What are common causes of agency and distributor disputes?
Common causes of agency and distributor disputes often seen include:
- Misrepresentation: Issues may surface if an agent falsely represents your business, influencing customers to enter contracts. One of the most prevalent issues arises from misrepresentation. This occurs when an agent provides false statements to a customer, influencing their decision to enter into a contract with your business. If the agent was acting within their authority, this could lead to claims against your company.
- Diversion of Business Opportunities: Another significant cause of disputes is the diversion of business opportunities. Agents may redirect potential business to themselves or another entity, breaching their fiduciary duty—a legal obligation to act in the best interest of your business. The law takes such breaches seriously due to the trust placed in agents.
- Misuse of Intellectual Property Rights: The misuse of intellectual property rights also presents a considerable challenge. As businesses strive to grow through their agents or distributors, the improper use of intellectual property in the course of selling products or services can lead to disputes. This underscores the importance of having well-drafted intellectual property clauses in your contracts to safeguard your rights.
- Termination Rights and Compensation: Disagreements over termination rights frequently emerge, especially if contracts lack clear provisions for fixed periods or automatic termination, or if reasonable notice of termination is not provided. Similarly, disputes about the amount of compensation upon termination often occur, highlighting the necessity for clear contractual terms regarding compensation.
- Remuneration Calculation: Conflicts can arise from opaque remuneration calculations. If the basis for remuneration is not clearly defined at the outset of the business relationship, it can lead to disagreements.
- Performance Assessment: Regular assessments of performance, based on clear and understandable criteria, are essential to maintaining a positive relationship between your business and its agents or distributors. Without these assessments, misunderstandings about expectations can cause relationships to sour.
- Acting Outside Agreed Geographic Areas: Operating beyond the agreed geographic area can damage your business’s reputation and cause friction with other agents who are properly representing your company within their designated areas.
How can you prevent disputes within your agency and distributor relationships?
To prevent or minimise agency and distributor disputes:
- Conduct Thorough Due Diligence: Conducting thorough due diligence on potential partners is crucial. This process, which can be outsourced to an independent body, should include credit and reference checks, reputational assessment, and an evaluation of business registrations, especially when engaging with overseas agents.
- Ensure English Law and Jurisdiction for Overseas Partners: Choosing your local law and jurisdiction for contracts with overseas agents or distributors simplifies the resolution process if disputes arise.
- Maintain Regular Communication: Treat the relationship as a partnership, supporting their sales efforts and conducting quarterly reviews. Maintaining open communication and viewing the relationship as a partnership, supported by regular reviews, can also prevent misunderstandings.
How can you shape your contracts to help to avoid disputes?
- Jurisdiction and Governing Law: Be clear on the applicable laws and jurisdiction.
- Regulations on Termination Compensation: Understand the Commercial Agents Regulations 1993 (as amended) that might entitle agents to compensation upon termination.
- Performance-Related Terms: Include clear performance expectations and consequences for non-compliance.
- Exclusivity: Define geographical exclusivity to manage territories effectively.
- Termination Clauses: Clear terms for ending the relationship can prevent future complications.
- Criminal Liability and Bribery: Be aware of the liability for bribery by agents seeking business advantages.
- Reputational Risks: Contract clauses should address professional conduct to protect your company’s reputation.
Our subject expert: Fayola-Maria Jack
Fayola-Maria Jack is a multi-award winning deal shaping and dispute resolution expert. She has shaped successful resolutions and out of court settlements for governments, multinationals, military, banks, and venture backed startups.
