Should I appoint an agent or a distributor?

Why appoint an agent or distributor at all?

In appointing a selling agent or a distributor, a manufacturer is effectively sub-contracting the selling function of his business. He may wish to do this for a number of reasons: 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 his own selling operation.

Why appoint an agent rather than a distributor?

As the agent is only an intermediary, he is generally not a party to the contract between the principal and the principal’s customer and will not have rights or obligations under it. For most purposes, the agent’s acts are treated as those of his principal. Unlike an agent, a distributor buys goods from the supplier and sells them on to his customers.

Unfortunately the labels “agent” and “distributor” are sometimes used interchangeably causing considerable confusion. This should obviously be avoided. It is also not unknown for the agent to be truly both agent and distributor of different products under the same agreement.

An agency arrangement may be preferable to a distributorship in a number of situations:

• If the supplier wishes to retain greater control of the terms of sale of his products. The imposition of resale price maintenance on a distributor is unlawful under UK and EU competition law and the national competition law of most countries. But selling through an agent, the principal can validly (and almost always will) retain the freedom to fix his own prices for sale.
• If the supplier wishes to restrict the agent’s freedom to choose the customers with whom the agent will deal. There are limits in most jurisdictions on the extent to which a supplier can restrict its distributors in the latter’s free choice of customers, while it is of the essence of agency that the principal can retain the freedom to pick and choose with whom he wishes to deal and with whom he wishes the agent to deal. Generally, fewer competition law issues will arise with agency than with distributorship.
• Where direct contact between manufacturer and customer is important (for example, because of bespoke design work or highly specialised after-sales service which can only effectively be provided by the manufacturer or supplier of the product).
• Where close control over the methods of marketing is important (for example, because brand image is a crucial factor).
• Where the manufacturer wishes to retain the financial risk of stock (consignment stock with an agent normally remains the property of the principal). If the manufacturer cannot find anyone on whom to off-load this risk (a distributor), he may have to settle for an agent.
• 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, at least in everyday terms, probably cost the supplier less than a distributorship. In situations where the Regulations do not apply (see below, but this is not always an easy thing to decide) the exit route from an agency relationship, if things do not work out well, may be cheaper for the supplier than that from a distributorship. Where the Regulations apply it will generally be the other way round.

The disadvantages of an agency arrangement are as follows:

• Rights to lump sum payments for agents on termination of agency agreements, regardless of breach of contract by the agent, arise in many countries, including the UK and Ireland. This is not the case in the UK for distributorships.
• Tax factors are often important. Sometimes a principal 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. It may be relevant whether the agent is a sales or marketing agent and whether the agent holds stock and has a permanent distribution depot. In each case, the relevant local laws and double taxation arrangements will need careful study.