Agency and Distribution Agreements in Hong Kong: Legal Framework and Key Terms

Introduction

Businesses seeking to expand into or within Hong Kong frequently do so through intermediaries—either agents who act on behalf of the principal, or distributors who buy and resell goods in their own name. The choice between these arrangements has significant legal and commercial consequences, and the contracts governing them must be carefully tailored to reflect the parties' intentions and to comply with Hong Kong law.

This article provides a practical overview of the legal framework for agency and distribution agreements in Hong Kong, the key terms that should be addressed in each type of agreement, and the principal risks that principals and their counterparties should manage.

Agent vs. Distributor: The Key Distinction

The distinction between an agent and a distributor is fundamental:

• An agent acts on behalf of and in the name of the principal. When an agent enters into a contract with a customer, the contract is between the principal and the customer. The principal bears the credit risk of the customer and retains title to goods until they pass to the customer. The agent earns a commission on sales made on the principal's behalf.
• A distributor buys goods from the supplier for resale to customers in the distributor's own name. The contract of sale is between the supplier and the distributor (not the end customer). The distributor bears inventory and credit risk and earns a margin on resale. The supplier has no direct legal relationship with the distributor's customers.

This distinction has important implications for liability, tax, competition law, and the regulatory treatment of the arrangement.

Agency Agreements

Authority of the Agent

The core of an agency agreement is the grant of authority to the agent to act on the principal's behalf. The agreement should clearly specify:

• The scope of the agent's authority (e.g., to solicit orders only, or to enter into binding contracts on the principal's behalf)
• The territory and any exclusivity arrangements
• The categories of customers or products covered
• Any limits on the agent's authority (e.g., minimum price requirements or the requirement to obtain principal approval for contracts above a specified value)

Commission

The agent's remuneration is typically a commission on sales generated. The agreement should specify the rate, the basis for calculation (net revenue, gross revenue, or another metric), when commission is earned (on order, on shipment, or on payment), and how it is paid.

Duties of the Agent

Agents owe fiduciary duties to their principals, including duties of loyalty, confidentiality, and the obligation to avoid conflicts of interest. The agreement should reinforce these duties contractually and address obligations such as maintaining records, reporting to the principal, and not competing with the principal.

Liability

As the agent acts in the principal's name, the principal is liable for contracts entered into by the agent within the scope of its actual or apparent authority. The principal should ensure that the agent's authority is clearly defined and that appropriate controls are in place to prevent the agent from creating unauthorised liabilities.

Distribution Agreements

Appointment and Territory

The distribution agreement should define the territory in which the distributor is authorised to sell, whether the appointment is exclusive or non-exclusive, and what the distributor must do to maintain its appointment (e.g., meet minimum purchase or sales targets).

Minimum Purchase and Sales Obligations

Exclusive distribution agreements often include minimum purchase obligations requiring the distributor to purchase (or guarantee sales of) a minimum quantity or value of products during each contract period. Failure to meet minimums may give the principal the right to terminate exclusivity or the agreement itself.

Pricing and Restrictions

Under Hong Kong's Competition Ordinance (Cap. 619), certain restrictions in distribution agreements may constitute anti-competitive conduct. Specifically, resale price maintenance (requiring the distributor to sell at a fixed or minimum price) is presumed to have an appreciable adverse effect on competition and is generally prohibited. Maximum resale price recommendations are permitted, as are other vertical restrictions that satisfy the conditions of a block exemption or have no appreciable anti-competitive effect.

Principals and distributors should take competition law advice before including pricing or territorial restrictions in their agreements.

Intellectual Property

The distribution agreement should address the distributor's right to use the supplier's trade marks, trade names, and branding in connection with the distribution activities, the restrictions on that use, and what happens to any goodwill generated in the territory upon termination.

Product Liability

Unlike an agent, a distributor sells goods in its own name and may bear direct product liability to end customers under Hong Kong's Sale of Goods Ordinance (Cap. 26) and the Supply of Services (Implied Terms) Ordinance (Cap. 457). The distribution agreement should address indemnification between the parties for product liability claims, particularly where the defect originated with the supplier.

Termination

Both agency and distribution agreements should contain clear provisions for termination, including:

• Termination for cause (material breach, insolvency, change of control, failure to meet minimum obligations)
• Termination for convenience (with a specified notice period)
• Consequences of termination (return of materials, cessation of use of IP, stock buy-back provisions, and the treatment of outstanding orders)

Hong Kong does not have statutory protection for agents or distributors comparable to the EU Commercial Agents Directive. This means that a principal can generally terminate an agency or distribution agreement in accordance with its terms without paying goodwill compensation. However, if the agreement is silent on notice, a court may imply a reasonable notice period.

Governing Law and Dispute Resolution

Agency and distribution agreements for Hong Kong operations are typically governed by Hong Kong law. Parties should include a clear governing law clause and specify the mechanism for dispute resolution—whether litigation in the Hong Kong courts or arbitration under the HKIAC or ICC Rules.

Conclusion

Agency and distribution agreements are versatile commercial tools for expanding a business's reach in Hong Kong and the wider Asia-Pacific region. Careful drafting of these agreements—with attention to authority, remuneration, competition law, IP, liability, and termination—is essential to protect the interests of both parties and to ensure that the arrangement delivers its intended commercial objectives.

Alan Wong LLP advises businesses on the drafting and negotiation of agency and distribution agreements, as well as competition law compliance for vertical arrangements in Hong Kong. Contact us to discuss your commercial distribution requirements.