Route-to-Market: Navigating Agency and Distribution Agreements for UK Companies

Agency agreements and distribution agreements can be indispensable assets for manufacturers and suppliers seeking to enhance sales, whether on a national or international scale. Although the terms agents and distributor are sometimes used interchangeably, they actually delineate distinct contractual frameworks, each carrying unique advantages and disadvantages. Understanding the difference between these relationships is paramount for businesses to select the most suitable agreement for their particular needs.

In this article, we will explore the crucial distinctions between agency and distribution agreements, elucidating key factors to consider so that you can determine when to deploy each agreement.

What is an AgencyAgreement?

Any agency agreement is an agreement whereby a manufacturer or supplier (the principal) appoints either an individual or legal entity (the agent) to negotiate and conclude contracts with customers on the principal's behalf. Agents are then paid commission based on the sales they generate. Importantly, under such agreements, the contractual relationship for the sale of products remains solely between the principal and the customer, absolving the agent of direct contractual liability.

What is a DistributionAgreement?

On the other hand, a distribution agreement is an agreement which involves an individual or legal entity (the distributor) purchasing goods from a manufacturer or supplier and subsequently reselling them to others within the supply chain or directly to end-users. The distributor typically adds a margin to cover costs and generate profit. In contrast to an agency agreement, in a distribution agreement, the distributor engages in contracts with both the manufacturer/supplier and the end customer.Additionally, the title to the products transfers from the manufacturer/supplier to the distributor before being passed on to the ultimate customer.

Factors to ConsiderWhen Choosing Between Agency and Distribution Agreements

The following factors should be considered when contemplating whether to opt for an agency agreement or a distribution agreement. 

Control Over the Product – An agency agreement provides your business with more control over the agent’s activities, particularly regarding the pricing and marketing. Conversely, in a Distribution Agreement, the manufacturer/supplier relinquishes some control over pricing and customer interactions to the distributor. A distribution agreement may therefore not be suitable for products where the supplier or manufacturer require contact with the ultimate customer, such as tailor-made products, or where the manufacturer/supplier wishes to maintain tight control over the marketing and pricing of the products.

• ‍CompetitionLaw -Compliance with competition regulations is paramount, as breaching them can lead to massive fines. Distribution agreements are more likely to engage competition law than agency agreements because a distributor contracts with customers in their own right whereas an agent does not. Therefore, any attempt by the manufacturer/supplier to tell the distributor to sell the product at a certain price or to impose other restrictive terms is likely to breach competition law.‍
• Risk andLiability - Distribution agreements often entail passing the risk and liability associated with the products to the distributor, whereas in agency agreements, the principal retains such responsibilities, including accountability for the agent's actions.‍
• CommercialAgents (Council Directive) Regulations 1993 (SI/1993/ 3053) - ThisRegulation gives agents considerable protection that is not afforded to distributors. It provides that agents must be paid compensation if the agency agreement is terminated in return for the goodwill that they have built up for the principal. This does not apply to distributors agreement.‍
• Jurisdiction– Different jurisdictions will have different rules and protections for distributors and/or agents. It is important for manufacturers/ suppliers looking to enter into across-border agreement to take local advice on the rules of that jurisdiction.‍
• Networks – A particular agent or distributor may have a well-established network in a territory that would greatly benefit the business. A manufacturer/supplier may want to consider which agreement will provide them with access to the most appropriate network for their business.
• ‍Motivation - Distributors may exhibit higher motivation to sell products due to their investment in inventory.

The choice between agency and distribution agreements is crucial for manufacturers and suppliers. Understanding their differences is key. Factors like control over the product, compliance with competition laws, risk and liability, regulatory considerations, compensation being payable on termination, establishment requirements, and distributor motivation must be weighed carefully.

By considering these factors, businesses can select the agreement that best aligns with their needs and objectives. Whether it's maintaining control over pricing and marketing with an agency agreement or leveraging a distributor's network with a distribution agreement, making an informed decision is essential for success in the marketplace.