Article courtesy of Law Dot News | Business Law – Company / Corporate Compliance

Directors – When Are They Personally Liable?

“… for the benefit of immunity from liability for its debts, those running the corporation may not use its formal identity to incur obligations recklessly, grossly negligently or fraudulently. If they do, they risk being made personally liable.” (Quoted in the judgment below)

Particularly in hard times, it is not at all uncommon to find yourself unable to recover a debt from a company in financial straits whilst at the same time you know that its directors hold assets in their own names. Can you attack them personally?

The answer is founded in the centuries-old concept of companies as separate legal entities or “juristic persons”. They trade in their own names and have their own assets and liabilities, so as a rule directors will not be personally liable for a company’s debts unless either –

 

1. They signed personal suretyship for them, or
2. They fall foul of one of our law’s provisions entitling a court to declare them personally liable.

So, in the absence of personal suretyships, when in practice can you recover a company debt from its director/s? And when are you as director at risk of being sued personally?

Let’s look at the facts and outcome of a recent High Court case for some insights –

 

The fraudulent car auction, the disappearing company and the director’s defence

 

• The buyer of a car on auction subsequently discovered that it was a 2010 model despite being sold to her as a 2012 model.
• She cancelled the sale, returned the car to the auction company that had sold it to her, and, when her demand for a refund of the purchase price was refused, took a default judgment against the company.
• What followed was a saga of unsuccessful attempts to recover her money from the company, its address having changed and the director claiming to have resigned and sold the company, which he said had ceased trading and was awaiting deregistration.
• The buyer eventually sued the director personally, asking the Court to “pierce the corporate veil”. The director’s defence boiled down to saying that he had not used the company “as a front”.

 

Piercing the corporate veil

“Piercing the corporate veil” in this context is, simply put, a court holding directors personally liable for a company’s debts by declaring that the company is to be “deemed not to be a juristic person” in respect of particular debt/s.

On what grounds will a court make such a declaration? Per the High Court in this matter:

 

• Where there is “fraud and the improper use of a company or conduct of the affairs of a company” or
• “[W]here its incorporation, use or an act performed by or on its behalf [the Court’s underlining] constitutes an unconscionable abuse of the juristic personality of the company as a separate entity.”

 

The director’s misrepresentation and “cavalier disregard” for the company’s interests

 

• On the facts, the Court found that the director had misrepresented the details of the motor vehicle to the buyer, that this misrepresentation was material and induced her to purchase the vehicle, and that it “was deliberate such that it amounted to fraud, alternatively dishonesty, further alternatively improper conduct.”
• “Additionally, as the director and owner, he acted with cavalier disregard for the interests of the company … Such conduct is manifestly not in the best interest of the company and may be considered reckless and dishonest. This conduct was indubitably with callous disregard for its effect on the company as a separate legal entity and at a time when he describes its financial situation as being parlous.Therefore, whilst a director is entitled to resign at any time, his resignation cannot be used as a means of evading his fiduciary duties as a director.”
• Concluding that “the conduct of the director adversely affected the [buyer] in a way that reasonably should not be countenanced and which constitutes an unconscionable abuse of the company’s juristic personality”, the Court declared him personally liable to repay her the purchase price, interest, and costs.

Disclaimer: The information provided herein should not be used or relied on as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your professional adviser for specific and detailed advice.

 

© LawDotNews

Article courtesy of Law Dot News | Business Law – Delict and Civil Claims

“Where one of the parties wishes to be absolved either wholly or partially from an obligation or liability which would or could arise at common law under a contract of the kind which the parties intend to conclude, it is for that party to ensure that the extent to which he, she or it is to be absolved is plainly spelt out.” (Extract from judgment below)

Employee theft has been a headache for employers from the dawn of history, and no business should ignore the dangers it poses, particularly if your business handles third-party high value goods. Your chances of being sued if one of your employees steals a customer’s asset/s are high, the reason being of course the concept of “vicarious liability” – the legal rule that can make you generally liable for your employee’s actions.

