How to appoint a UK agent or distributor

Is it the right model?

Traditionally, a producer or manufacturer wishing to enter the UK market will seek out – or be sought out by – a UK agent or distributor.   That is probably the best way to go about it  for the producer who has no, or very little, pre-existing UK distribution.  It is, however, only one of several possible models to consider, each with its pros and cons.  See setting up UK distribution.

Be aware of the dangers

Assuming the agent/distributor route looks like the best way forward initially, there are dangers that a producer needs to be aware of.  As lawyers specialising in this field, we are used to seeing what happens when things go wrong.  Here are some of the most important things a producer should try to do, or avoid doing.

Check the proposed agent/distributor out

Be sure who and what exactly you will be dealing with.  You will only have recourse to that person if things go wrong.  Will he/she/it be good for the money, where credit  is extended?  (Ask for our FREE GUIDE to Making Sure You Get Paid.)

A limited company is a legal entity quite separate and distinct from its shareholders and directors.  Consider its trading history/record and whether any guarantees should be required from its parent, directors and/or shareholders.  Ask us to help with company searches and credit checks – they’re  inexpensive and can help avoid an awful lot of grief further down the road.  Where is the company registered?  Be aware that England & Wales, Scotland and Northern Ireland are different jurisdictions, with broadly similar, but different, legal systems.  We would not recommend your appointing of an Isle of Man- or Channel Islands-registered company as your UK agent or distributor without first taking legal advice.

Appoint a distributor rather than an agent

An agent negotiates sales on behalf of the producer.  There is one resultant sale contract, which is between the producer and the customer, not between the agent and the customer.  The agent is remunerated by the producer for sales he achieves, usually in the form of commission.

The essence of distribution is that the producer sells his products to the distributor, who then re-sells it to the customer on his own account.  He makes his profit by adding a mark-up to his cost price.

If you appoint an agent (whether an individual, a partnership, or a limited company) who acts as a true ‘commercial agent’, the agent will have certain important rights.  In particular, on the termination of the relationship you may have to pay him compensation, based on the value of the agency at the date of termination.  Appointing a distributor will usually be preferable, as long as you can be sure that any credit you extend will not be at risk.

Be wary of claims that you must appoint an agent

Deciding how to conduct the proposed business is primarily a matter for you and the proposed agent/distributor.  However, you may be told that certain large customers require business to be done on the agency basis, with the agent not only handling all orders but also receiving payments from those customers.  This can be a real danger area for a producer: such arrangements should be questioned, and resisted if possible.  If it genuinely is the case that there will be no prospect of dealing with an important customer in any other way, then a set of minimum essential protections will be required and we suggest you contact us for advice.

If you really must use an agent

Try to get him to agree to accept an “indemnity”, rather than compensation, on termination.  This could substantially limit your liability.  You will have your best chance of negotiating this – and, indeed, any other terms that may improve or protect your position – at the very outset, when the agent is keen to gain the new business.  Which takes us to the final point …

Consider whether you need a written contract

You may or may not be better off with a written contract.  This requires an analysis of what the position will be without a written contract, and whether you can and should try to improve your position by putting one in place.  Do not assume that by producing your “standard” agency or distribution agreement, governed by the law of your country, you will be secure – there are mandatory provisions of UK/EU law that can apply irrespective of any choice of law.  Again, we suggest you contact us for advice in relation to this.

Legal formalities

Once you have chosen your agent/distributor there is nothing you have to do in order to formalise or validate the appointment.  Apart from any regulatory matters that will have to be sorted out in order to ship products and get them into the UK, the two of you can get on with it.

Where the Commercial Agents Regulations apply, each party is entitled to receive from the other, on request, a signed, written document setting out the terms of the agency contract.  Other than that, there is no legal requirement to have a written contract.

UK Tax

A foreign business represented by an independent UK agent is not usually subject to UK tax.  But depending on how the agency will actually operate in practice, the principal could be regarded as carrying on trade in the UK through the agent.  If so, the principal’s income and capital gains from the UK trade could be subject to UK tax.  Registration and compliance with UK company law and VAT requirements may also be necessary.  You should take advice in order to ensure that the arrangements you make will not have the above or any other undesired or unforeseen consequences.

Last reviewed/revised – 04.11.2011