Overview of agency and distribution agreements

Overview of agency and distribution agreements

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Contents

If you're a producer of goods or services, you may not have the resources to market them yourself in all the markets you want to cover. You may want to use an agent or distributor to help with your marketing. This section looks at how agency and distribution agreements work, so that you can choose the best way to market your products.

What is an agency agreement?

An agency agreement is a contract between an agent and their 'principal' (in this case, this is the producer of the goods or services). The agreement usually states what the agent will do, how they'll do it, and how they'll be paid. The agent is usually paid on a commission basis. The agency agreement will set out the rights and obligations of the principal and agent to each other. For example, it might say that the agent must act in good faith and do their best to market the principal's goods.

In an agency agreement, the agent finds customers for the principal. The agent might also have authority to enter into contracts for the sale of goods or supply of services on behalf of the principal. However, these contracts are between the principal and customer.

If the agent sells goods to a customer on behalf of the principal, the ownership of the goods passes directly from the principal to the customer. The agent never owns the goods, but just acts to facilitate the sale from the principal to the customer. As the agent isn't a party to the sale contract, in general they can't sue or be sued by the customer.

An agency agreement may be appropriate if:

  • You have the resources to supervise and support the agent
  • You have a good level of familiarity with the market in which the agent will operate
  • You're producing goods tailored to an individual customer's needs and wish to control this process
  • The goods require after-sales service that you wish to provide or closely monitor; or
  • The agent won't have the resources to store large supplies of the goods and you plan to supply them directly to the customers.

What is a distribution agreement?

A distribution agreement is an agreement between a distributor and a manufacturer. With this agreement, the distributor buys the goods from the manufacturer and sells them on to another distributor or a retailer. The distributor makes their profit from a mark-up on the price of the goods when they sell them on.

The distribution agreement contains the terms of the sale of goods from manufacturer to distributor. It also contains the conditions under which the manufacturer wants the distributor to sell the goods on to the distributor's customers. This way, the manufacturer can control the terms of a sale to which the manufacturer isn't a party i.e. the sale from the distributor to the distributor's customer. This kind of agreement can breach competition law if it interferes with the distributor's freedom to contract with their customer or distorts normal competition in the distributor's market. For more information, see Competition law.

A distribution agreement may be appropriate if:

  • The distributor has the resources to store, insure and market the products themselves
  • You don't have the resources to, or don't wish to, supervise sales by the distributor
  • The distributor will accept the commercial risk of the goods not selling well in that market
  • You're happy to rely on the distributor's knowledge of the market where they're selling the goods
  • The products don't require adaptation or tailoring for specific customers, and will be sold on in the same state that you supplied them to the distributor; or
  • You wish to be shielded from direct contractual liability to customers of the distributor. The customers won't be able to sue you in contract, as their contract of sale would be with the distributor. However, if the products are defective you could still be liable to the ultimate users of the products in negligence, the Consumer Protection Act and under product safety legislation. You may also be liable to the distributor for breach of contract.