The following is an extract from the ‘Simple Guide To Cross-Border Business‘ co-written by Morgan McManus Solicitors for InterTradeIreland. This Guide has become the first point of reference for any company seeking to enter the Cross-Border market, offering up-to-date and user-friendly comprehensive information on questions connected with doing business in the other jurisdiction.
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Cross-Border Distributorships Or Agencies
What Is The Difference Between A Distributor And An Agent?
In a distributorship a supplier or manufacturer sells his products to the distributor, who in turn sells the products on to his customers, adding a margin to cover his own costs. Distributorships are used as a low risk means of expanding business into new markets or territories.
The distributor assumes liability for the products incurring a greater degree of risk than an agent in the course of his business. The distributor has no authority to create a contract between the supplier and customer. The customer’s contract will be with the distributor.
A Sales Agent is a self employed intermediary who has continuing authority to negotiate the sale of goods on behalf of another person “the principal” (or to negotiate and conclude the sale of goods on behalf of and in the name of that principal).
What are the advantages and disadvantages of each?
Advantages Of A Distributorship
- A supplier is able to pass on risk associated with the products.
- The distributor is motivated to sell the stock purchased from the supplier.
- A supplier will not incur any liability as a result of the distributor’s activities (although the supplier may remain liable for defective products).
- The appointment of a distributor will avoid the need for a supplier requiring an established place of business in the territory, reducing administrative costs.
- A supplier will only need to monitor accounts with a distributor.
- No compensation is automatically payable to a distributor upon termination of the distributorship agreement.
Disadvantages Of A Distributorship
- The supplier has limited control over activities of a distributor.
- Under an exclusive distributorship arrangement, the supplier’s entire credit risk in respect of sales in that territory is concentrated on the distributor.
- A distributorship arrangement is likely to be governed by domestic and European competition legislation.
- Given the large degree of autonomy granted to a distributor, it is critical that the selected distributor is financially and commercially sound.
Advantages Of Sales Agency
- Supplier has more control over the activities of a sales agent.
- The financial and commercial background of the sale agent will not be as critically important to the principal; although the principal will want to ensure the integrity of the sales agent since the principal will in the normal course be bound by the actions of the sales agent.
Disadvantages Of Sales Agency
- The principal is not able to pass on risk associated with the products to the sales agent.
- The principal will incur liability as a result of the agent’s activities.
- In most instances the principal will be obliged to take on the expense of training the sales agent.
- The principal will still be obliged to take on the expense of training a sales Agent.
- The principal will still be obliged to monitor the accounts of all customers.
Under EU Commercial Agents Regulations (enacted in both ROI and NI) minimum notice provisions apply (from one month to three months) in the event of termination of the agency and the agent may also be entitled to compensation over and above this notice requirement.
What Should We Cover In An Agency Contract Or Agreement?
- Duty of agent to comply with reasonable instructions from his principal
- Duty of agent to communicate necessary information to his principal
- Duty of principal to provide his agent with the information necessary for the performance of the agency contract.
- Remuneration of agent – entitlement to commission
- Termination provisions
- Consequences of termination
- Agreement to supply product
- Clear order and delivery procedures
- Minimum sales and targets
- Competition and restraint of trade – the principal may wish to prevent the sales agent from selling similar products on behalf of other competitors which compete with the contract products for a period after termination of the agreement.
Types Of Distributor Contracts
There are different types of Distributorships; namely an Exclusive Distributorship, a Sole Distributorship, a Non-exclusive Distributorship and a Selective Distributorship.
An Exclusive Distributorship
This is an arrangement whereby a supplier agrees not to appoint another distributor within a defined territory and also agrees not to sell the products directly to customers within that territory. Such an arrangement is frequently used to exploit a product within a new territory. A distributor agrees to take on the risk and cost associated with promoting the new product in the knowledge that he alone will benefit from his efforts. A supplier has the advantage of knowing that the distributorship will be motivated to sell his products.
This is an arrangement whereby a supplier appoints a distributor as his only distributor within a defined territory, but retains the right to promote the products himself within the territory and to sell products direct to customers in the territory in direct competition with the distributor.
A non-exclusive arrangement gives a supplier complete freedom both to sell directly and to appoint other distributors in a territory.
A supplier appoints distributors to establish a network provided that additional distributors meet certain criteria. This effectively limits the number of additional distributors who will be appointed within a defined territory. Such arrangements are perceived as particularly suitable where the product requires an enhanced level of service or advice at the point of sale or where the supplier or manufacturer is required to provide after sale support.
Distributors generally agree only to sell products to end users or to other approved distributors and individual distributors are in a position to compete against each other.
The Contents Of A Typical Distributorship Agreement
- Agreement to supply product
- Clear order and delivery procedures
- Passing of risk
- Payment terms
- Imposition of specific obligations on pricing and other conditions under which the distributor may sell the product to its customers
- Minimum sales targets
- Inspection of records
- Reservation of intellectual property rights
- Competition and restraint of trade – the supplier may wish to prevent the distributor from manufacturing or distributing products which compete with the contract products for a period after termination of the agreement.
- Exclusion of liability – the principal may want to limit the warranties which are given on sale of the goods.
- Product liability – limiting the circumstances/procedures in which the supplier will be liable to the distributor in the event of defective products
- Length of agreement
- Termination of agreement
- Consequences of termination – disposal of stock upon termination
- Additional obligations, such as after sales maintenance service
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