Your best defence (other naturally than taking steps to stop light-fingered employees from stealing in the first place!) is the “exemption” or “disclaimer” clause. It can present a formidable obstacle to any customer (or their insurer) seeking to hold you liable, but it needs to be professionally drawn, unambiguous, and tailored to suit your particular industry, circumstances and contracts.

A recent Supreme Court of Appeal (SCA) decision illustrates –

The cargo thief who stole R4.5m worth of computers

A customer imported by air freight some R4.5m worth of computers and accessories, and contracted a clearing and forwarding agent to receive and forward them to the customer from the SAA cargo warehouse.

The agent’s employee, armed with his “identity verification system” card and the necessary custom release documents, collected and loaded the consignment into an unmarked truck, signed the cargo delivery slip, and disappeared with his loot.

Sued by the customer for its losses, the agent relied on the exemption clauses in its Standard Trading Terms and Conditions. These clauses were comprehensive and widely worded which, as we shall see below, proved central to the agent’s legal victory here.

On appeal the SCA dismissed the claim against the agent on the basis that it had been able to prove that its liability was excluded by the exemption clauses. Let’s see how it achieved that…

Employers – can you be sued?

Without an enforceable exemption clause in its standard contract, the employer in this case would have been liable for R4.5m (plus substantial legal costs).

Critically, the forwarding agent’s success here resulted from the Court’s interpretation of the wording of these particular clauses, in the context of this particular contract, and in the particular circumstances of this matter. Any ambiguity in meaning would have been fatal for it, and it was particularly assisted in this case by the fact that it had made special provision in the contract for “goods requiring special arrangements”. In other words, make sure your contracts all contain unambiguously worded exemption clauses tailored to your specific industry and circumstances.

Customers – can you sue?

Read and understand the contracts you sign, follow any requirements applying to specified or “valuable” goods, and take professional advice if you are unhappy with any of the terms. The reality is however that few service providers will be prepared to compromise on exemption clauses, which leaves you vulnerable unless you have the right type of insurance cover – check upfront!

Disclaimer: The information provided herein should not be used or relied on as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your professional adviser for specific and detailed advice.

© LawDotNews

Article courtesy of Law Dot News | Business Law | Corporate Compliance

“Creditors have better memories than debtors” (Benjamin Franklin)

In these hard times of pandemic and economically destructive unrest, an unfortunate number of businesses face collapse, and many will opt for the “first aid for companies” option of business rescue.

Creditors coming out of that process with a shortfall (only the luckiest creditors are likely to emerge with full settlement) will naturally look to any personal suretyships they hold to cover that shortfall.

A recent SCA (Supreme Court of Appeal) decision has brought welcome clarity to the question of whether – and in what circumstances – such personal suretyships will survive the business rescue process.

Both directors and creditors need to understand the outcome, and to act accordingly.

Sued for R6m, a CEO’s defence crumbles

• A company CEO (Chief Executive Officer) signed a personal suretyship in favour of a creditor supplying the company with petroleum products.
• When the company fell upon hard times it was placed into business rescue. Eventually a business rescue plan was adopted, the rescue process was terminated, and the creditor sued the CEO for the shortfall on its claim of just over R6m.
• The CEO’s main defence was that his liability as surety was an “accessory obligation” – in other words, if the creditor’s claim against the principal debtor (the company) fell away, he should be released from his liability as surety.
• But, held the Court, although a principal debtor’s discharge from liability does indeed ordinarily release the surety, our law allows the creditor and the surety to agree otherwise.
• And the suretyship agreement in this case did just that. It contained “unobjectionable” and “standard” terms which included a specific agreement by the surety that he would remain liable even if the creditor “compounded with” the company by accepting a reduced amount in settlement of its claim. Nor was there any mention in the business rescue plan of its effect on creditor claims against sureties (it could, for example, have provided specifically for sureties to remain on the hook, or to be released). But the deciding factor remained that the wording of the suretyship was such that the creditor did not abandon its claim against the surety by supporting the business rescue plan.
• Bottom line – the CEO goes down over R6m, and the creditor has another shot at emerging unscathed from the mess.

