Distribution agreement

Distribution agreements are typically used as a low-risk means of expanding a business into new markets or territories. It is important for a supplier or manufacturer, when considering how best to market, sell or distribute its products, to be aware of the difference, in legal and practical terms, between appointing an agent and a distributor.

Should we appoint a distributor or an agent?

Essentially, an agent is appointed by the principal to negotiate and possibly conclude contracts with customers on the principal’s behalf. It is paid commission on the sales it makes, usually on a percentage basis. The only contract for sale of the products is made between the principal and the customer. The agent generally has no contractual liability to the customer. A distributor, on the other hand, is a reseller. 

Under a distribution agreement, the supplier or manufacturer sells its products to the distributor, who then sells the products on to its customers, adding a margin to cover its own costs and profit. In purchasing and reselling the products, the distributor contracts both with the supplier and with its customer, and title to the products in question will pass to and from it.

In the supplier/distributor relationship, the duties owed by the principal and agent to each other are replaced by mutual contractual rights and obligations within the distribution agreement, which is essentially a variation on a sale of goods contract. This has the disadvantage for the supplier that it has less control over the distributor’s activities than it would over an agent, particularly with regard to the final pricing of the products to retailers or end users. However, in selling the products to a distributor, it also passes on a large degree of the risk in the products.

In reselling the products to its customers, the distributor assumes liability for the products and therefore incurs a greater degree of risk than an agent in the course of its business. This is particularly the case if the distributor is not fully indemnified by the supplier for any claims brought in respect of the products. The higher level of risk assumed by the distributor is reflected by its level of remuneration or margin as compared with the commission earned by an agent. The greater the level of risk that the supplier places on the distributor, the higher the distributor’s margin will generally be.

Frequently, a distributor is granted the exclusive right to resell a product within a stated territory. This is known as “exclusive distribution”. The Commercial Agents Regulations do not apply to distributors.

Therefore, within the UK, there is no requirement to pay compensation to a distributor on termination of the distribution agreement, although this may not always be the case in other countries. However, EU and UK competition rules, which prohibit anti-competitive agreements and abuse of a dominant position, may potentially have an impact on the appointment of a distributor, whereas they generally do not apply to a genuine agency relationship.

Exclusive distribution

An exclusive distribution agreement is one where a supplier agrees to sell the contract products only to the distributor within a certain defined territory, and agrees not to appoint other distributors or sell the products directly to other customers within the territory.

Such an arrangement is frequently used to exploit a product within a new territory. The supplier appoints a distributor with local knowledge and usually an established business within the territory. The distributor in turn agrees to take on the high risk and costs associated with promoting a new product in return for the knowledge that, as exclusive distributor, it alone will benefit from its sales and promotion efforts. The supplier has the advantage of knowing that the distributor will be motivated to sell its products, particularly if a restriction is placed on the distributor prohibiting it from selling competing products. The supplier can use the threat of withdrawing the exclusivity if target sales are not met by the distributor within a specified period.

Sole distribution

A sole distribution agreement is one whereby a supplier appoints a distributor as its only or sole distributor within a territory, but the supplier reserves the right to supply the products directly to end users. The meaning of the term should always be clarified within the agreement.

Such an arrangement combines the advantages of exclusive distribution for the distributor, with the advantage for the supplier that it is free to promote the products itself within the territory and to continue to deal with any customers it may have had in the territory before the appointment of the distributor. Such an agreement would contain similar provisions and restrictions to those in an exclusive arrangement, but it would afford more control by the supplier over the territory, should the distributor fail to meet the required minimum purchase targets.

Non-exclusive distribution

A non-exclusive appointment gives the supplier complete freedom both to sell directly and to appoint other distributors within the territory. The terms of the appointment will be far less onerous on the distributor than those within an exclusive or sole appointment, as it will need to compete with the supplier and other distributors in terms of both pricing and promotion of the product.