What is an agent?
Agents are appointed by a business (known in this context as the “principal”) to negotiate and conclude contracts with third parties on behalf of its principal. The contracts are made between the principal and the end customer and so the agents have no contractual liability to the customer.
A ‘genuine' agency exists if:-
- the agent bears no significant financial or commercial risk in relation to the activities it undertakes; and
- it is immaterial whether the agent acts for one or several principals; or
- whether the parties or the legislation categorise the relationship as being an agency.
Agents are predominantly paid a percentage based commission on the sales that they make.
What is a distributor?
Distributors will buy products from a business (be it a supplier or manufacturer) before selling these products on to its end customer directly, with a cost mark up to make a profit on its original expenditure. Distributors, therefore, have contracts with both the supplier/manufacturer and the customer, with title to, and risk in, the products passing along the chain accordingly. The distributor will therefore inherit ultimate liability to the customer.
The margin or remuneration received by a distributor can be significantly higher than the commission earned by an agent, to reflect the greater level of risk that it will bear.
What compensation will I pay on termination of the relationship?
Under the Council Directive on Commercial Agents, and accordingly the UK Commercial Agents Regulations, an agent has the right to "compensation" or an "indemnity" on termination of the agency agreement in certain circumstances. The intention behind this is to protect the agent, who is treated under the Directive as being the weaker party in the relationship. If the Regulations say that compensation or an indemnity is payable, then it is payable, even if the agent has no right to damages at common law in respect of the termination.
There are significant differences between the compensation and indemnity alternatives:
1. Unless the indemnity alternative is specifically chosen, the compensation alternative will apply by default. The indemnity alternative would generally be the preferable alternative from a principal's point of view.
2. The indemnity alternative is capped at a maximum amount. There is no cap on the compensation alternative.
3. Under the indemnity alternative, an indemnity is due if and to the extent that the agent has brought in new customers or significantly increased the principal's business with existing customers. There is no similar qualification on compensation. If the expectation is that the agent will take on and service a static, mature, saturated pre-existing customer list, then its scope for bringing in new customers will be small and likewise its scope for growing the business with existing customers. In that event, its entitlement under the indemnity alternative would be likely to be small or potentially non-existent.
4. Under the compensation alternative, the proper basis for calculating the compensation is by reference to the loss of the value of the agency. The value of the agency is the amount that a hypothetical purchaser would be willing to pay for it as at the date of termination. Where an agency has a modest and falling income in a steadily deteriorating environment, and there is no evidence anyone would have paid anything to buy it, there may well be limited compensation.
It can therefore be advantageous to appoint a distributor over an agent as there is no requirement to compensate a distributor upon the termination of a distribution agreement, although care needs to be taken as this is not always the case within other countries.
Is competition law relevant?
EU and UK competition rules, which prohibit anti-competitive agreements and abuse of a dominant position in the market, can potentially have an impact upon the appointment of a distributor, when ordinarily they do not apply to a genuine agency relationship.
Which option is best for you?
Some of the advantages and disadvantages of appointing a distributor as opposed to an agent are summarised below:
For further information, please contact our Corporate team.