Many suppliers take the commercial decision not to market goods themselves, but instead choose to do so through a third party. This may be a result of the supplier’s lack of resources to market the goods effectively, or perhaps because they want to break into a new territory and need to rely on the expertise of a third party.
The most common way of doing this is by appointing either an agent or a distributor to act on the supplier’s behalf. This article looks at some of the commercial and legal considerations for suppliers when making the decision to market their product through either an agent or a distributor.
Agency v Distribution
Both an agent and a distributor act as a middle man in the supply chain between the supplier and the end buyer. There are advantages and disadvantages to both and suppliers should give careful thought to which is most suitable for their product and their plans to get it onto the market.
The term ‘agent’ is often used loosely in business to cover a number of different commercial relationships. A true sales agency agreement is one where the agent contracts with customers on behalf of the supplier in return for a commission or fee.
This is usually based on the percentage of sales or the number of introductions secured by the agent. The contract itself is between the supplier and the buyer, the supplier will be liable for the agent’s actions and the agent will bear no responsibility if a customer makes a complaint or claim provided that they have acted within their authority.
A distributor on the other hand buys goods in its own right from the supplier and then sells them to an end buyer, adding a margin to cover their own costs and profit. The supplier will have no contractual relationship with the end buyer, however if the goods are defective the supplier may remain liable as a manufacturer. The following commercial considerations should be taken into account when deciding whether to engage with an agent or a distributor:
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Control over the sale price Under an agency agreement the supplier will be able to retain greater control over the sale of their product including the sale price.
Imposing a resale price on a distributor on the other hand will probably fall foul of UK and EU competition law, yet by selling through an agent, the supplier can validly retain the freedom to fix the price.
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Relief of Risk Instructing a distributor has the advantage of transferring the risk of the product (save for manufacturer’s warranty) to the distributor.
The distributor will also be responsible for the storage of the product and insurance costs which will ultimately reduce the supplier’s outgoings. |
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Nature of the product If the product is bespoke or needs an after-care service requiring contact with the supplier/manufacturer, it is advantageous to enter into an agency agreement so that contact can be maintained.
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Greater incentive to push the product It is arguable that because the distributor has taken a financial risk to sell the product, they will be more motivated to push the product than an agent would be. |
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Protecting the brand A supplier may be particularly concerned about protecting the goodwill of the product, particularly if it is new and not yet established in the marketplace. The advantage of an agency agreement is the ability to retain control over how the product is marketed. Brand image is crucial to a product’s future success and so this continued level of control is often desired.
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Geographical access Appointing a distributor, whether in the UK or abroad, will avoid the need for the supplier to have an established place of business in the particular territory. This will reduce administration costs for the supplier and may also have tax advantages.
The supplier can also take advantage of the distributor’s knowledge in unfamiliar markets where language and customs may be an issue.
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Commission Overall it is likely to be more profitable to the supplier to instruct an agent rather than a distributor, to reflect the greater risk and duty to the end buyer. Typically, the commission earned by an agent is less than the profit gained by a distributor.
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No Liability for the Distributor’s Actions Distribution agreements require limited supervision from the supplier as they will not generally be held liable for the distributor’s activities. In comparison, they will be held liable for the actions of their agent which in turn requires heightened supervision. |
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Competition Law Agency agreements have more freedom under competition law as they are less at risk of distorting competition. Distribution agreements on the other hand are more likely to distort market competition. The following provisions may fall foul of EU and UK competition law: · Exclusivity provisions placing territorial limits on where the distributor can sell the product. · Price fixing as this is highly likely to distort the market by artificially inflating the price of a product. · Non-compete obligations which place restrictions on a distributor’s ability to handle competing products. |
Commercial Agents (Council Directive) Regulations 1993 Agency agreements are regulated by European law which places a number of obligations on the supplier’s duty towards the agent:
· Financial provisions – the agent is entitled to commission both during the agency agreement and after, for sales which are mainly attributable to the agent. If a new agent is appointed, then the new agent may also be entitled to commission on the same transaction as the previous agent. · Termination payments – all agents are entitled to compensation or indemnity when the agreement is terminated, calculated on the value of the agency business to the agent at the time of termination. |
A supplier’s decision on whether to instruct an agent or a distributor will largely depend upon the nature of the product, the location of their target customers and the level of control which they hope to retain. Regardless of whether you are the supplier, distributor or the agent, it is advisable to obtain legal advice before entering any contractual agreement.
If you need any advice in relation to agency or distribution arrangements please contact the head of our Corporate and Commercial Team, Ed Barnes, on 01244 354829 or at edward.barnes@dtmlegal.com.
