Project part-financed by the European Union
Agent and distributor arrangements are both examples of ways of entering an overseas market. Both agents and distributors offer the principal (exporter) a presence in the overseas market.
This gives the advantage to the principal of:
For both agent and distributor agreements, the basic parties involved are usually:
The relationships between the parties, and the contractual responsibilities, will differ depending on whether the intermediary is an agent or distributor.
The term agent is often used as a generic term to describe either an agent or a distributor. The term agent is often, wrongly used, to describe what is in fact a distributor arrangement.
An agent is a person employed by a principal (usually the exporter) to make commercial contracts on the principal’s behalf with third parties (customers and buyers). The contracts are for the sale of the principal’s products or services to the buyer.
The agent puts the principal into contractual relations with the overseas buyer(s). There is no contract of sale between the agent and the buyer. The agent does not usually take the commercial risk. It is the principal who takes the commercial risk. The agent is usually paid a commission, based on a percentage of the value of the order secured.
A distributor buys goods for their own account to resell to their own customers. Like an agent, the distributor is usually based in the overseas market. There is a contract of sale for the goods or services, between the principal and the distributor. There is no contractual relationship between the principal and the distributor’s customers.
AGENCY: In an agency arrangement, the principal will be dealing with ‘multiple customer accounts’ and therefore must fulfil each contract of sale on a separate and individual basis, for example:
For each account the Principal must:
The disadvantage here is that all these operations will incur additional costs, (distribution, invoicing, accounting, administration, debt collection) resulting in increased prices or reduced profits).
DISTRIBUTOR: In a distributor arrangement, the principal only deals with one account i.e. that of the overseas distributor. The distributor takes the commercial risk of multiple accounts.
The advantage here compared to agency, is that:
Terms and Conditions of agency agreements are governed by EU law (Commercial Agents Regulations 1993. These regulations cover primarily the rights and duties of principal and agent and are automatically incorporated into any agency contract.
For example:
Duties of Agent:
Duties of Principal:
Rights of Agent:
Termination:
There are mandatory Notice Periods:
Compensation:
On termination the principal must pay:
The terms and conditions of a distributor agreement are essentially based on contractual principles.
Distributor agreements usually contain terms relating to:
Although the distributor contract is based on contractual agreement, there are some restrictions imposed by both UK and EU law:
Price Fixing:
Price fixing is almost always illegal under European competition law.
Minimum selling prices are regarded as price fixing.
Both agents and distributors usually require some kind of exclusivity before they commit to representing their principal. This means that the agent or distributor is given exclusive rights over a particular territory for a particular product. The principal agrees that no other agent or distributor will be appointed to sell those products in that territory.
The disadvantage here is that the principal is restricting market entry potential which will be dependent upon the ability and the results of the agent or distributor. It could be that there are other opportunities in the market which they are not accessing.
A sole agency or distributor agreement, would enable the principal to sell directly into the market, where there had been no initial introduction made to the customer by the agent or distributor. Exclusivity agreements exclude even the principal from accessing the market without the involvement of the agent or distributor. In some circumstances exclusivity can deliberately keep a principal out of the market, because the agent or distributor is more successfully selling competitors products.
Market presence
AGENCY: Because the principal is contracting directly with the customers in the market, the principal has a presence and reputation in the market.
The Advantage of this is:
DISTRIBUTOR: The principal usually has no control over which customers the distributor sells to.
Both agents and distributors often have more than one principal. It is important for the principal to know who else the agent or distributor is representing, particularly if exclusivity is granted. An agent or distributor who represents a few principals who offer complementary products, can offer a comprehensive product range which enables products to be sold on the back of others.