Heed these lessons from the judgment!

The SCA in its judgment undertook a comprehensive interpretation of the terms of the deed of suretyship, of the business rescue plan, and of the relevant legislation. Although the detail will be of more interest to lawyers and academics than it will be to the average director or creditor, it did bring welcome clarity to an issue of great practical importance, and the valuable lessons therein should be heeded –

Directors: As always, think twice before signing any personal suretyship, and if you absolutely have no alternative, at least understand fully what you are letting yourself in for both legally and practically. Equally, ensure that the business rescue plan lets you fully off the hook as regards any possible personal liability; you may be advised to go further and have a separate release agreement with any creditor/s holding your surety. Although not directly relevant to this article, think also of managing any risk of personal liability beyond suretyship, such as allegations of reckless trading and the like.

Creditors: You on the other hand should always try for watertight and upfront suretyships from directors and others with attachable assets (again not directly relevant to this article, but also take whatever security you can over company assets such as debtors, fixed property etc). And when it comes to the business rescue plan, make sure that it leaves your claim against sureties unaffected.

Upfront professional advice and assistance is a real no-brainer here!

Disclaimer: The information provided herein should not be used or relied on as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your professional adviser for specific and detailed advice.

© LawDotNews

 

The Elon Musk Tweet

As most entrepreneurs and business owners the world-over know, Elon Musk is the CEO and, until recently, chairman of the board of Tesla. In these positions, whenever Elon speaks or writes, it has a profound affect not only on the reputation but also on the share price of Tesla. Knowing this, I was stunned when Elon recently tweeted that British diver- Vern Unsworth who rescued the young boys of the Thai football team from near certain death- was a paedophile and child rapist. There was, at the time of Elon’s tweet, no evidence of the truth or veracity of such accusations. Unsworth is now suing Elon for defamation for a claim of £ 57,000.00 (approximately ZAR 1,098,960.00).

Regulated Twitter Use

The use of Twitter and other social media platforms has become part of many a business marketing and PR strategy to grow brand presence and to attract new customers. As business lawyers, we have always advocated that employing such a social media strategy must be done with the awareness of the risks that any improper tweet or post could have on the reputation of the business. One way to help mitigate such risks, from an employment point of view, is to regulate the use of social media by a business through a comprehensive social media policy.

Can an employee be fired?

But what about that employee who tweets or posts comments, views and opinions that are not necessarily that of the business and are disclaimed using that old chestnut “all views are my own” disclaimer? Can such an employee whose tweet harms or potentially harms the reputation of the business be fired?

In general, there is no reason why not, especially where the comment or views can be contextually linked to his or her employer. In today’s connected world, the “all views are my own” disclaimer by an employee (even when posted on his or her personal social media account) cannot be relied upon and it must be assumed that any posting on social media could almost always be viewed as a statement emanating from the business.

Rhiannon Cambrook, Managing Director of Zest Recruitment and Consultancy and Solicitor states: “Tweeting is seemingly an innocent way to pass the time and keep up with your network. With 74% of people using it as their primary news source, each tweet that is posted has the potential to be seen not just within the immediate network, but by hundreds, thousands or even a million people. The need to mind one’s p’s and q’s has never been greater”

When an employee uses social media, even in his or own time and on his or her personal social media account, the world is waiting to take on news of any kind. This is a death trap all of its own as frustrated or angry or rebellious or bored employees vent their feelings and beliefs on social media. The lines have become blurred between the personal space of the employee and that of the business and because of this, fairly or unfairly, thoughtless posting may lead to a business suffering unimaginable reputational damage as well as face the real risk of a civil suit for defamation. This was the case with Elon who, after posting his views about Unsworth, was not only sued for defamation but also resulted in Tesla’s share price falling by nearly 3% in a few days!

