A typical way to carry out business in another country or within another geographical territory is through so-called agents or distributors. By concluding an Agency Agreement (also referred to as Representation Agreements / Contracts) or a Distribution Agreement (also referred to as Reseller Agreements / Contracts) one can easily do business in another country without self being obliged to, for example, open up a sales office in the country in question.
The difference between a Distribution Agreement and an Agency Agreement is that the distributor acts in its own name, i.e. it first purchases the products and then independently resells them on its own conditions. Thus, there is a clear economic risk connected to the distributor’s business activities, as the distributor bears the risk of getting the acquired products sold and that the customers pay for the products. For example, importers are often distributors. An agent, also referred to as a commercial representative, on the other hand acts in the name of its principal with the aim to promote the sales of the principal’s products or assist with the purchase of products for the principal. The agent obtains sales- or purchase offers for the principal and if it has been separately authorized it may also conclude binding contracts in the name of the principal. The agent is generally paid a commission based on completed deals.
In Finland, the agents’ activities are regulated by the Act on Commercial Representatives and Salesmen (417/1992; FI: Laki kauppaedustajista ja myyntimiehistä), which is based on the European Union’s Directive on self-employed commercial agents and which, among other things, includes mandatory provisions on the notice period for indefinitely valid Agency Agreements and the agent’s right to indemnity (compensation) upon the end of the representation contract. However, in Finland there is no special legislation governing solely distributors and therefore general contract law, commercial law and competition law norms are applied to Distribution Agreements.
It is strongly recommendable to draw up the Agency Agreements and the Distribution Agreements in writing.
In an Agency Agreement, the parties may, among other things, agree on the following issues:
- the area of representation and a possible exclusive right (exclusivity) to represent connected thereto;
- possible limitations to the right to represent (e.g. a certain geographical territory or a certain clientele);
- the agent’s authority;
- the commission (on what basis it is calculated, when it is paid, compensation at the end of the contract period etc.);
- minimum sales requirements (e.g. quantity of products or monetary volume) and how not meeting the requirement affects the contractual relationship;
- delivery of the products;
- intellectual property rights (e.g. usage of the principal’s trademarks in marketing);
- the agent’s possible responsibility to the principal for the customer’s non-payment;
- how possible costs (e.g. marketing costs) related to the activities shall be divided.
In a Distribution Agreement it is common to, among other things, agree on the following issues:
- the area of representation and a possible exclusive right (exclusivity) to represent connected thereto (i.a. competition legislation shall be observed);
- the distributor’s minimum purchase requirements / the seller’s minimum sales obligation;
- delivery and transfer of title of the products;
- storage of the products and guarantee and maintenance services;
- consequences in case of late delivery;
- intellectual property rights (e.g. usage of trademarks)
- how possible costs (e.g. marketing costs) related to the activities shall be divided.
In addition, when drawing up an Agency Agreement or a Distribution Agreement, it is always recommendable to, among other things, pay close attention to the following issues:
- length of the agreement (fixed term or valid indefinitely);
- payment terms;
- non-competition and duty of confidentiality;
- making amendments to the agreement and transferring the agreement;
- terminating the agreement;
- damages and possible contractual penalties;
- the law applicable to the agreement and how and where disputes related to the agreement shall be resolved.
Our firm is glad to answer your questions related to Agency Agreements and Distribution Agreements and naturally we can also assist with the preparation of proper agreements. Please do not hesitate to contact us!
