Businesses deciding whether to appoint a commercial agent or distributor may be unaware that an alternative may be found in the European concept of commissionaire agent. But how does a commissionaire agent differ from a commercial agent or a distributor and what are some of the key legal and operational aspects to consider?
A commissionaire agent
A commissionaire agent:
- sells directly to customers in the agent’s own name – the customer is therefore not aware that the agent is acting for a principal;
- invoices the customer in its own name and remits the price it receives to the principal;
- is remunerated by commission paid by the principal either as a percentage of the sale value or on a cost-plus basis;
- deducts the commission from the price received from the customer and remits the balance to the principal;
- does not acquire any rights in the goods – the legal title in the goods passes directly from the principal to the customer;
- remains liable to the customer for the goods since no contractual relationship is made between the customer and the principal.
Commissionaire agent v commercial agent
A commissionaire agent does not fall within the scope of the European Agents Directive which defines “commercial agent” as “a self-employed intermediary” who:
- acts on behalf of the principal, not for himself; and
- has continuing authority to negotiate and conclude contracts for the sale or the purchase of goods on behalf of the principal.
The non-application of the Directive to commissionaire agents was decided in a European Court judgement. The Court reached its decision on the basis that a commissionaire agent acts in its own name and not that of the principal.
This means that for principals using a commissionaire arrangement, such agents will not be subject to the statutory protection which is conferred on commercial agents by the Directive. In particular, a commissionaire agent will not have the statutory right to receive a lump sum payment from the principal either in the form of compensation or indemnity upon termination of a commercial agency. Nevertheless, the costs and risks to which a commissionaire agent is exposed are such that a commissionaire agent can be expected to require a significantly greater commission than that which would be required by a commercial agent.
The concept of “undisclosed agency” is the closest comparison in English law to the European law commissionaire arrangement. However, the key difference is that English law provides that the customer retains a right of recourse against the principal in an undisclosed agency arrangement.
Why use a commissionaire agent over a distributor?
As with a commissionaire agent, a distributor acts in its own name and falls outside the scope of the Directive.
However, although both commissionaire agent and distributor hold the relationship with the customer, a distributor acts for its own risk and account whilst a commissionaire agent acts for the risk and account of the principal. Accordingly, a distributor buys products from the supplier to resell and therefore bears the burden of financing the purchase of stock from the supplier, the risk of holding stock and the credit risk on resale. In a commissionaire arrangement, the products remain the property of the principal until they pass directly to the customer so the principal bears these main financial risks.
In addition a supplier is unable to control the price at which the distributor sells owing to the restrictions on price fixing between independent undertakings under EU competition law. It is less likely that a commissionaire arrangement will be caught by EU competition law as the agency lacks the relevant element of independence from the principal’s business. In a commissionaire arrangement the principal is therefore able to retain control over the price of the products.
Other attractions of the commissionaire arrangement are from an operational perspective. In particular, for a principal wishing to merge its operations over a number of European territories the commissionaire structure can provide an opportunity for weak or new markets to be subsidised with revenue flows from stronger markets. There may also be tax-savings. For example, where a principal is located in lower tax territory and commissionaire agents operate in normal rate territories, the effective rate of the “group” is likely to be reduced.
Take home point
Whether a business chooses to use an agency or distributorship structure will depend on the aims of the business as a whole. In particular, how much control it wishes to retain versus the financial risk it is willing to carry. It is worth considering, however, that a commissionaire arrangement provides the option for a principal to retain greater control without being subject to the agent-friendly provisions of the Directive.