Key points
- An agent must account to the principal for all money and goods received and cannot make secret profits (Sections 211 to 218, Contract Act).
- A distributor buys and resells; an agent sells on the principal's behalf. The label in the contract does not decide which one it is.
- Termination must follow the notice period in the contract; an agency for a fixed term or coupled with an interest cannot be revoked at will.
Agent or distributor?
Courts look at substance. If the intermediary buys goods, takes title and bears credit risk, it is a distributor and the relationship is one of sale. If it sells in the principal's name, remits collections and earns commission, it is an agent, and the fiduciary duties of agency apply. Many Indian arrangements mix the two, and the first task in a dispute is to characterise the relationship correctly.
Recovering collections and stock
An agent who has collected money from customers holds it for the principal and must account. A suit for accounts and recovery, or a summary suit where the amount is admitted in reconciliations, is the usual route, often with an application to restrain the agent from dealing with the stock. Criminal complaints for criminal breach of trust are sometimes filed but courts discourage using them as recovery tools.
Commission claims
Agents claim commission on orders procured, including orders concluded after termination if the contract so provides. The contract's definition of when commission is earned, on order, invoice or realisation, decides these claims.
Termination
Section 205 makes a principal liable in damages for revoking an agency before the agreed term without sufficient cause. Where the agreement is for an indefinite period, reasonable notice is required. Distributors often claim compensation for investment made in the territory; Indian law does not imply such compensation, but the contract or conduct may support it.
Forum
Most of these contracts contain arbitration clauses; where they do not, the dispute is a commercial dispute under the Commercial Courts Act with mandatory pre-institution mediation.
Frequently asked questions
Can I terminate a distributor for poor performance without notice?
Only if the contract allows termination for cause and the performance shortfall meets the contractual threshold. Otherwise the notice period applies and premature termination attracts damages.
Is a non-compete on a former agent enforceable?
A restraint after termination is void under Section 27 of the Contract Act, subject to narrow exceptions. Restraints during the term, and protection of confidential information, are enforceable.
Related practice area: Commercial Litigation & Arbitration
This article is for general information and does not constitute legal advice. Laws, rules and limitation periods change and depend on the facts; please take advice on your own situation before acting. Reading this article does not create a lawyer-client relationship with Akhtars Legalitarian.