Agency and Distributorship Guide for Businesses
A number of businesses that operate across a wide geographical area may find that utilising agents or distributors is cost-effective. Owing to a number of queries recently, we thought it might be useful to highlight the circumstances in which a business may want to engage the services of an agent or a distributor, and more importantly what the risks potentially are.
It is however probably appropriate to highlight the difference between an agent and a distributor from the outset. An agent is an intermediary appointed by a business to negotiate and possibly conclude contracts with customers on its behalf. An agent is paid commission on the sales they make, usually on a percentage basis. A distributor on the other hand is essentially an independent contractor. In a distributorship arrangement, a business sells its products to a distributor, who then sells the products on to their customer, adding a margin to cover its own costs and profit.
In appointing a selling agent or distributor, a business is effectively sub-contracting its selling function. The business may want to do this to take advantage of an agent’s or distributor’s local knowledge and established trade connections; or to perhaps save the cost of having to establish its own sales operation.
Whatever the reason or motivation for the appointment, always be clear about which arrangement is being used, as it is possible for a party to be both agent and distributor of different products under the same agreements (for example, a distributor in selling products but an agent for software relating to those products). This can become very tricky for the unwary.
There a number of situations where an agency arrangement may be preferable to a distributorship:
- If the business wants to retain greater control of the terms of sale of its products, in particular the price. Imposing resale price maintenance on a distributor is unlawful in most countries, but by selling through an agent the business can retain the freedom to fix its own prices for sale.
- If the business wants to restrict the agent’s freedom to choose the customers that they deal with. In most countries, there are restrictions on the extent to which a supplier can restrict a distributor’s choice of customer. However, by using an agent, a business retains the freedom to choose who to deal with and with whom the agent deals. Generally, fewer competition law issues arise with agency rather than distributorship.
- Where the business wants to retain direct contact with its customer. For example, because of bespoke design work or highly specialised after-sales service that can only be effectively provided by the business.
- Where close control over marketing methods are important (for example, because brand image is a crucial factor for the business).
- If the business wants to retain the financial risk of stock (consignment stock with an agent would normally remain the business’ property).
Typically, the commission paid to an agent is lower than the margin which a distributor will earn (since the distributor is taking a greater financial risk). Agency will therefore, in everyday terms, probably cost the business less than a distributorship.
There are however a number of risks to be aware of when considering the appointment of an agent, most notably owing to the Commercial Agents (Council Directive) Regulations 1993. These state that certain terms will automatically apply to the agency, and in particular, the business may have to pay the agent compensation on termination or expiry of the agency. It is absolutely vital therefore to have a thorough understanding of what the potential compensation could be, and the circumstances that could potentially result in a claim.
- Businesses must also be aware of the Bribery act 2010, which states that a business will be criminally liable for acts of bribery committed by its agents intending to obtain or retain business or a business advantage for the business. Strict and close monitoring of agents once appointed is therefore essential.
The Commercial Team at Vincents are able to assist on all aspects of Agency and Distributorship, and will work with you in order to identify which is the most appropriate option for you and your business from the outset.