Overview of commercial agreements  

Joining commercial ventures with other businesses may be an attractive proposition, especially, for example, if you or the other party want to sell your products in unfamiliar areas.

Types of agreement

There are four main types of commercial agreement and the type you choose depends on how much control you will want to retain going forward. They are:

• Agency
• Distribution
• Franchise
• Licence

Agency agreements

Agency agreements are frequently used by a business in the sale or marketing of goods and services. An agent might introduce customers or enter into contracts with customers on your behalf. The effect of an agency agreement is that the agent will act as an intermediary in a commercial transaction in return for the payment of commission. There are different types of agency agreement and before drafting begins, you should decide which one suits your needs best. They are:

• Exclusive (where only the agent represents the business and the business cannot enter into contracts with other agents).
• Sole agency (where the business may not appoint other agents but may also contact customers itself).
• Non-exclusive (where the business can appoint other agents and also seek customers directly).

The agency agreement should specify the basis for the commission – whether it should be on a fixed rate or percentage, and when it is to be paid – as well as the information has to be exchanged between you and the agent. Agreements need to be drafted in a way that ensure compliance with the regulations which transposed European Directive 86/653/EEC into UK law. Other issues they should deal with include:

• Appointment of the agent.
• The duties of you and the agent.
• What the agent can say about your products.
• Duration of the contract and provisions for termination (including compensation due on termination).
• Sales targets.
• Dispute resolution mechanisms.
• Compliance with competition laws.
• Restrictive covenants.
• Intellectual property rights.

Your duties to a commercial agent:

• To provide necessary documentation regarding the goods concerned.
• To procure for the agent the information which he/she needs to perform the agency contract.
• To tell the agent if he/she anticipates that the volume of commercial transactions will be less than the agent would normally expect.

Agent’s duties to you:

• To make adequate efforts to negotiate and complete transactions.
• To give the principal all the relevant information available to him.
• To follow the principal's instructions (provided these are reasonable).

Distribution agreements

For suppliers wishing to supply goods or services on a regular basis in a certain territory, at minimum expense and with little day-to-day supervision required, a distribution agreement may be the best option. A distribution agreement allows the supplier to lay down the terms and conditions for trading with distributors, enabling the supplier to trade with several distributors in a variety of territories on the same terms and conditions.

The distribution should include clauses covering the following issues:

• Whether the appointment is exclusive or non-exclusive.
• How long the contract will run for.
• Rights and duties of the supplier and the distributor.
• The price at which the goods will be supplied to the distributor and when and how payment should be made.
• The territory in which the distributor is allowed supply the goods or services.
• When title and risk transfers from the supplier to the distributor.
• Whether the distributor can appoint sub-distributors and if so, on what basis.
• Confidentiality clauses.
• Warranties, liabilities, indemnities and exclusions of liability.
• Responsibility for insurance.
• Shipping provisions.
• Intellectual property rights.

Licensing agreement

A licensing agreement allows the exploitation of intellectual property rights by permitting a third party to use a process or manufacture a product. It is a useful device where you have a great idea and own the rights to a product but don’t have the time/ money/ inclination to make and release it yourself. Basically, you grant a licence to someone who has the knowhow to make and market the product in a certain territory. You would usually retain ownership of the intellectual property and would receive royalties for the duration of the licence.

A licensing agreement can be made on any of the following terms:

• Exclusive – just the licensee markets/ makes/operates the product.
• Sole – the licensor will not grant any other licences but retains the right to market/ make/operate the product himself.
• Non-exclusive –licensor can grant a number of licences and may market/ make/operate the product himself.

The licensing agreement should include terms relating to the following:

• The parties to the agreement.
• Obligations of the parties (e.g. imposing a duty on the licensee to use its best endeavours to exploit the licensed product to the maximum capacity, but whilst retaining a certain quality standard).
• Intellectual property rights.
• Product liability indemnity.
• The type of licence – exclusive, sole, or non-exclusive.
• The exact territory that the agreement covers.
• The level of royalties and how/ when/ where they will be paid.
• Whether it is for manufacture, operation or sale, or a combination of the three.
• Provisions for or restrictions on sub-licensing.
• Confidentiality obligations.
• Method and jurisdiction of dispute resolution.
• Provision for termination.

Franchise Agreement

With a franchise agreement the franchisor grants the right to the franchisee to operate an outlet of the franchise business within a particular territory. They are suitable vehicle for exploiting a business format with each franchisee required to follow a set business formula drawn up by the franchisor. The franchisor will receive an initial fee from the franchisee, plus an on-going management service fees which is usually based on a percentage of annual turnover or mark-ups on supplies. The franchisor closely controls many aspects of the sale of its product, thus enabling it to protect and foster its goodwill. It will provide training and usually handles the marketing of the brand. The franchisee puts in the capital for its outlet and although benefits from the goodwill that the franchisor has built up, has limited scope to make changes to the business model.

A franchise agreement should outline the:

• Rights and responsibilities of the franchisor and franchisee.
• The territory in which the franchisee can operate.
• Duration and renewal of the franchise.
• Responsibility for and frequency of training and marketing.
• The standards the franchisee must keep up to.
• Fees payable.
• Intellectual property rights.
• Transfer of the franchise.
• Confidentiality and competition restrictions.