketing conditions that the franchisee must meet;
7. Monitoring powers of the franchiser;
8. Rights and obligations of the parties;
9. Payment terms and delivery conditions;
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 opened, checked, terminated or dissolved, the lawyers of Fruytier Lawyers in Business can advise you on this.

Competition

Regardless of the choice for a particular sales channel and the relevant arrangements, the parties must always take into account competition law. Making agreements about prices or the division of the market may be contrary to competition law. In that respect, there is a clear limit to what can and cannot be agreed to. The coordination of mutual behaviour is also contrary to competition law.

General

Regardless of the method of sale chosen, the applicable laws and regulations in the 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. Fruytier Lawyers in Business can help you with the choice of your sales channel or with affiliated agreements and advise on related laws and regulations.