MEMBER FIRM OF
The law of agency and distribution in Hong Kong is governed by common law principles of equity and contract. These principles govern the rights and liabilities of a principal and an agent and the relationship between them.
Contracting parties are generally free to enter into contractual arrangements to regulate and agree the terms of their relationship, such as commissions, termination, choice of law and jurisdiction, etc.
In this respect, only mercantile agents 1 are afforded statutory rights and protection as provided under the Factors Ordinance (Cap 48).
Other legislation that indirectly refers to agency principles includes the:
Similarly in the PRC, there is no legislation dedicated to the protection and rights of commercial agents and distributors, but there are statutory provisions relating to agency under the General Principles of the Civil Law of the People’s Republic of China (PRC Civil Law) 2 , and the Contract Law of the People’s Republic of China (PRC Contract Law) 3 .
In each jurisdiction, statutory provisions are generally binding and cannot be contracted out of.
Agents v Distributors
Agents contract and interact with third parties in the name of and/or on behalf of their Principal. Title to the Principal’s goods does not pass to the agents and they are remunerated by way of commission on sales.
It is important to describe clearly the relationship between the Principal and Agent under an agency agreement, in particular the ambit of the Agent’s legal authority to act on the Principal’s behalf. Third parties may be entitled to rely on an Agent’s ostensible authority and hold the Principal liable for the improper conduct of the Agent. 4
Consent is important in determining the authority vested in an Agent and a Principal should be wary of what can be construed and interpreted as consent by an Agent and third parties. Consent can be implied by the Principal’s conduct with the Agent 5 , particularly if it appears the Principal has ratified the actions taken on its behalf. Therefore this issue must be carefully structured within the relevant agency agreement.
Distributors contract and interact with third parties in their own right. They purchase the goods from their Principal and title passes to the Distributor who is remunerated by way of a mark-up on sales. The Distributor in this situation will not be considered as an agent but as a purchaser of the Principal’s goods.
Agency Agreements – Commercial considerations
Before entering into an agency agreement, it is worthwhile for the Principal to consider whether the appointment of an Agent would be the best option for expanding sales in a particular geographical region.
The Principal should then consider whether the agency agreement shall provide sole, exclusive or simple authority to the Agent as their representative in that particular territory.
A sole agency ensures to the Agent exclusivity save that the Principal may also enter the territory and engage in the market to sell the goods itself. An exclusive agency ensures complete exclusivity to the Agent with sole right to sell the goods in the territory, excluding even the Principal itself. Simple agency simply provides the Agent the right to sell the goods in the territory alongside other Agents and the Principal.
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Distribution Agreements – Commercial considerations
Before engaging a Distributor, the Principal should be certain that it is willing to give up control of the sale of its goods in that particular territory up to the point of the restrictions imposed on the Distributor under the distribution agreement.
The principal restriction would be whether the Distributor has exclusive, sole, non-exclusive or selective powers in the resale of the Principal’s goods.
A sole distribution allows the Distributor exclusivity in the sale of the goods save that the Principal may also sell in the territory as well. An exclusive distribution would provide the Distributor with sole power to sell the goods in that particular territory, excluding even the Principal itself. A non-exclusive distribution simply affords the Distributor the right to sell the goods in the territory alongside other distributors and the Principal itself while selective distribution allows a limited number of approved Distributors to resell the goods based on them meeting defined minimum criteria.
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Further considerations: choice of law and jurisdiction
In Hong Kong, if your agency/distribution agreement is silent as to the choice of law and jurisdiction, the courts will generally consider factors such as the place of performance of the agreement and the parties’ respective domiciles in order to determine whether it has jurisdiction and, if so, what is the applicable law.
In the PRC, parties have the right to agree to a different jurisdiction and forum for agency/distribution agreements. There will always be a risk that PRC courts will assume jurisdiction against the contract provisions. Appropriate advice from a PRC lawyer should be sought before concluding any contractual arrangements.