Where an employee’s tweet or post negatively impacts upon a business, especially where such causes the business a risk to reputational damage or even foreseeable risk to reputational damage, such a business has a reasonable right, in my view, to protect its interest. This may, itself, be the foundation upon which an employee could be fired.

Prevention better than a cure

So, what can employers and employees do to avoid the death trap of tweeting on Twitter? Well, its starts with applying common sense in the first instance: Realise that the whole world is now connected and it makes very little difference to readers of social media content whether you tweet or post in your own name or that of your company. Secondly, refrain from posting on debatable issues where opinion (informed or uninformed) is divided. Thirdly, never post or tweet in a state of anger or frustration as you will not be thinking clearly to objectively determine the appropriateness of your tweet.

As business lawyers, we often advise our business clients that prevention is better than looking for a cure and one way to achieve this, in the employment space, is to develop policies to train and guide employees on the use of social media. Given that the reputation of any business in a connected world is a protectable interest, any threat thereto by an employee tweeting content that undermines such reputation is one that may very well result in the employee’s dismissal.

Disclaimer to this article: This article is published for you to read and, if you so wish, share with others on the understanding that at all times the copyright herein will and is the sole and exclusive ownership of the author. The article is made available for informational purposes only and does not in any way constitute legal advice. No representations as to the accuracy, completeness, suitability or validity of this article is made. No liability will attract to the author for any losses, injury or damage you may suffer arising out of your use of this article. It is recommended to always seek professional assistance of a qualified lawyer at all material times.

By: Sean Bosse

The Cost of Litigation

The very nature of business and our commercial interactions with each other means that the ground is always fertile for disputes to arise. In cases of dispute that cannot be resolved between the parties on an amicable basis, either one or both parties may proceed to have the dispute referred to court for a final determination.

The fact that everyone in South Africa has the right to access to justice, does not always mean that it comes without cost. In this article, I explain in broad terms the nature and application of costs in litigation proceedings.

In general, our legal system is premised on the so-called adversarial system meaning that parties to a dispute will present and argue their respective sides of a matter in a dispute before an impartial judge, magistrate, arbitrator, or the like. More often than not, the disputing parties will employ the services of professional legal representatives to assist with the preparation and presentation of their cases.

The dispute resolution procedure.

A legal representative renders his/her services to his/her client on the basis of a contract of engagement, colloquially referred to as a mandate. The mandate spells out, among other things, what services will be rendered by the legal representative and what he/she will charge the client for such services.

The legal charges are usually made up of two parts: out of pocket expenses, also known as “disbursements” such as: costs of travel, sheriff services, advocates charges, courier charges and the like. The legal representative will also charge his/her client a time-based amount for the services he renders when employing his skills and expertise to the matter. These costs are known as the “attorney and own client costs” and are derived from the mandate concluded between the legal representative and his/her client.

In the process of the legal representative executing his/her client’s instruction and performing his/her services under the terms of the mandate, the client will be invoiced on a regular basis by the attorney his legal charges for work done. The client will be required to pay these legal charges to the attorney as and when they become due.

As a general rule, the party who is successful in the litigation matter will be awarded an order by the court for the loser to pay his/her costs. The rationale hereof is, in general, that the loser will be required to recompense the winner a portion of all the legal charges that he has paid in successfully bringing or defending the legal action. The amount of such legal costs that the loser must pay depends on the nature of the award of costs.

If the court orders the loser to pay the winner’s costs on the scale as between “attorney and own client”, this means that the loser will be required to pay almost all of the winner’s legal costs that he/she can show was incurred.

If the court orders the loser to pay the winner’s costs on the scale as between “attorney and client”, such costs will be payable at a rate usually lower than that of the first-mentioned scale as determined by the charges emanating from the mandate.

Lastly, the court may order the loser to pay the winner’s costs on the scale as between “party and party” and which scale of costs is the lowest level of charges that can be recovered and that is regulated by legislation.

