TRW & Co · Commercial contracts
Agency or Distribution Agreement? The Commercial Agents Regulations
Agents sell in your name for commission; distributors buy and resell at their own risk. That choice decides your exit costs and your competition law exposure. A commercial agency agreement UK law governs gives a goods agent minimum notice and a mandatory right to compensation or indemnity on termination, while distribution agreements avoid that but limit control over resale prices.
Key pointCompensation is the default for agents under the 1993 Regulations and has no statutory cap; principals who want a predictable, capped exit cost must opt into the indemnity in the contract, and no clause can remove the agent's entitlement altogether.
At a glance
Goods agents protected
The 1993 Regulations cover self-employed intermediaries with continuing authority to negotiate sales or purchases of goods; services agents are generally outside them.
Minimum notice periods
Notice must be at least one month in year one, two in year two and three from year three onwards; shorter agreed periods are ineffective.
Compensation by default
Unless the contract chooses an indemnity, the agent is compensated; an indemnity is capped at one year's average annual remuneration.
One-year claim window
An agent loses its entitlement unless it notifies the principal within one year after termination that it intends to pursue the claim.
Distributor price rules
Under VABEO, fixed or minimum resale prices are hardcore restrictions; the Order provides a safe harbour up to 30% market share until 1 June 2028.
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The short answer: agent or distributor?
An agent finds customers and negotiates (and sometimes concludes) sales on your behalf, in your name, for a commission. A distributor buys your products and resells them on its own account, at its own risk, for a margin. If you appoint a sales agent for goods in Great Britain, a commercial agency agreement UK law governs will be subject to the Commercial Agents (Council Directive) Regulations 1993, which give the agent minimum notice periods and a mandatory right to compensation or an indemnity when the relationship ends.
A distributor has no equivalent statutory protection, but distribution agreements face tighter competition law controls. A supplier cannot fix a distributor's resale prices, and restrictions on where and to whom the distributor sells must fit within the vertical agreements block exemption.
The choice therefore turns on control, risk and exit cost. Agency gives the principal control over prices and customers but creates a potentially significant payment on termination. Distribution transfers stock and credit risk to the distributor and avoids the agency regulations, but gives up control over resale prices.
The legal framework
The Commercial Agents Regulations
The Commercial Agents (Council Directive) Regulations 1993 implement an EU directive and continue to apply in Great Britain after Brexit. Northern Ireland has its own parallel regulations. They govern relations between commercial agents and their principals in respect of the agents' activities in Great Britain.
A "commercial agent" is a self-employed intermediary with continuing authority to negotiate the sale or purchase of goods on behalf of a principal, or to negotiate and conclude such transactions on the principal's behalf and in its name. Three points follow. The regulations cover goods, not services, so a software-as-a-service or consultancy sales agent is usually outside them. They require continuing authority, so a one-off introducer is outside them. And agents whose activities are secondary, under tests set out in the Schedule, are excluded.
Competition law
Distribution agreements are vertical agreements under Chapter I of the Competition Act 1998. The Vertical Agreements Block Exemption Order 2022 (VABEO) provides a safe harbour for most vertical agreements where the supplier's and the buyer's market shares each do not exceed 30%, provided the agreement contains no hardcore restrictions. The Order ceases to have effect on 1 June 2028. The CMA's VABEO guidance explains how it applies, including to agency.
The general law of contract
Both agency and distribution agreements are long-term relational contracts. In Yam Seng Pte Ltd v International Trade Corporation Ltd [2013] EWHC 111 (QB), a distribution case, the High Court implied a duty of good faith into such a relationship. Later cases show that this depends on the specific contract, but it is a reminder that conduct during the relationship matters, not just the written terms.
| Issue | Commercial agent | Distributor |
|---|---|---|
| Title to goods | Never owns the goods | Buys and resells |
| Contracts with customers | Principal contracts with customers | Distributor contracts with customers |
| Income | Commission | Resale margin |
| Stock and credit risk | Principal | Distributor |
| Resale pricing | Principal sets prices | Distributor sets prices; supplier may only recommend or set a maximum |
| Statutory termination rights | Minimum notice and compensation or indemnity under the 1993 Regulations (goods agents) | None by statute; contract terms and common law apply |
| Competition law | Genuine agency generally outside Chapter I | Subject to Chapter I and VABEO |
Termination: notice, compensation and indemnity
Termination is where a commercial agency agreement UK law governs differs most from an ordinary commercial contract. The agent's rights on exit are statutory and largely mandatory.
