Differences between agents and distributors and legal implications

Solicitors for agency agreement or distributor agreement Agency or distributor agreement? Under a distribution arrangement, the supplier or manufacturer sells products directly to the distributor, who then sells the products on to his customers, adding a margin to cover his own costs and profit. An agency relationship exists where one party (the agent) has permission

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Solicitors for agency agreement or distributor agreement

Agency or distributor agreement?

Under a distribution arrangement, the supplier or manufacturer sells products directly to the distributor, who then sells the products on to his customers, adding a margin to cover his own costs and profit.

An agency relationship exists where one party (the agent) has permission from another party (the supplier), to take orders from a third party (the customer), or to create a legal relationship between the supplier and customer. The difference being that the agent is acting on behalf of the Principle whereas in a distributor is likely to act on their own behalf, but have a contractual relationship with the Principle to purchase certain goods and then market directly subject to any restraints.

Rights and obligations of agents vs distributors

An agent’s rights will vary depending on the agreement, but will generally include a right to be paid for providing agent’s services and a right to be insured in respect of any action taken on behalf of the supplier. The agent will also have the authority to create a contract between the supplier and customer.

Whereas an agent does not contract with customers in his own right, the distributor is obliged to contract both with the supplier and with his customer. A further distinction between agent and distributor is that the latter takes more financial risk than the former. However this is usually reflected in the margins on resale of the product, which is generally greater than commission payable to an agent. The greater the level of financial risk for the distributor, the higher the profit margin is likely to be.

Frequently, a distributor is given the exclusive right to resell a product within a stated territory, which is known as “exclusive distributorship”.

In addition, provided an agency relationship exists, the Commercial Agents Regulations 1993 will apply to the Parties. This is significant and implies a number of provisions to the relationship. This note does not deal with the Regulations in any detail and advice should be sought at the outset as well as during and prior to considering termination of any relationship.

Advantages of appointing a distributor

  • The supplier may be able to pass on a large degree of the risk associated with the products.
  • A distributor should be more motivated to sell the stock he purchases from the supplier, since he takes on greater risk of failing to sell
  • The supplier will only need to monitor accounts with the distributor as opposed to a number of individual customers.
  • In the UK, the supplier is not responsible for providing compensation to a distributor on termination of the distribution agreement.

Advantages of appointing a business agent

  • A supplier has more control over the activities of an agent than he would of a distributor. Therefore, an agency is more appropriate in situations where the supplier wishes to maintain tight control over the marketing and pricing of the products.
  • An agency agreement is much less likely to be at risk from competition law problems. EU courts have stated that where the agent bears no significant financial or commercial risk for the activities for which he has been appointed as an agent, the European competition regime will not apply to those aspects of the agreement that restrict the manner in which the agent may sell the principal’s goods or services.
  • Key clauses in a  distribution agreement

 

Protection of brand, IP, reputation and retaining control generally are key consideratiosn when drafting a distribution agreement. Other key legal areas include :-

  • Exclusive or non-exclusive?
  • All products you sell or just a selection?
  • Territory – will it be worldwide or limited to certain parts of the world, countries or even areas within countries?
  • Term – fixed term is generally teh way to go so as to provide some certainty, renewal is also a consideration.
  • Termination and events of default – what will constitute a fundamental breach of contract and will damages be capped in any way?
  • Brand and IP protection – distributor agreements commonly include clauses whereby the distributor must comply with marketing materials provided and in no way damage or exploit an Intellectual property of the appointor.
  • Any performance criteria (default allowing change of territory or exclusivity, or termination).
  • Price, payment and delivery – establishing the amount to be paid by the appointee and the obligations of the appointor so that the distributor can sell with confidence that he/she/they will be able to comply with contractual obligations to their customers.
  • Restrictive covenants – placed on the distributor.
  • Risk and title in the goods

Further issues to consider

It is essential to clearly specify whether the relationship between the supplier and intermediary is one of agency or distributorship. A lack of distinction between the terms can lead to unnecessary litigation.

For instance, in the case of AMB Imballaggi Plastici SRL v Pacflex (1999), Pacflex claimed that trading between the two parties had been carried out under a commercial agency contract. They therefore believed they were entitled to compensation under the regulation on termination of that contract. However the court found that trading was carried out on a sale and resale basis, charging a mark up to end users. This brought into question whether the agreement was in fact one of agency rather than distributorship.

If you need lawyers for a distributor agreement or an agency agreement, please get in touch with Debbie Serota. We have lots of experience in drafting, negotiating and advising, also if disputes have arisen based on existing contracts of these types.

More advice on agency agreements on this part of the site.

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