Irrespective of the costs order, the winner of the litigation will be required to prove and quantify his/her costs incurred by way of the preparation of a Bill of Costs. This bill tabulates each and every cost item incurred and provides a reference to the date of such cost item incurred and brief explanation thereof.

The Bill of Costs is referred to both the loser and to an independent adjudicator known as the Taxing Master. The Taxing Master will, on a prescribed date made known to both parties, invite them or their legal representatives to persuade him (Taxing Master) why certain cost items should be refused. The idea behind this process is to ensure that on a final determination, the costs recoverable from the loser is fair and reasonable.

Once the Bill of Costs has been carefully considered, the Taxing Master will approve it, and which approved Bill of Costs is now referred as the taxed allocator. This taxed allocator represents the amount that the loser must pay to the winner.

Are there any alternative courses of action?

Litigation is not for the feint-hearted in terms of the time and process but also in respect of the potential legal costs that may be incurred and that will be payable by the loser. It is therefore advisable that all business owners review their contracts and ensure that they include therein the basis on which costs will be recoverable from the other contracting party in the event of a dispute.

It is equally advisable that before parties’ rush into protracted litigation, consideration be given to alternative means to resolve disputes that will both be a time and money saving alternative. This includes consideration of self-imposed mediation or assisted mediation. The use of arbitration is another alternative to consider that, while costs will be incurred, is sometimes a faster process and eliminates time-spend. Also, the access to tribunals established under law giving access to the public to various ombudsman must also be carefully considered.

When all else fails and litigation is the best alternative, we recommend that you discuss the potential legal costs with your legal representative to agree on costs management arrangement other than one that is only time-based. This can be achieved in numerous and, sometimes, innovative ways such as a fixed-charge arrangement, contingency arrangement (in limited circumstances), a pre-payment arrangement and such similar fee structured arrangements.

Good luck!

Disclaimer to this article: This article is published for you to read and, if you so wish, share with others on the understanding that at all times the copyright herein will and is the sole and exclusive ownership of the author. The article is made available for informational purposes only and does not in any way constitute legal advice. No representations as to the accuracy, completeness, suitability or validity of this article is made. No liability will attract to the author for any losses, injury or damage you may suffer arising out of your use of this article. It is recommended to always seek professional assistance of a qualified lawyer at all material times.

By: Sean Bosse

In a recent commercial dispute, our client stared down a demand from her ex- franchisor to stop trading in her new business that was deemed to be the same or similar to the one she had operated under license from the ex-franchisor. The franchise agreement had a rather clumsily drafted restraint of trade clause incorporated therein which our client’s ex-franchisor was relying on to prevent her from trading in competition with the franchised business.

On the facts of our client’s case, the question was whether the restraint was legal and, if so, was enforceable? To our client’s delight, we were able to demonstrate that the restraint had no force of law and that she could continue with her business without fear of the threats made by her ex- franchisor.

So, what, in broad terms, does our law say about the legality and enforceability of a restraint of trade?

Firstly, it is worth remembering that under our constitution, every person has the right to choose and practice his or her trade, occupation or profession. This right is, however, not absolute and it can be limited under certain laws of general application.

It must also be remembered that our law recognises that people have the freedom to make their own contracts and to bind each other to such terms and conditions as they may wish to impose on each other but always mindful that such a contract or any of the terms of such contract is/are not unlawful or against public policy.

While a restraint of trade would appear to be a violation of a person’s rights to chose and practice his or her trade, occupation or profession, our law has not ruled that the inclusion of such a term of contract is, per se, unlawful and without force.

What is the purpose of a restraint of trade provision?

The purpose of a restraint provision in a contract must be directed at the preservation of a protectable interest such as, for example, the trade secrets of a business and not merely with the aim of stifling competition. Any restraint of trade that has, as its main feature, the aim only at preventing competition and nothing more, would, arguably, be held to be against public policy and therefore unenforceable.