Minimum notice periods
Under regulation 15, an agency contract for an indefinite period can be ended by notice of at least one month in the first year, two months in the second year commenced, and three months in the third year commenced and later years. The parties cannot agree shorter periods. Unless otherwise agreed, the notice period must end at the end of a calendar month. A fixed-term contract that continues after expiry is converted into an indefinite one.
Compensation or indemnity
Under regulation 17, the agent is entitled on termination to either compensation or an indemnity. Compensation is the default unless the contract provides for an indemnity.
- Indemnity applies where the agent has brought new customers or significantly increased business with existing customers and the principal continues to benefit, and payment is equitable. It is capped at one year's remuneration, calculated from the agent's average annual remuneration over the preceding five years (or the shorter period of the contract).
- Compensation is for the damage the agent suffers from the termination. There is no statutory cap. In Lonsdale v Howard & Hallam Ltd, the House of Lords held that it should reflect the value of the agency business at the date of termination, broadly what a hypothetical purchaser would pay for the right to receive the future commission stream.
Because the indemnity is capped and its calculation is more predictable, many principals opt into it when they draft a commercial agency agreement UK agents are asked to sign. But a capped indemnity is not always cheaper: for a recently built, fast-growing agency, compensation may be lower.
When the right is lost
The agent loses the right if it does not notify the principal within one year after termination that it intends to pursue the claim. Under regulation 18, no payment is due where the principal terminated for the agent's default justifying immediate termination, where the agent terminated (unless justified by circumstances attributable to the principal or by the agent's age, infirmity or illness), or where the agent assigned the agency with the principal's agreement. The parties cannot derogate from these rights to the agent's detriment before the contract expires.
Post-termination restrictions
A restraint of trade clause binding an agent is valid only if it is in writing, relates to the agent's territory or customer group and the kind of goods covered, and lasts no more than two years after termination. It must also satisfy the common law restraint of trade rules.
The termination payment is the hidden cost of agency. Before appointing an agent for goods, model the likely indemnity or compensation on exit, decide which regime the contract will adopt, and build that cost into the commercial case. Agents, for their part, should diarise the one-year notification deadline the day the agency ends.
Drafting a commercial agency agreement UK courts will uphold
A well-drafted commercial agency agreement UK principals and agents can rely on addresses the following points expressly.
- Appointment and territory: whether the agency is exclusive or non-exclusive, the territory or customer group, and whether the principal can sell directly.
- Authority: whether the agent may only negotiate, or may also conclude contracts in the principal's name, and any approval process for orders.
- Commission: the rate, the transactions it applies to (including repeat orders and direct sales in the territory), when it becomes due, and the agent's right to information to verify it. The regulations contain default rules on when commission is earned and paid that protect the agent.
- Duties: the agent's duty to act dutifully and in good faith and the principal's duty to provide information and notify acceptance or refusal of transactions both arise under the regulations and cannot be excluded.
- Termination: notice periods at least equal to the statutory minimum, grounds for immediate termination, and whether an indemnity or compensation applies.
- Restraint of trade: a post-termination restriction within the two-year limit and limited to the agent's territory and goods.
- Governing law and disputes: including how claims under the regulations will be resolved.
Distribution agreements need a different set of terms: purchase price and minimum purchase obligations, exclusivity and territory, permitted sales restrictions within VABEO, marketing obligations, trade mark use, product liability and recall, and stock buy-back on termination. Our franchising and distribution solicitors draft both.
Competition law limits on distributors
Restrictions that are harmless in a genuine agency can be unlawful in distribution. The key VABEO rules are:
- Resale price maintenance: a supplier may recommend a resale price or set a maximum, but must not fix or impose a minimum resale price, including through pressure or incentives. This is a hardcore restriction.
- Territorial and customer restrictions: exclusive distribution can be protected by restricting active sales into territories reserved to the supplier or allocated to other exclusive distributors, but restrictions on passive (unsolicited) sales are generally hardcore.
