Distribution Agreements

There is scope for a great deal of variety within these two models, but we provide a summary of the main differences between the models as commonly implemented below:

Distribution: A distributor buys products from the supplier, and sells those products to customers in the distributor’s name.  This means that, for a distribution arrangement relating to goods, two transfers of legal ownership occur – first from the supplier to the distributor, then from the distributor to their customer. 

A distributor sets its selling prices and makes a profit by selling the products at a mark-up to the price it buys them from the supplier. 

These aspects of the arrangement are detailed in the Distribution Agreement between the parties, which will also specify commercial details such as the term and territory of the arrangements, and whether the distributor is appointed on an exclusive, sole or non-exclusive basis (see below), and any minimum sales targets, operational arrangements in respect of matters such as forecasting, accounting and reporting, and delivery of goods, as well as setting out the legal terms of the arrangement. 

Agency: An agent, by contrast, acts on behalf of the supplier (referred to as the ‘principal’ in this context) in the promotion of the principal’s products, and does not supply the products to customers in its own name.  This means that, for an agency arrangement relating to goods, there will be only one actual transfer of legal ownership – direct from the principal to the customer – even if the agent in practice holds stock for onward supply to customers. 

The agent generally earns a commission from the principal, often calculated as a percentage of the value of the products which the principal sells through the efforts of the agent.  These aspects of the arrangement should be set out in the Agency Agreement between the parties, which will also cover other commercial, operational and legal aspects of the arrangement.

From the perspective of the supplier choosing between the models, the distribution model can be viewed as achieving a greater transfer of risk from supplier to distributor (since it is the distributor that generally bears the financial risk of the products failing to sell, and the distributor also has direct contractual obligations to its customers). This model also generally reduces the administrative burden for the supplier since the distributor acts as a single point of contact for the supplier in the territory. 

Appointing an agent tends to preserve greater control for the supplier (the supplier, as principal, can set pricing, determine how the products are marketed and sold etc), but at a cost in terms of ongoing involvement in respect of the downstream arrangements, since the supplier itself, as principal, will have direct contractual relationships with the customers that buy the products through the agent. The supplier as principal will need to be aware of local law tax and compliance requirements affecting businesses trading in the relevant territory through an agent.       

Significantly, the Commercial Agents Regulations (and the EU Directive on which those Regulations are based) apply to agency appointments in respect of goods but do not generally apply to distribution agreements. The objective of the Regulations is, in broad terms, to protect the interests of agents, so the supplier may wish to avoid their application by using the distribution model. However, it should be noted that some countries extend similar rights and protections given to commercial agents under the Commercial Agents Regulations to distributors operating within their borders.

Many of the terms commonly used in relation to agency and distribution arrangements are given different meanings by different businesses or in different contexts, so it is always important to check that the contract you are using reflects the parties’ actual intention regarding the arrangements.  Commonly used terms are:

Reseller – this is generally used to refer to a business that operates as a distributor (rather than as an agent).  In some cases, the terms ‘distributor’ and ‘reseller’ will be used interchangeably, but in other cases, a supplier may distinguish between ‘distributors’ – which it appoints in respect of a specified territory and allows to appoint a further tier of ‘resellers’ in that relevant territory – and ‘resellers’, which will have direct contact with customers.

Value Added Reseller (VAR) – is used in the IT/ Technology sector to describe a business that combines software provided by a third party with its own hardware, software and/or services to provide a ‘value added’ combination for the benefit of its customers. The VAR is permitted by the original licensor of the software (the supplier) to resell the software only in the ‘value added’ combination and cannot grant downstream licences of the software on a standalone basis.   

Exclusive/ Sole/ Non-Exclusive Distribution – a distributor or agent appointed on an ‘exclusive’ basis will be the only representative of the relevant products appointed by the supplier in the relevant territory, and the supplier will also commit not to take active steps itself to make sales of the same products in the same territory. 

In the case of a ‘sole’ distribution appointment, the supplier will again commit to make the distributor or agent the only representative it appoints in the territory, but there is no commitment from the supplier that it will not itself take active steps to make sales in the same territory. 

A ‘non-exclusive’ appointment gives the distributor or agent the right to represent the products in the territory but leaves the supplier free to appoint other third parties to promote the products in the territory and to take active steps to make sales in the same territory.

Marketing Agent/ Sales Agent – terminology used to define the different types of agents that a principal may appoint.

Normally, the term ‘marketing agent’ (or ‘introducer’, ‘introducing agent’) will apply to an agent that is given authority to promote the products, but must refer any interested customers to the principal, and cannot itself enter into contracts on the principal’s behalf. 

By contrast, in addition to the rights granted to a ‘marketing agent’, a ‘sales agent' will often be granted authority to conclude contracts with customers, acting on behalf of the principal.