Agency and distributorship

Thisarticle just provides an overview of the law in this area. You should talk to our Disputes Team for a complete understanding of how it may affect your particular circumstances.

Charles Abraham, Head of Disputeshighlights the circumstances in which a business may want to engage the services of an agent or a distributor.

What is an agent?

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.

What is a distributor?

A distributor 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.

Why appoint an agent or distributor?

In appointing a selling agent or distributor, a business is effectively sub-contracting its selling function. The business may want to do this for a number of reasons, for example:

• 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 sales operation.

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).

Why appoint an agent rather than a distributor?

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 than with distributorship.

• Where the business wants to retain direct contact with its customer. For example, where it offers bespoke design work or highly specialised after-sales service that can only be effectively provided by the business itself.

• 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 general terms, probably cost the business less than a distributorship.

What are the risks when appointing an agent?

Businesses must always consider whether the Commercial Agents (Council Directive) Regulations 1993 apply to the arrangement. If they do apply, certain terms will automatically apply to the agency. In particular, the business may have to pay the agent compensation on termination or expiry of the agency.

Bribery Act 2010

Under the Bribery Act 2010, 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.

A business should carry out background checks on the proposed transaction, jurisdiction and the agent's reputation.

The business should also consider putting in place adequate procedures to mitigate the risk, for example, by:

• creating an anti-bribery policy that agents must comply with; and
• monitoring and auditing agents on a regular basis.

If you have any queries in relation to this post, please contact our Head of Disputes, Charles Abraham on 0113 201 0405.