- Non-compete obligations: obligations not to sell competing goods are excluded from the safe harbour if they last more than five years or are indefinite, including through automatic renewal, with an exception linked to premises owned or leased by the supplier.
- Post-term non-competes: generally excluded, unless limited to competing goods, to the premises from which the buyer operated, to protecting know-how transferred by the supplier, and to one year after termination.
A genuine agency agreement, where the agent bears no significant commercial or financial risk in relation to the contracts it negotiates, generally falls outside Chapter I altogether, so the principal can set prices. If the agent takes on significant risks, such as holding stock or bearing customer credit risk, the arrangement may be treated as distribution for competition purposes. See our competition law compliance guide and our competition law team.
Choosing and setting up your route to market
- Define the commercial goal. Decide how much control you need over prices, customers and branding, and how much stock and credit risk you are willing to carry.
- Check the regulatory position. Confirm whether the intermediary will sell goods with continuing authority, which would bring the 1993 Regulations into play, and assess market shares for VABEO.
- Model exit costs. Estimate an indemnity or compensation for agents, and stock buy-back or notice costs for distributors.
- Draft the agreement. Use a form tailored to agency or distribution, not a hybrid that blurs the line.
- Operate consistently. Make sure day-to-day practice matches the contract, especially on pricing, stock and who contracts with customers.
- Plan termination. Serve correct notice, document grounds for any immediate termination, and assess the agent's likely claim before deciding.
An illustrative scenario
This scenario is illustrative only; the parties are generic and the facts invented.
An overseas manufacturer of industrial equipment appoints a self-employed sales agent to cover the north of England. The agreement is silent on termination payments. After several years of steady growth, the manufacturer gives three months' notice so that it can sell directly.
Although the document was never labelled as such, it is in substance a commercial agency agreement UK law protects: the agent negotiates sales of goods with continuing authority, so the regulations apply. With no indemnity clause, the agent is entitled to compensation by default, valued by reference to the agency business it has lost. If the agent notifies its claim within a year, the manufacturer faces a payment it had not budgeted for.
Had the manufacturer chosen an indemnity, its exposure would have been capped at a year's average remuneration, and if it had appointed a distributor instead, the regulations would not have applied at all, though competition law would have limited its control over resale prices.
Risks and common mistakes
Calling an agent a "consultant" or "distributor"
The label in the contract does not decide whether a document is a commercial agency agreement UK courts will treat as within the regulations. A court looks at the substance: whether the intermediary has continuing authority to negotiate sales of goods on the principal's behalf. Calling an agent a consultant or introducer will not avoid compensation if the relationship is in substance a commercial agency. The safer course is to accept the regime and manage the cost through the contract.
Trying to contract out of compensation
The parties cannot derogate from the compensation and indemnity provisions to the agent's detriment before the contract expires. Clauses excluding any termination payment, or making the agent waive its claim in advance, are ineffective. A settlement after termination can resolve the claim, but it should be documented carefully and reflect a realistic valuation.
Fixing a distributor's resale prices
Suppliers sometimes insist that distributors do not discount below a set price, or threaten to cut supply to discounters. Fixed or minimum resale prices are hardcore restrictions under VABEO and a serious infringement of competition law, exposing the supplier to investigation and substantial fines. Recommended or maximum prices are permitted, as long as they are genuinely not enforced as minimums.
Hybrid arrangements
Arrangements where an "agent" also holds stock, or a "distributor" sells at prices set by the supplier, cause problems under both regimes. They may attract agency compensation while also failing the competition law test for genuine agency. Decide which model you are using and make the contract and day-to-day practice consistent with it.
Cross-border distribution and Bangladesh
The 1993 Regulations apply to agents' activities in Great Britain. Agents operating in EU member states are protected by local laws implementing the same directive, which may apply even if the contract chooses English law. Agents in other countries, including the Gulf and South Asia, are governed by local law, which may include registration requirements or protections for local agents and distributors. Check the position before appointing.
For manufacturers in Bangladesh selling into the UK, appointing a UK distributor transfers import and credit risk, while a UK agent gives more control but triggers the regulations. For UK suppliers entering Bangladesh, local counsel should review registration, import and foreign exchange rules; TRW & Co's headquarters in Dhaka can advise alongside our London office. See our UK–Bangladesh trade and finance practice.
