Distributor or agent: what are the implications?

When appointing an agent or distributor, a supplier is, in practice, outsourcing part of the selling operation of its business.

There are many reasons a supplier might want to do this, for example, to benefit from local knowledge and trade connections, or to save on the cost of establishing a sales function in a specific territory.

It’s therefore key for suppliers to understand both the legal and practical implications of deciding to appoint an agent or distributor, particularly in light of the Commercial Agents Regulations 1993 (“Regulations”).

The key differences

Factors to consider when making an appointment

Whether an agency or distributor arrangement is suitable for a supplier will depend on the business’ specific circumstances and aims.

An agency arrangement might be preferable where:

• The supplier wishes to maintain a close relationship with the customer. For example, if a product involves bespoke features or a specialised after-sales service these may be better provided by the supplier.
• The supplier wants greater control over the terms of the products, such as 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, selling through an agent allows suppliers to fix their own prices for sale.
• The supplier seeks to reduce initial costs. The commission paid to an agent is usually lower than the margin which a distributor will earn (due to the increased financial risk borne by distributors). However, suppliers should be mindful that an agent may have the right to compensation or indemnity upon termination of the agreement under the Regulations. For more information on the Regulations, read our article here.

A distributor arrangement might be preferable where:

• The supplier wishes to reduce its exposure to risk. A distributor will take on a greater degree of risk due to its contractual relationship with the customer. In turn, this often incentivises the distributor to focus on selling the products which could even lead to larger order volumes.
• The supplier wishes to avoid the potential tax implications of cross-border agency arrangements. At times, a supplier might be regarded as trading in a territory if they have an agent there. Appointing a distributor should negate this issue.
• The supplier wishes to reduce its logistical burden. A distributor will typically deal with product storage, transportation and delivery.

The relationship between a supplier and its agent/distributor needs to be clearly outlined in any agreement so all parties are clear on their responsibilities and exposure to risk. We can help advise on which arrangement is best suited to your business needs.