Selling wine via an agent or a distributor? What's the difference?

It is common practice in the wine industry for producers or traders to appoint a third party to sell their product. This can be an effective way to increase the market reach of the wine. Most wine producers will offer direct to customer sales but will not have the capacity or capability to engage in the marketing, sale and delivery of their wine on any significant scale to wholesalers or international markets. They are likely to contract with an agent or a distributor instead.

A wine producer may appoint either an agent or a distributor. There is an important distinction between the two and there are several potential pitfalls that producers need to be aware of when contracting with the third party. The main practical impact that can catch the unwary producer is that a commercial agent may be liable to compensation when the agency agreement ends.

Typically, an agent will act as an intermediary between the producer and the producer’s customer whereas a distributor will purchase the producer’s goods and sell the goods on their own behalf. A distributor can, helpfully, also be described as a ‘re-seller’.

Key characteristics of an agent

Typical features of an arrangement with a commercial agent are:-  

• The agent acts on the principal’s (producer’s) behalf to find and negotiate sales of the producer’s wine. The sale will be from producer to customer;
• The legal title to the goods remains with the producer until the point the sale to the customer is concluded. The agent does not take ownership of the wine;
• The agent is usually paid commission. This may be a percentage of the sales that the agent themselves have concluded;
• The producer will usually set the sale price;
• The risk in unsold wine remains with the producer;
• The producer remains liable for wine that is returned for being poor quality.

If a relationship is one of agency then the Commercial Agents (Council Directives) Regulations 1993 (‘the Regulations’) will apply. These govern the relationship between the producer and the agent and, importantly, will entitle the agent to compensation if the agency agreement is terminated. The Regulations define a commercial agent as:

'...a self-employed intermediary who has continuing authority to negotiate the sale or purchase of goods on behalf of another person (the “principal”), or to negotiate and conclude the sale or purchase of goods on behalf of and in the name of that principal.'

Accordingly, an agent should be independent and self-employed rather than employed by the producer. The relationship between the parties should have an element of duration to it, if the third-party was appointed for the purposes of one transaction only then they are unlikely to be an agent. When the agent enters into contracts for sale of the producer’s wine, these contracts should be concluded in the name of the producer rather than in the name of the agent. 

If a producer does choose to appoint an agent and the producer then terminates the agency agreement, the agent may be entitled to compensation under the Regulations. In the absence of any agreement as to the amount of compensation, the agent will be entitled to compensation for any damage that has occurred as a result of the termination of the agent’s relationship with the producer. Regulation 17 defines damage as circumstances that:

‘(a) deprive the commercial agent of the commission which proper performance of the agency contract would have procured for him whilst providing his principal with substantial benefits linked to the activities of the commercial agent; or

(b) have not enabled the commercial agent to amortize the costs and expenses that he had incurred in the performance of the agency contract on the advice of his principal.’

The Regulations do not set out how compensation is calculated, however, the High Court case of Lonsdale v Howard & Hallam [2007] UKHL 32 held that the basis for calculating compensation is by reference to the loss of value of the agency. This means asking the question, what would a hypothetical purchaser be prepared to pay for the agency agreement on termination? In Lonsdale v Howard & Hallam the net annual commission for the agent was £80,000 and the judge found the appropriate figure for compensation was £5,000. This agent’s business was in decline which may explain the relatively small amount of compensation that was paid. By comparison, in Green Deal Marketing Southern v Economy Energy Trading Ltd [2019] EWHC 507 (Ch) the agent’s business was stable and the economy in which it operated was growing, the agent was accordingly awarded compensation of £1,049,600 calculated using the EV/EBITDA method of valuation (Enterprise Value/Earnings Before Interest Tax, Depreciation and Amortisation). This is a complicated calculation that was based on the expert evidence given in Court, but followed the precedent set by Lonsdale v Howard & Hallam that compensation will be calculated according to what the hypothetical purchaser would pay for the agency agreement.

If the agent and the producer have agreed to pay compensation on an indemnity basis then this is calculated in accordance with Regulation 17 (4). This stipulates that the amount shall not exceed a figure equivalent to the agent’s annual remuneration over the preceding five years, and if the contract goes back less than five years the indemnity shall be calculated on the average for the period in question.

Key characteristics of a distributor

If a producer appoints a distributor for their products then the Regulations do not apply. If the relationship is one of distribution then the distributor typically buys the products from the producer and sells them on independently forming a contract in their own name directly with the buyer.  A distributor would normally apply a mark-up to the price that they bought the wine at. The distributor owns the legal title to the goods and assumes the risk of that wine not selling. If the distribution agreement is terminated, the distributor has no statutory entitlement to compensation, although the parties could still agree, under the contract, that some measure of compensation should be payable.

Which to choose

Whether to enter into a distribution agreement or an agency agreement will depend on the priorities of the wine producer.

In circumstances where a producer wishes to retain a degree of control over where their product is sold and to whom, then an agency agreement may be appropriate. Appointing an agent can also help cost-conscious producers keep expenses down, the commission paid to agents is often less than the discount given to distributors when purchasing the wine. From a competition law perspective, an agency agreement may be beneficial to producers if they are concerned about their channel to market, although it should be borne in mind that competition law may still apply to the producer’s own market share. 

A distribution agreement may be appropriate if the producer wants the distributor to absorb the risk of the goods not selling. If a producer is looking to expand into a new territory, the appointment of a distributor can spread some of the risk that this involves, furthermore, a producer may be able to capitalise on the reputation and experience built up by certain distributors in new territories. If a producer is concerned about avoiding a taxable presence or permanent establishment in a certain jurisdiction, appointing a distributor can be a way around this. A distribution relationship can provide administrative and financial benefits, if a producer appoints a distributor then this could significantly reduce the number of customer relationships that the producer needs to manage. For any producers seeking to reduce their expenses, using a distributor may come with the added benefit of cost-saving which is often a key attraction of outsourcing.

The key point to bear in mind is that there is more recourse available to an agent upon termination of the agreement than there is to a distributor. If you are a wine trader or producer and would like to discuss any of the issues raised in this article, please contact Ed Henderson or Nigel Urwin  to discuss further.