Any restraint of trade that has as its aim the preservation of a protectable interest must, in addition, also be reasonable in terms both of time and geographical location. It would, arguably, be unreasonable, and therefore against public policy, for a franchisor to enforce a restraint of trade on a franchisee from operating his business (even if it is the same as the that of the franchisor) where such business is conducted in another geographical area to that of the franchisor. It would, also, be unreasonable to impose a restraint on a person where the period of such a restraint is irrational and unreasonable say, for example a restraint of trade for a period of 10 years.

The situation may, arguably, be very different and the restraint enforceable where its limitations a reasonable to, say, the same geographical area in which the Franchisor operates his business and has almost all of his customers and if the period of that restraint was effective for no more that, let’s say, 2 years.

Glancing at the case law we researched when assisting out client with her restraint issue mentioned above, it dawned on us that litigants are too quick rush to court to enforce restraint of trades without first asking the fundamental questions and objectively answering whether: (a) there is a legitimate protectable interest worthy of preserving rather than the restraint terms of the contract being used as a tool to only stifle competition, and (b) whether the time period of the restraint is reasonable;  and(c) whether the restraint is reasonable given the geographical extent and reach of the franchisor’s protectable interest is concerned.

A carefully considered and properly worded restraint of trade provision in a contract is a powerful tool to legitimately protect a person’s business interest, always mindful that such restraint not fall foul of public policy or be aimed solely at stifling competition.

Disclaimer to this article: This article is published for you to read and, if you so wish, share with others on the understanding that at all times the copyright herein will and is the sole and exclusive ownership of the author. The article is made available for informational purposes only and does not in any way constitute legal advice. No representations as to the accuracy, completeness, suitability or validity of this article is made. No liability will attract to the author for any losses, injury or damage you may suffer arising out of your use of this article. It is recommended to always seek professional assistance of a qualified lawyer at all material times.

By: Sean Bosse

Taking products to market for sale to the end consumers usually entails a supplier engaging with a distributor or an agent in the supply chain. Broadly observed, the distributor and agent would appear to be one and the same thing except for the obvious difference in the names. This broad observance has, however, caught many a supplier out and has been the subject of many disputes. But why?

Generally, a lack of understanding of the differences between the purpose, scope and function of an agent and a distributor and how, and to what extent, the engagement of the one or the other impacts the supplier’s business are the main reasons. In this article, I intend to give a broad overview of what an agent and distributor is as well as some general insight into the advantages and disadvantages a supplier should consider before concluding an agency or distribution agreement.

Agent and Agency Agreements

An agent is best described as an intermediary tasked with bringing together the supplier and the supplier’s customers. The best example of this relationship is that of an estate agent who assists a home owner to market his or her property to the general public and, through such marketing efforts, finds a willing and able purchaser. The agent brings together the home owner and the purchaser so that they can conclude the sale agreement.

An agency agreement usually sets out the extent that such agent is empowered to represent the supplier in its dealings with the public at large and the supplier’s customers in particular. So, for example, the conclusion of an exclusive agency would prevent the supplier from appointing any other agents in the territory and would also limit the rights of the supplier in marketing and selling its products directly to the customer. A sole agency, on the other hand, would likewise prevent a supplier from appointing other agents in the territory but would allow the supplier itself to seek out sales in the territory. Finally, an agency may be granted by the supplier on a non-exclusive basis allowing the supplier to appoint multiple agents in the territory while also allowing the supplier itself to seek out direct sales with customers.

In terms of the agency relationship, the agent earns its remuneration by way of an agreed commission for the services provided to the supplier. The amount of the commission payable by the supplier is one that is agreed between the agent and the supplier. Such commission is, however, usually much lower than what a distributor earns is the sale of the products for the reasons explained below.