Checklist before you appoint
- Decide whether you need control over prices and customers (agency) or want to transfer risk (distribution).
- Check whether the 1993 Regulations will apply: goods, continuing authority, self-employed intermediary.
- Choose indemnity or compensation, and model the likely exit cost.
- Set notice periods at least equal to the statutory minimum.
- For distributors, check market shares and remove hardcore restrictions such as minimum resale prices.
- Keep non-compete obligations within VABEO limits and agent restraints within two years.
- Make day-to-day operations match the contract model.
If you are appointing, terminating or in dispute with an agent or distributor, our commercial contracts and contract disputes teams can help. Contact our London office at info@trw.co. If you are reviewing a commercial agency agreement UK courts may later have to interpret, it is worth taking advice before the relationship ends rather than after.
Frequently asked questions
01What is the difference between an agent and a distributor?
An agent negotiates, and sometimes concludes, sales on behalf of and in the name of its principal, never owns the goods, and earns commission. The principal contracts directly with customers and bears stock and credit risk. A distributor buys products from the supplier and resells them on its own account, setting its own prices and bearing the risk of unsold stock and bad debts. The legal consequences differ: agents of goods are protected by the Commercial Agents Regulations, while distributors are subject to stricter competition law limits.
02Do the Commercial Agents Regulations apply to services?
Generally no. The 1993 Regulations define a commercial agent by reference to the sale or purchase of goods. An agent selling services, such as software subscriptions, consultancy or advertising, is usually outside them, although a contract can choose to apply similar terms. Mixed arrangements covering goods and services need careful analysis. Software supplied in some forms has been treated as goods by the courts, so technology businesses should take advice rather than assuming they are outside the regime.
03How much compensation is a commercial agent entitled to?
There is no fixed formula or cap for compensation. Following Lonsdale v Howard & Hallam, the courts value it by reference to the value of the agency business at termination, broadly what a hypothetical purchaser would pay for the agency and its future commission income. Factors include the agency's profitability, its prospects and the market conditions at the time. If the contract opts for an indemnity instead, the payment is capped at one year's average annual remuneration over the preceding five years.
04Can I terminate an agent without paying compensation?
Only in limited circumstances. No payment is due if you terminate because of the agent's default that would justify immediate termination, if the agent terminates without justification attributable to you or its age, infirmity or illness, or if the agent assigns the agency with your agreement. The right is also lost if the agent fails to notify its claim within one year. You cannot contract out of the entitlement in advance.
05Can I stop my distributor selling below a certain price?
No. Fixing a minimum resale price, or imposing one through pressure or incentives, is a hardcore restriction under the Vertical Agreements Block Exemption Order and a serious breach of competition law. You may recommend a resale price or set a maximum price, provided it does not operate in practice as a fixed or minimum price. If you need control over end prices, a genuine agency model may be more appropriate.
06Does a choice of foreign law avoid the Commercial Agents Regulations?
Not necessarily. The regulations apply to agents' activities in Great Britain, and courts have treated the protection as mandatory in many situations. Equally, agents operating in EU member states are usually protected by local laws implementing the same directive, whatever law the contract chooses. Choosing a governing law is still important, but it should not be relied on to remove agents' termination rights.
Sources and official materials
- Commercial Agents (Council Directive) Regulations 1993 — Rights of commercial agents in Great Britain, including regulations 15 to 20
- Commercial Agents (Council Directive) Regulations (Northern Ireland) 1993 — Parallel regulations for Northern Ireland
- Competition Act 1998 (Vertical Agreements Block Exemption) Order 2022 — Safe harbour, hardcore and excluded restrictions for vertical agreements
- CMA guidance on the Vertical Agreements Block Exemption Order — How VABEO applies, including agency and distribution
- Competition Act 1998 — Chapter I prohibition on anti-competitive agreements
- Yam Seng Pte Ltd v International Trade Corporation Ltd [2013] EWHC 111 (QB) — Good faith in a long-term distribution relationship
General information only, current as at 21 October 2026. It is not legal advice and does not create a solicitor–client relationship. It reflects the law of England and Wales unless stated otherwise; Scotland and Northern Ireland have separate legal systems, and the law changes frequently. Check current official sources and take advice on the facts of your matter.