Issues to consider before appointing an agent or a distributor
You’ve got the product – now you need to get it to market. If you’ve ruled out selling directly, the choice will be whether to appoint an agent or a distributor. Appointing an agent rather than a distributor will give you more control over the sale of your product – such as end price, terms of sale and method of marketing. However, retaining control also means more risk.
Scoping the appointment
If you choose to appoint an agent, carefully scope out their authority (does it only cover marketing or will they sell products or services for you?).
What ‘territory’ will the agent or distributor get? Will it be exclusive or will you want to encourage competition? Might you want to operate in that territory yourself? Carving up territories and customer groups can be subject to competition law, so tread carefully.
Be clear about the products or services covered by the agreement and who has responsibility for compliance with applicable regulations and requirements etc. Agree how you can end your relationship and what happens afterwards (will you expect the return of your products and advertising materials, for example).
A sales agent will usually collect payments on your behalf. Have tight controls to ensure you get all you are owed, including requiring the money be put in a separate trust account if necessary. Agree the detail of commission entitlements and arrangements for payment, including after termination.
Key concerns with distributors will be sales targets, product liability and issues with promotional materials including regulatory compliance and protecting your trademark. You will also need to deal with insolvency risks and delivery and insurance of any products.
One of the main legal issues with agency agreements is the Commercial Agents Regulations, which give some European agents certain rights, including a redundancy-type payment on termination. There are exceptions though, so it’s worth getting advice to see if you can structure your arrangements to fall, either wholly or partially, outside of the regulations’ scope.
Beware of the effect of the Bribery Act 2010 – you may be liable for bribes your agent makes so check your chosen agent is reputable, put in place an anti-bribery policy and monitor compliance.
Competition law issues arise with distribution agreements and have an impact on areas such as duration, exclusivity and restrictive covenants, particularly if you want to control what your distributor can do following termination.
If you are looking to expand your network overseas, check what the usual business practice is as regards agency or distribution arrangements. Some countries may strongly favour one over the other.
There may also be specific legal considerations. Countries within the EU broadly follow the same rules, but there are variations. Some countries give agents employment or quasi-employment status, which can have significant implications.
Check whether you need to register the agreement on a foreign commercial register and consider having a formal translation with the aim of avoiding misunderstandings and disputes later.
Whether to appoint an agent or a distributor is an important choice. Weigh up all the relevant factors (including tax advice) and have a signed contract to record your agreement.