For many UK businesses, selling abroad involves using agents and distributors. Knowing when its best to use agents and when to choose a distributor is important. This article explains both and and the legal advice that exporters need to be aware of when using agents and distributors.
When selling to China, bear in mind that if you’re not going to appoint an agent or distributors, your only other options are to enter into a joint venture with a local – Chinese – partner or to set up a Wholly Owned Foreign Enterprise – a WOFE.
What is an agent?
An agent is an intermediary you appoint to negotiate and, if required, conclude contracts with customers on your behalf. Agents are paid commission on the sales they make, usually on a percentage basis.
What is a distributor?
A distributor is essentially an independent contractor. In distributor agreements, you sell products or service to a distributor, who then sells these on to their customer, adding a margin to cover the distributor’s 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 or services under the same agreements (for example, a distributor in selling products or services 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 agreement may be preferable to a distributor agreement:
- If the business wants to retain greater control of the terms of sale of its products or services, 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 safeguard 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 agent agreements than with distributor agreements.
- 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. In effect the agent finds the customer and the business maintains the customer throughout the entire lifetime of the relationship.
- Where close control over marketing is important, for example, where brand and image are crucial factors for the business or where the customer will only buy from an agent who has authorisation to use the Manufacturer’s brand at point of sale.
- If the business wants to retain the financial risk of stock (consignment stock with an agent would normally remain the business’s property). So that, for example, in the event of the agency going into administration the business still owns the stock.
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). Appointing an Agent will therefore, in general terms, probably cost the business less than a Distributor.
What are the Benefits of appointing a distributor?
The business sells the product or service to the distributor so a sale is made at that point in the accounts of the distributor.
The business does not have to incur the costs of expensive retail premises to access consumer markets eg Apple Premium Resellers are distributors incurring the premises costs directly.
Getting the best deal when using agents and distributors
The business needs to decide if the appointment will be exclusive (ie no other agents or distributors will be appointed in the specified territory) or non-exclusive.
If it is an exclusive appointment then this should be tied to the achievement of sales targets by the agent or distributor. If the targets are not achieved then the agent or distributor becomes non-exclusive.
Be very clear what obligations the agent or distributor has take on including how branding can be used and the training of sales personnel with specific product knowledge.
What are the risks when appointing an agent?
Commercial Agents (Council Directive) Regulations 1993
Businesses must always consider whether the Commercial Agents (Council Directive) Regulations 1993 apply to the arrangement in the EU in relation to goods not services. 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. If these Regulations apply, then the business should appoint the agent as a non-exclusive agent on a rolling notice contract which the business never needs to terminate as it has a range of agents to deal with.
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. The UK is one of the few countries to have a Bribery Act and follows the US Anti-Bribery laws.
A business should carry out background checks on the proposed transaction with the customer, jurisdiction and the agent’s reputation. Certain industries (eg Defence & Aerospace) and countries are higher risks than others
The business should also consider putting in place adequate procedures to mitigate the risk, for example, by:
– creating an anti-bribery policy that agents and distributors must comply with;
– training all staff particularly those in sales and business development negotiating with agents, distributors and customers; and
– monitoring and auditing agents and distributors on a regular basis.
To join the relevant trade body called The Institute of Export see http://www.export.org.uk/
For further information and legal advice, please contact Richard Mullett on 0208 334 8049 or check out our website www.thelegalpartners.co.uk.