Is it better to use a distributor or an agent?

Agency agreements

A typical agency relationship arises where the UK agent contracts on behalf of the supplier or manufacturer (the principal) to arrange sales to UK customers without retaining any contractual liability towards the customers.

The advantage of using an agent is that the principal retains control over how the product is marketed and sold, and what after sales service is offered. It is easier for the overseas company to direct the agent’s activities and monitor the success of the product launch. The company can also benefit from the agent’s knowledge of the local trading conditions and take advantage of the customer contacts developed.

The downside is obvious, when employing an agent the overseas manufacturer/supplier retains all legal and commercial risk, for instance, in respect of product liability and disputes, and a statutory obligation to pay compensation to the agent on termination.

Distribution agreements

A distributor purchases goods from an overseas supplier or manufacturer for resale to his/her UK customers. The distributor makes a profit on the margin imposed on the resale of such products and passes title to the products to the customers directly.

The advantage of this arrangement is that the distributor retains contractual liability for the sale of the products and no relationship is formed between the supplier/manufacturer and the customer which means that once the product is sold to the distributor, there is no further liability for costs and commercial risks. These worries are essentially shouldered by the UK distributor. The overseas company is free to concentrate on product development and targeting new markets.

The disadvantage is the lack of connection between the end user – the UK customer – and the supplier/manufacturer. It is therefore considerably harder for the overseas manufacturer to have access to the customer’s list and monitor trends in the UK market which naturally affect product development. In the same way the supplier has little or no influence over the distributor’s marketing tactics or pricing policy.

Seek local advice

The safest route is to seek advice at an early stage from a lawyer qualified to act in the relevant jurisdiction. Not only will this involve the local legislation in the foreign market but also how terms of an agreement may be challenged or affected by EU competition which has an increasing role to play in respect of cross border relationships. Tax liabilities should also be considered, particularly the issue of whether or not, by employing an agent or distributor, the overseas supplier/manufacturer would be deemed to have a permanent establishment in the UK. This may be relevant in respect of whether or not they would be subject to double taxation regulations and payments due at the end of an agreement.

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