A Guide To Agency & Distributorship

Reasons to choose Wilson Browne

This guide highlights the circumstances in which a business may want to engage the services of an agent or a 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?

Commercial Agents (Council Directive) Regulations 1993

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.

Frequently Asked Questions (FAQs)

What is the main difference between an agent and a distributor?

An agent acts on behalf of a business and typically earns commission on sales, whereas a distributor purchases products from a business and resells them to customers for a profit.

Is an agent an employee of the business?

No. An agent is usually self-employed or operates through their own business. They act on behalf of the principal but are not generally employees.

Can a business appoint both agents and distributors?

Yes. A business may choose to use agents in certain territories, markets or product lines, while appointing distributors in others. It is also possible for the same organisation to act as an agent for some products and a distributor for others.

Which arrangement is better for international expansion?

The answer depends on the business’s objectives. Agency arrangements may offer greater control, while distributorship arrangements may require less day-to-day involvement. Legal, commercial and tax considerations should all be assessed before deciding which model is most suitable.

Can an agent enter into contracts on behalf of a business?

Potentially, yes. Depending on the terms of the agency agreement, an agent may have authority to negotiate and conclude contracts on behalf of the business.

Who owns customer relationships in an agency arrangement?

In most cases, the business retains the primary relationship with the customer because the agent is acting on the business’s behalf.

Who is responsible for customer debts?

This will depend on the arrangement. Under an agency arrangement, the customer usually contracts directly with the business. Under a distributorship arrangement, the customer generally contracts with the distributor.

Do agency and distribution agreements need to be in writing?

While some arrangements can be created informally, a written agreement is strongly recommended to clearly define rights, obligations, territories, payment arrangements, termination provisions and dispute resolution procedures.

Can an agent or distributor be given exclusive rights?

Yes. Businesses may grant exclusive, sole or non-exclusive rights depending on their commercial objectives. The terms should be clearly documented in the agreement.

What should be included in an agency or distribution agreement?

Key provisions commonly include:

Territory and customer scope
Products covered by the arrangement
Payment and commission arrangements
Performance targets
Intellectual property rights
Confidentiality obligations
Termination rights
Post-termination restrictions
Dispute resolution procedures

Can a business terminate an agency or distribution agreement at any time?

Not necessarily. Termination rights will depend on the terms of the agreement and, in the case of commercial agents, may also be affected by statutory protections.

Are there competition law considerations when appointing agents or distributors?

Yes. Certain restrictions relating to pricing, territories, customers and online sales may be subject to UK and international competition laws. Legal advice should be sought when drafting agreements containing these types of restrictions.

What happens when an agency or distribution agreement ends?

The consequences will depend on the terms of the agreement. Issues to consider may include outstanding payments, customer orders, stock, intellectual property rights, confidential information and post-termination obligations.

When should a business seek legal advice?

Legal advice should ideally be obtained before appointing an agent or distributor. This can help ensure the arrangement is properly structured, commercially effective and legally compliant from the outset.