The trade contracts trio: agency, distribution and franchise

In commercial practice, various legal methods exist for companies bringing products and/or services on to the market. In the Netherlands, the following main methods can be distinguished: agency, distribution and franchising.

Agency, distribution, and franchise agreements have in common that they are allcontinuing performance agreements. A continuing performance agreement is a legal relationship between parties where the parties have commited to perform one or more services for a fixed or indefinite period of time. These performances must be continuous, recurring or successive.

In general, agency, distribution and franchise are not always properly kept apart. To determine which rights and obligations apply to your (intended) business relationship, it is important that you are familiar with the differences between the agency agreement, the distribution agreement and the franchise agreement. We therefore briefly set out these agreements for you.

The agency agreement
The agency agreement is an agreement regulated by law. Article 7:428 paragraph 1 of the Dutch Civil Code gives the following definition of the agency agreement: "The agency agreement is an agreement where one party, the principal, instructs the other party, the commercial agent, and the latter undertakes, for a definite or indefinite period of time and against remuneration, to mediate in the formation of contracts, and to conclude them, if necessary, in the name of and on behalf of the principal without being subordinate to it."

From the definition of the agency contract, it is clear that agency has a number of characteristics. First, the commercial agent performs its activities independently - not as a subordinate - and for a fee. The commercial agent mediates and sometimes represents the principal. Furthermore, the commercial agent performs work on behalf of and at the risk of the principal. At this point, the agency contract differs from the distribution contract to be discussed below. The commercial agent does not enter into agreements himself, but fulfils an intermediary role and is entitled to commission if, through his efforts, a contract is concluded between the principal and the customer.

Note (!): to protect the commercial agent's position, the law contains a number of provisions that are mandatory law and cannot be deviated from by contract. These provisions are based on the 'European Directive on the coordination of the laws of the Member States relating to self-employed commercial agents' and apply throughout the EU. These mandatory provisions in particular address the following: the agent’s liability, the principal's duty of care, commission, termination, dissolution, goodwill compensation on termination of the agency contract, competition clause and limitation period.

The distribution agreement
Unlike the agency agreement, the distribution agreement is not regulated by law and is difficult to delineate. In legal practice, the distribution agreement is defined as "a continuing performance agreement under which one party, the supplier, commits to supplying certain products or services to its counterparty, the distributor, with a view to reselling those products or services to customers of that distributor for the distributor's account and risk and in the distributor's name".

By a distribution agreement, the supplier commits to supply certain products or services to the distributor, who then (re)sells these products or services to customers for his own account and in his own name. This is the main difference between distribution and agency agreements. In an agency agreement, the commercial agent mediates and the contracts are ultimately concluded on behalf of and usually also in the name of the principal. Another important difference between the distribution agreement and the agency agreement is that with a distribution agreement, there is no legal obligation to pay a goodwill or customer fee at the end of the agreement (contractually, this can be agreed).

The distribution agreement may exist under different titles such as: resale, exclusive purchasing, dealer, and concession agreements and can be classified into the following types:

- Exclusive distribution agreements: the supplier commits to supply products to only one distributor in one particular sales territory or to a particular group of customers. For example, suppliers often appoint exclusive distributors for several countries in the EU.
- Exclusive purchasing agreements: the distributor commits to source the contract products exclusively from one or more particular suppliers (e.g. petrol stations, beer purchase contracts).
- Selective distribution agreements: only certain selected vendors that meet certain requirements can supply the products to end-users. Selective distribution is widely used by manufacturers of luxury brands. Think of products such as: watches, clothing and cosmetics. This allows the manufacturer to set requirements for the distributors who want to sell the products, such as the appearance of the outlets and the provision of service.

It is important to test agreements that may restrict competition, such as exclusive territories or competition clauses, on compliance with EU and Dutch competition law. Article 101 of the Treaty on the Functioning of the European Union prohibits trade agreements between EU countries that may prevent, restrict or distort competition. If the supplier's market share does not exceed 30% of the market on which he sells the contract goods or services and the distributor's market share does not exceed 30% of the relevant market on which he purchases the contract goods or services, the EU Vertical Agreements Block Exemption may be used. This block exemption allows certain anti-competitive agreements under conditions. For example, a supplier may grant exclusive sales territories to up to six distributors within the EU and prohibit active sales within the territory assigned to another distributor. The restriction of passive sales is never allowed.

The franchise agreement
The concept of franchising originated in the US where it was already common in the late 19th century and took a leap in the 1950s with chains such as McDonald's, Kentucky Fried Chicken and Holiday Inn. In the Netherlands, franchising has also proved successful and since the Franchise Act came into force on 1 January 2021, the franchise agreement is included in Book 7 Dutch Civil Code. Article 7:911 Dutch Civil Code defines the franchise agreement as "the agreement where the franchisor grants a franchisee the right and imposes the obligation, all for a fee, to operate a franchise formula in the manner designated by the franchisor for the manufacture or sale of goods or the provision of services".

The franchise agreement has many forms, but has certain common elements. It is an agreement where the franchisor (franchisor) grants to the franchisee (franchisee), for consideration, the right to operate a business within the franchisor's network for the purpose of selling specific products in the franchisee's name and on the franchisee's behalf. Unlike a distributor, the franchisee has the right and obligation to use the franchisor's trade name or trademark and other intellectual property rights, know-how and methods of operation. Franchise differs from agency in that the commercial agent mediates (whether for several principals or not), while the franchisee operates the products of usually one franchisor for his own account and risk.

Note (!): Since 1 January 2023, articles 7:920 and 7:921 Dutch Civil Code also apply to franchise agreements concluded before 1 January 2021. The mentioned articles are mandatory which means that, in principle, these articles cannot be deviated from to the disadvantage of the franchisee. Article 7:920 Dutch Civil Code provides that a goodwill arrangement and a post-contractual non-competition clause must be included in the franchise agreement. Article 7:921 Dutch Civil Code regulates the franchisees' consent right in cases where the franchisors want to change the franchise formula and/or introduce a derived formula and franchisees are (or risk being) financially disadvantaged as a result.

If you have any questions about agency, distribution and franchise agreements, we will be happy to discuss them with you. With regard to the (consequences of) termination of continuing performance agreements - and in particular agency and distribution agreements - we would like to refer to our article on this matter by clicking on this link.