Insights

Andrew Robins

Published 25 October 2023
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A Guide to Agency and Distribution Agreements

Avoidable legal disputes and issues often arise when a distributor or agency relationship breaks down. This in turn is frequently as a result of a poorly drafted agency or distributor agreement or the parties having no written agreement at all. With this in mind, in this first of a series of posts about agency and distribution agreements, I take a look at the difference between an agency and a distributor and some of the considerations to take into account when appointing either.

What are agency and distribution agreements?

An agency agreement

An agency agreement sets out the terms and conditions of the relationship between a business that wants to sell products, services, or both (the principal) and an intermediary who agrees to sell them on the principal’s behalf (the agent). Crucially, when a sale of the product or service is made in this situation, in law, the sale agreement is deemed to be between the principal and the end customer, not between the principal and the agent. Therefore, an additional agreement is required to govern the agency relationship, and this is an agency agreement.

Agents do not acquire title to the goods as they pass from the principal to the end customer. However, a fiduciary relationship is created between the parties and the agent holds a position of trust.

A distribution agreement

A distributor buys services or products from a business and sells them to a third party, such as a retailer, wholesaler or directly to customers. A distribution agreement covers the agreement between the principal and the distributor. In these circumstances, the principal does not have any contractual relationship with the ultimate customer (i.e. the retailer, wholesaler or customer). There is a separate agreement between the distributor and the customer for that.

A distributor does obtain title to the goods before they pass to the end customer because the distributor buys the goods from the principal.

You may sometimes come across reference to a reseller which is similar but not the same as a distributor and which I’ll explain further in the last in this series of posts.

Why would a business need an agent or distributor?

It’s common for a business to use intermediaries to sell their products or services particularly if an intermediary has specialist knowledge of a particular market, commodity or area or has an existing presence in a certain location. By appointing an agent or distributor it can also potentially reduce the principal’s risk and liabilities in setting up in a new market or territory.

Agent or distributor?

There are both legal and practical considerations to take into account when deciding whether to work with a distributor or agent and to some extent it will depend on the nature of your business and your markets.

Summary of the pros and cons

An agent

An agent can be granted authority to negotiate and enter into contracts or sales on behalf of the principal business. The agent gets paid by way of commission from the principal which is normally calculated by reference to a percentage of sales made.

From the agent’s perspective, their exposure to risk is limited as they do not enter into a contract with the end consumer and do not buy the service or products from the principal. Furthermore, in the UK, agents may be entitled to compensation or indemnity from the principal on termination of their relationship. It is possible to contract out of this requirement but there are limits on how this is done, and the agency agreement will need to consider the minimum conditions set out in the regulations governing this. Therefore careful drafting of the agreement is essential.

A distributor

Distribution agreements do not give a distributor the authority to negotiate or conclude sales on behalf of the principal business. What’s more, the principal can pass on any risk and liability to the distributor and is not liable for the acts of the distributor. There is also no requirement on the part of the principal to pay compensation to the distributor when the relationship is terminated.

From the distributor’s perspective, they carry the risks that come with overseas currency fluctuations, inflation failure to sell, non-payment and logistics. They will make their money based on their sales margins.

Other considerations when appointing an agent or distributor

There are a number of other considerations to take into account when appointing either an agent or a distributor and I will examine these more carefully in the next two posts. However, thought needs to be given to the amount of authority of an agent will have, whether the agent or distributor will be given exclusivity (where they have the right to operate on an exclusive basis in an area), the length of the agreement and how it can be terminated. Consideration must also be given to protecting the principal’s goodwill, intellectual property, any restrictive covenants and competition law implications.

In my next post about agency and distribution agreements, I will take a closer look at agency agreements, including the different types of agreements and the terms and conditions they should include.

If you would like further advice on agency and distributor agreements, then please get in touch.

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