Often confused due to some common features between them, there are in fact are important distinctions between an agency and distributor relationship.
Agency and distribution are both examples of channels to market: i.e. means by which a manufacturer, producer or an intermediary, such as a wholesaler, gets its products to end-user customers.
Other channels to market include direct sales (where sales staff are employed directly by the manufacturer) or where the manufacturer sells at a distance (eg via the internet), entering into a joint venture with a local business, and franchising (which has many features in common with distribution).
Let us know if you need an agency or distributorship agreement for your business.
To help understand the factors to determine whether an arrangement is agency or distribution, the following features can be considered:
Sells on whose behalf: In an agency arrangement, the agent sells on behalf of the principal, while in a distribution arrangement, the distributor sells on their own behalf.
Sells in whose name: In agency, the agent usually sells in the name of the principal, although sometimes they may sell in their own name. In distribution, the distributor sells in their own name.
Sole agent/distributor: Both agency and distribution agreements may contain clauses designating the agent or distributor as the sole representative, but again, competition law should be considered.
Payment for services: In agency, the agent is typically remunerated by commission, fixed fee, or other forms of recompense. In distribution, the distributor receives profit on the sale of goods or services purchased from the manufacturer.
Contractual relationship with customers: In agency, the contractual relationship is between the customers and the principal. In distribution, the contractual relationship is between the customers and the distributor.
Business relationship with customers: In agency, the agent may have a strong influence as an intermediary, but the business relationship is primarily with the principal. In distribution, the manufacturer usually has little or no contact with customers.
Responsibility for pricing and terms of business: In agency, the principal is responsible for pricing and terms of business. In distribution, the distributor has control over pricing and, to a lesser extent, other terms.
Risk of unsold products: In agency, the principal bears the risk of unsold products. In distribution, the distributor assumes the risk.
Liability for defective products: In agency, the principal is liable for defective products. In distribution, the distributor may require an indemnity from the manufacturer for certain risks.
Liability for acts of the agent/distributor: In agency, the principal is liable unless the agent acts outside their authority and the principal has not ratified. In distribution, the distributor is liable unless otherwise agreed with the manufacturer.
Taxable presence: In agency, there is a possibility of taxable presence depending on the law of the territory and relevant double taxation treaties. In distribution, it is unlikely but depends on the law and treaties.
Competition law issues: Both agency and distribution arrangements may have competition law implications, and consideration should be given to market share, abuse of dominant position, and the provisions in the agreement.
Liability for payment on termination of the arrangement: In agency, commercial agents are entitled to compensation or indemnity unless there was a serious breach by the agent. In distribution, there is no liability unless specified in the agreement.
Form of agreement: In the UK, agency agreements generally do not need to be in writing, but it is recommended to have one. In distribution, it is also recommended to have a written agreement to avoid confusion.
These key and and a range of other factors will help determine whether an arrangement is considered agency or distribution, taking into account the nature of the relationship, contractual obligations, risk allocation, and legal responsibilities.
Which one is preferable?
Agency may be preferable when the principal/manufacturer wants or needs:
• to retain control of the channel to market (e.g. for marketing purposes);
• to retain control of a customer relationship (eg major customers) or where the nature of the product and/or support requirements mandate this;
• to avoid competition law issues in respect of the channel to market, although they may still exist in respect of the principal's own market share if the principal/manufacturer is dominant in that market (e.g. it operates a strict retail price maintenance policy);
• to reduce cost—typically an agent's commission is less than the distributor's discount, to reflect the degree of risk assumed by distributors;
Distributorship may be preferable when the principal/manufacturer wants or needs:
• to pass on product sales risk, although the sale price to the latter will usually be less than the price to customer net of commission under an agency arrangement;
• to spread the risk of expanding into new products or territories;
• to utilise the distributor's name and/or experience (of products/support or market/territory) as a positive factor in selling;
• to take advantage of the cost benefits, improved sales services and greater flexibility that any outsourcing of a business process provides;
• to avoid a taxable presence or permanent establishment in the distributor’s jurisdiction;
• to avoid the administration of multiple customer relationships for particular products/markets, and to have only one, with the distributor.
The following can be downloaded from our Templates page:
Exclusive Distribution Agreement Template
Sales and Marketing (goods) Agency Agreement Template
Sales and Marketing (services) Agency Agreement Template
See also our articles of Dealerships and Joint Ventures.
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This publication does not necessarily deal with every important topic nor cover every aspect of the topics with which it deals. It is not designed to provide legal or other advice. The information contained in this document is intended to be for informational purposes and general interest only.
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