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Distributor or agent: why does it matter?

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Posted by Rhys Jarman on 22 February 2016

Rhys Jarman Partner

In appointing an agent or distributor, a supplier is effectively outsourcing part of the selling function of its business.

A supplier may wish to do this for a number of reasons, including to take advantage of an agent's or distributor's local knowledge and established trade connections, or to save the cost of having to establish its own selling operation and sales force in a particular territory. In some jurisdictions, it may be that a foreign supplier can only do business through a local national agent or distributor.

However, it is important for a supplier, when considering how best to market, sell or distribute its products, to be aware of the difference both in legal and practical terms between appointing an agent and appointing a distributor. In particular, given the regulatory framework that may apply in respect of agents, namely the Commercial Agents (Council Directive) Regulations 1993 (SI 1993/3053) (Commercial Agents Regulations). 

Summary of differences

Distribution Arrangement Agency Arrangement
One party (the distributor) buys goods on his own account from a manufacturer or reseller (the supplier) and resells them to customers. One party (the agent) has authority from another party (the supplier) to introduce orders from a third party (the customer) or to create a legal relationship between the supplier and a customer.
Contract for goods is between distributor and customer. Contract for goods is between supplier and customer.
The supplier has no contract with the customer. However, the supplier may have liability under general legal principles, or under product liability legislation. The supplier contracts directly with the customer who has been introduced by the agent. The agent may ‘manage’ the relationship with the customer.
A distributor takes more financial risk than an agent (for example, it may hold stocks of the products) but this should be reflected in the margins on the resale of the products which will generally be greater than commission payable to an agent. An agent makes commission on sales arranged between the supplier and a customer. 
As the distributor has the contract with the customer, the distributor is responsible for the delivery of the products and providing an after sales service in respect of the products.

Agents are generally not involved in the delivery of the product or the after sales service. 

In the UK, the Commercial Agents Regulations only applies to agents, not to distributorships. The Commercial Agents Regulations may apply. 

Commercial Agents Regulations

The Commercial Agents Regulations impose various terms on the relationship between supplier and commercial agent to the advantage of the commercial agent, many of which the parties may not exclude by contract. In particular, they normally entitle the commercial agent to a payment on termination of the agency arrangement.

In order for an agent to benefit from the protection of the Regulations, he must fall within the definition of a ‘commercial agent’, “a self-employed intermediary who has continuing authority to negotiate the sale or purchase of goods on behalf of another person (the principal), or to negotiate and conclude the sale or purchase of goods on behalf of and in the name of that principal”.

In most cases, it will be clear whether the subject matter is goods. When the question has been considered by the courts in relation to software, it has been held that although software on its own is not goods, software sold bundled within hardware would be.

When appointing an Agent may be preferable

  • Where the supplier wishes to retain a close relationship with the customer. For example, in cases where the product involves bespoke design work or a highly specialised after-sales service which can only effectively be provided by the supplier. Using a distributor inevitably distances the supplier from the end customer.
  • If the supplier wishes to retain greater control of the terms of sale of his products, particularly as to price. Imposing a resale price on a distributor is unlawful under UK and EU competition law and the national competition law of most countries. However, by selling through an agent, the supplier can validly (and almost always will) retain the freedom to fix his own prices for sale.
  • Where the supplier wants to reduce initial costs as typically, an agent's commission is less than the distributor's discount. However, suppliers should be mindful of the increased costs on termination that may be incurred if the Commercial Agents Regulations apply to the arrangement.

When appointing a Distributor may be preferable

  • If the supplier wants to spread the risk of expanding into new products or territories. For example, it will be the obligation of the distributor to maintain sales depots in the territory.
  • When the supplier wants to take advantage of the cost benefits, improved sales services and greater flexibility that any outsourcing of a business process provides.
  • Where the supplier has appointed an agent, the agent may have a right to compensation or indemnity on termination of the agreement under the Commercial Agents Regulations; this is not the case in the UK in respect of distributor arrangements.
  • If the supplier has appointed agents in other territories outside its main trading territory, this may have tax implications for the supplier. Sometimes a supplier can be regarded as trading in a territory if he has an agent there, whereas the appointment of a distributor should not give rise to this problem.

Mixed Arrangements

In certain situations, it is possible for a supplier to appoint a party to be both agent and distributor of different products under the same agreement. For example, the appointed party could be a distributor in selling products and an agent in respect of software relating to such products.

Another common mixed arrangement can be found where the appointed party acts as a distributor to re-sell low value, high volume products, but as an agent for high value contracts, where the customer wants the security of dealing with a large manufacturer. However, mixed arrangements are not commonplace.

Conclusion

The relationship between a supplier and its agent and/or distributor need to be clearly outlined in any agreement setting out the details of the arrangement to ensure that each party is clear on (i) its role and responsibilities, and (ii) its exposure to risk.

Furthermore, labelling an agreement as a ‘Distributor Agreement’ or an ‘Agency Agreement’ is not sufficient evidence in itself as to the nature of the arrangement.  In the event of a dispute, the courts will look at the substance of the arrangements between the parties and will not be bound by the description or label of ‘distributor’ if, in substance, the arrangement between the supplier and that party is one of agency.

If you are a party looking to enter into either a distribution or agency arrangement, either as a supplier or as a distributor/agent, or you are a party to an existing agreement seeking advice on its terms, please contact one of our specialist Commercial lawyers for further advice and support. 

About the author

Rhys specialises in the protection and enforcement of intellectual property rights and technology disputes. Rhys is interested in all things "Brexit" and is a member of our Brexit Advisory Board.

Rhys Jarman

Rhys specialises in the protection and enforcement of intellectual property rights and technology disputes. Rhys is interested in all things "Brexit" and is a member of our Brexit Advisory Board.

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