Q&A with Isidora & Company: Agent or distributor: Which option and why?
My daughter recently graduated from the University of Dar es Salaam, and our family would like to help fund her start-up sales business in the fast moving consumer goods (FMCG) sector in Tanzania. Kindly explain the legal and practical differences between an agent and a distributor. Given the differences, if any, which is best for my daughter’s FMCG sales business? Is it possible to be both agent and distributor of various goods under the same agreement? Mzee Lugano.
To grow a manufacturing business and increase sales, manufacturers have a choice: either to endeavour to perform the full scope of the selling function by themselves, or they can outsource part of that function by appointing agents or distributors.
The benefits of outsourcing the selling function includes taking advantage of the local knowledge and established personal and business networks of an agent or distributor, or saving the costs associated with setting up and managing own selling operations in Tanzania.
Legal and practical differences
The terms “agent” and “distributor” are often used interchangeably, however, from a legal perspective, the roles of an agent and a distributor are very different.
A distributor buys goods on his own account from a manufacturer and resells them to customers.
An agent introduces purchase orders from third parties (customers) and then the manufacturer or supplier sells directly to these third party customers.
What this implies is that, in a distribution arrangement, the contract for goods is between the distributor and the customer.
In an agency arrangement, the contract for goods is between the reseller/supplier and the customer.
A distributor assumes more financial risk reflected in the margins on the resale of the manufacturer’s goods. The margins are normally greater than the commission of an agent on sales deals between the supplier and the customer.
Another notable difference between an agent and a distributor is that the distributor is responsible for delivering the goods and providing after sales service regarding the goods, whereas agents are not usually involved in delivering the goods or providing after sales service.
Sections 134-189 of the Tanzanian Law of Contract Act, Cap 345, apply to agents and give much greater protection to agents, entitling them to a payment on termination of the agency arrangement.
As the principal-agent relationship can be delicate and expensive, careful planning for contractual mechanisms and procedures to deal with principal-agent problems is very crucial.
Which is better?
Straightforward answers to the question as to which is the better option between an agent and a distributor, are not always forthcoming.
It all depends on one’s own circumstances. Thus, if your daughter wants to assume more risk and to earn greater margins on FMCG sales, she is probably better off acting as a distributor.
However, acting as such could increase her risk for product liability claims if the goods are defective.
But if your daughter wishes to have control over the marketing and pricing of the goods and to maintain relationships with the end customer, then acting as an agent may be a better option.
In addition, if a foreign manufacturer appoints an agent in Tanzania, this may trigger tax implications for the manufacturer, but appointing a distributor should not give rise to this problem. So, basing on the tax advice received, the manufacturer may insist on a distribution arrangement.
Distributorship arrangements and agency arrangements are fraught with legal disputes, particularly when the manufacturer or reseller thinks that it is a distributorship arrangement, but the “distributor” thinks it is an agency arrangement they entered into and attempts to claim compensation when the relationship ends.
Acting as both agent and distributor
It may be possible to act as both agent and distributor of various goods under the same agreement. For instance, your daughter’s FMCG sales business could act as a distributor in reselling low value and high volume goods, but act as an agent for high value contracts for which the customer desires the security of transacting with a big manufacturer.
However, mixed agency and distributorship arrangements are a rarity.
It is really important to clearly outline the relationship in the agreement to leave no doubt as to roles and responsibilities and exposure to risk. Inscribing the words “distributor agreement” or “agency agreement” on an agreement is insufficient evidence in itself as to the nature of the arrangement.
In the event of a dispute, the court may invoke the doctrine of “substance over form” to hold that the inscription of “agency agreement” is not binding on the parties if the arrangement is one of distributorship.
We strongly recommend that your daughter takes professional advice on the terms of any agency or distribution agreement to ensure safe trading.
Please do send us your questions by e-mail to [email protected]
DISCLAIMER: The purpose of this weekly Q&A column with Isidora & Company Advocates is intended to educate the public on Tanzanian law matters, and is not a substitute for the role of your legal counsel. For any legal issue you face, you are strongly encouraged to contact your legal counsel.
Paul Kibuuka ([email protected]) is a tax and corporate lawyer, tax policy analyst and chief executive of Isidora & Company.
