Orr Litchfield
Solicitors and Business Lawyers
Solicitors and Business Lawyers
For start-ups or SMEs with local market knowledge who want to upscale but have limited expertise outside their own region, business owners can save on financial and operational costs by appointing a third-party intermediary, such as an agent or a distributor, to market or sell their goods and services in a new territory.
An agency or distribution agreement sets out the roles and responsibilities of both the business (the “Principal”) and the agent or distributor to test out new markets, products, services or regions without the need to establish a physical presence.
Although agency and distribution agreements both have the common objective of selling products and services to customers, they differ significantly in their legal effect.
This article provides an overview of the differences between an agent and a distributor and the advantages and disadvantages of appointing one or the other.
An agent usually has the authority to market goods, introduce new customers and/or negotiate sales on behalf of the Principal. However, the Principal retains control over the contract, including pricing and after-sales services, with the end-customer. It is important that the Principal chooses an agent who has good selling skills, contacts and knowledge of the market to avoid poor choice of customer or bad debts. Thorough due diligence of an agent is essential.
A distributor on the other hand, purchases the products and services from the Principal and concludes contract sales on its own behalf. There is no direct contract between the Principal and the distributor’s customers. The distributor also sets its own prices and assumes all risk in the products or services, including dealing with after sales.
An agent is paid commission on sales that he/she successfully negotiates on behalf of the Principal and is entitled to compensation on termination of the agency agreement as provided under the Commercial Agents (Council Directive) Regulations 1993 (CARs) provided they fall within the definition of ‘Commercial Agent’ under Regulation 2(1) of the CARs.
A distributor purchases products or services from the Principal at prices set by the Principal, then can set higher prices for resale to retailers or consumers in order to earn profit on sales. The CARs do not apply to distributors in the UK.
In an agency agreement, the Principal assumes all risk and deals with after-sales queries and defective products or services.
A distributor assumes ownership of the products and services that it purchases from the Principal and assumes sales risk, including liability for defective products, as well as the risk associated with transportation, product storage costs and any unsold products.
The advantages of appointing an agent are that the Principal has greater control over the agent’s activities; the payments of commission to an agent incentivises the agent to maximise sales; and the Principal has control over the prices of its products and how it deals with returns/recalls.
The disadvantages are that the Principal will spend more time and costs, for example, during the due diligence exercise, which might involve carrying out background checks and obtaining testimonials from clients of the agent. If appointing an international agent, a Principal will additionally need local legal advice in the agent’s jurisdiction.
Secondly, the Principal needs to factor in the commission payments and potential compensation (on termination of the agency agreement) into its financial forecast.
Finally, the Principal risks suffering financial loss if the agent does not choose the right customers.
The advantages of appointing a distributor are that the Principal does not need to dedicate as much time and resources in a distribution arrangement; it does not need to be involved in contract negotiations or pricing discussions; and does not need to spend time dealing with after-sales complaints or product recalls.
The disadvantages are that the Principal has less control over how the distributor markets its products and services so will need to ensure the distribution agreement contains undertakings by the distributor to market and advertise in accordance with the Principal’s instructions.
Additionally, there is a potential risk of reputational damage, for example, if the distributor has to sell at discounted rates to dispose of unused stock or if the distributor does not have in place robust processes to deal with after-sales complaints.
Finally, if appointing a cross-border distributor, a Principal will additionally need local legal advice in the distributor’s jurisdiction.
Whether you are planning to enter into a new agency or distribution agreement or would like us to review your existing agreements or any part of them, we can help you to plan, prepare, review and implement your contracts in a way that helps you to protect and develop your business.
If you would like more information about any aspect of commercial contract law or would like to discuss a potential or existing contract or commercial contract law matter, please email us at enquiries@orrlitchfield.com, complete an Enquiry Form or call us.