The advantages of an agency relationship include the following:

• The customers will be those of the supplier and not that of the agent. Maintaining direct relationships with customers is an important consideration and under an agency agreement, this will, generally, be achieved as opposed to that under a distributor relationship;
• The supplier will control the sales process right from the marketing of the products, the terms of the sale contract and the price for the products;
• The payment of commission is usually payable to an agent only on the meeting of certain agreed terms resulting in a sale contract. This frees up monthly cashflow for the supplier rather than the burden of having to pay the agent a monthly salary;
• The performance of the agent can be strictly controlled by the supplier. In the event of a non-performance or an under-performance, the agency agreement may be terminated by the supplier.

There are certain disadvantages a supplier must be aware about when concluding an agency agreement. These are:

• The agent is an extension of the supplier and, as a result, all the actions of the agent will be regarded to be the actions of the supplier. The supplier will, generally, be liable for all of the acts of the agent;
• The supplier will continue to be burdened with administrative matters and the cost of administration in dealing with customers as well as bear the full financial risks in marketing and selling the products. All after sales issues will also be the burden of the supplier and not that of the agent.

Distributor and Distribution Agreements

A distributor, unlike and agent, purchases the products from the supplier and then re-sells those self-same products to its customers in a particular territory and on its own terms. The distributor is not an intermediary and therefore enters into a sales contract direct with its customers.

An example of a distributor would be someone who obtains the rights of an overseas manufacturer or supplier to distribute the its products in South Africa. The distributor acquires the product direct from the overseas supplier and will, thereafter, conclude a sales agreement between it and its own customers. The overseas supplier does not feature in the contractual relationship with the customer at all.

Similar to an agency agreement, a distribution agreement will also set out the parameters of the rights of the distributor including whether such distributor is granted rights to distribute and sell the supplier’s products on an exclusive, sole or non-exclusive basis.

Unlike an agent, the distributor earns its revenue from the mark-up it levies on the products purchased from the supplier. The mark-up is usually at a greater percentage than what an agent would earn on commission but such difference takes into account the financial risk the distributor takes.

Some of the advantages of a distributor relationship are the following:

• The supplier has less administrative responsibility and has reduced administrative costs to contend with as its supply and sale of the products is to the distributor and not to a plethora of customers. Customer accounts and customer management are, therefore, far less in a distribution arrangement than in an agency relationship;
• The distributor bears most of the financial risk in the supply and re-sell of the products. As a result of this risk, the distributor’s earnings are normally greater than that of an agent;
• The distributor is motivated to sell products quickly given that its funds are tied up in the sale and until the payment of the sale price by the customer.
• The main disadvantages of a distribution relationship are the following:
• The supplier has very little control over the activities of the distributor, especially in the way and manner it markets the products and the after-sale service;
• The customers purchasing the products from the distributor are the customers of the distributor and not those of the supplier;
• There is limited control by the supplier on the price establishment as the distributor will usually determine the mark-up to be levied on the products to cover not only its costs but also ensure a reasonable profit margin.

Agency or Distribution?

The choice of whether to engage an agent or a distributor is one that requires careful consideration by the supplier for the many reasons summarised in this article. The decision by the supplier as to the best supply channel to market must not only be driven by profit but also upon careful consideration as to whether the agent or distributor will help to enhance the supplier brand and grow sales through their commitment to ensuring standards of safety and utility of the products sold and the brand building of the supplier and /or the products to develop meaningful trust in the mind of the customers.

Simply concluding an agency or distribution agreement without thought into the advantages and disadvantages of both is a recipe for disaster. If you do that, all we can say is “Supplier be careful!”

As retail lawyers, we can advise you on the appropriate supply chain channel partnership to engage in and to assist you in preparing your agency and distribution agreements. Contact us if we can assist.

Disclaimer to this article: This article is published for you to read and, if you so wish, share with others on the understanding that at all times the copyright herein will and is the sole and exclusive ownership of the author. The article is made available for informational purposes only and does not in any way constitute legal advice. No representations as to the accuracy, completeness, suitability or validity of this article is made. No liability will attract to the author for any losses, injury or damage you may suffer arising out of your use of this article. It is recommended to always seek professional assistance of a qualified lawyer at all material times.