A supplier, when considering the distribution of his goods, has to decide whether to appoint agents or distributors. There are many factors that need to be considered when making this decision. But what are the differences?
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An agency agreement involves both a “principal” who contracts the services, and an “intermediary” whose job it is to represent the principal in business activities. These activities can include entering into contracts, or taking decisions on behalf of the principal concerning finances.
A common type of agency agreement is one where a company contracts agents to act on their behalf selling goods into a new territory where the agent has good local knowledge.
There are two further types of these “sales of goods” relationships between a manufacturer and his agent, who can act as either a sales or marketing agent.
• Sales Agent – has been given the responsibility by the supplier to negotiate with customers on their behalf. The agent can bind the supplier to any agreements he negotiates.
• Marketing Agent – A marketing agent doesn’t have the authority to enter into binding agreements on the supplier’s behalf. Their job is simply to promote and market their products to customers. If a customer decides to purchase, the agent simply passes him onto the supplier to negotiate the deal.
3 types of agency agreements
Generally the three different types of agreements are as follows:
• Exclusive – this stops the supplier themselves from trying to get sales in the agents’ territories, and prevents them from making deals with other distributors or agents in the territory.
• Sole rights – this stops the supplier appointing distributors, agents or resellers in the given territory but will not stop them from trying to sell there themselves.
• Non-exclusive – this sort of agreement gives the supplier the right to both make sales themselves in the territory and to look for more agents or distributors.
This sort of agreement might be appropriate when a supplier is trying to expand into a new territory or market and needs a distributor to help. The distributor gets control of the product and control over what prices to charge, and gets the profit too.
Distribution agreements are often used when the supplier has no office, presence or other reputation in the market or territory concerned. These agreements often come with clauses such as
· Restrictions on what other sorts of products the distributor can sell
· Restrictions on the geographical scope of where the distributor can sell
· Ban on selling any competing products
· Minimum order quantities for the distributor
· Stipulations regarding pricing
· Conditions about terminating the contract and limitation of liability.
3 types of distribution agreements
Just as with agency agreements, there are different types of distribution agreements.
· Exclusive – these prevent the supplier from looking for sales in the territory managed by the distributor and from appointing other distributors there.
· Sole – allows the supplier to make sales in the territory, but prevents them from dealing with other distributors there.
· Non-exclusive – allows the supplier to deal with more distributors if they choose to, and look for sales themselves in the territory.
Agency or distribution agreement – what’s right for me?
Depending on your business, either a distributor or agency agreement may be more appropriate. Consider the following factors.
· An agent negotiates contracts on behalf of the supplier, whereas the distributor takes on the role of the supplier and negotiates contracts with customers himself.
· As a supplier, you have less control over a distributor then you do over an agent.
· Agents are paid commission based on an agreed percentage. In contrast, a distributor sells the product direct to the customers, adding on a margin to cover costs and profits. Usually, the commission paid to an agent is less than the margin which the distributor will add.
· An agent never owns the product. This means the supplier keeps control over how the product is sold, specifically the selling price and marketing plan. The distributor does own the product, and bears the risk of not selling it. In agreements where a supplier appoints a distributor on an exclusive basis for one territory, the supplier’s credit risk is on the distributor alone rather than spread across several customers as would be the case in an agency agreement.
· Distributors might have more motivation to sell products than agents, given that he bears the risk of not selling.
· Using an agent agreement usually minimises the risk of running into competition law problems.
· Suppliers are not usually liable for the actions of their distributor in this type of agreement, but the supplier will be liable for things done by any agent.
· Using a distributor means that the supplier can avoid the administrative costs and tax implications of setting up an office or other place of business within the territory.
· Using a distributor means that the supplier only has to monitor an account with the distributor, not any number of end customers.
How our business solicitors can help you
If you are a supplier, our commercial law team can help with the drafting of all the required agreements, and can help you pursue the best course of action when an agency agreement has to be terminated.
If you are on the other side and are thinking about taking on the role of an agent or distributor, and have been sent an agreement to sign by the other side, our solicitors can check it over and give advice on whether the terms are correct, and fair.
Need Advice on Drafting an Agency or Distribution Agreement? Call Us Now
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