Distribution and Agency: How to tell a Ripple from a Wave?

Introduction

Businesses often use agents or distributors to sell their goods or services especially when an intermediary has a presence in a certain market or location or possesses specialist knowledge. Appointing an agent or a distributor may also serve to reduce some of the business’ risks and solve marketing, sales administration and logistical issues.

Agents

An agent is someone who acts on behalf of another (the “principal”) and can either introduce customers to the principal or create contracts between the principal and a customer. The principal pays the agent a commission which is ordinarily calculated by reference to a percentage of realised sales or revenue.

An agent may be appointed on an exclusive, sole or non-exclusive basis. If the agent has exclusive rights, the principal is prevented from actively seeking sales in the agent’s territory and also from appointing other agents there. If the agent has sole rights, the principal cannot appoint another agent for the same territory, but the principal is allowed to actively seek sales there. Non-exclusive rights allow the principal to both actively seek sales in the non-exclusive agent’s territory and to appoint other agents and distributors there.

An agent and principal have many common law and equitable duties as well as those that have been imposed by legislation. The agent and principal often agree to additional contractual obligations.

Commercial Agents

In Ireland there is a definition of a “commercial agent” contained in the European Communities (Commercial Agents) Regulations 1994 and 1997 (the “Commercial Agents Regulations”), which transpose the Commercial Agents Directive (86/653/EEC) into national law. A “commercial agent” is a “self-employed intermediary who has continuing authority to negotiate the sale or the purchase of goods on behalf of another person” or “to negotiate and conclude such transactions on behalf of and in the name of that principal”.

If an agent qualifies as a commercial agent within the meaning of the Commercial Agents Regulations, they may be entitled to an indemnity or compensation on the termination of the agency agreement. The Commercial Agents Regulations stipulate that a commercial agency contract will only be valid if evidenced in writing.

Distributors

A distributor purchases goods or services from a business (usually a manufacturer or other supplier) and sells them to a third party in the supply chain such as direct customers, wholesalers or retailers. The distributor enters into contracts both upstream with the supplier and downstream with its customer, and title to the goods or products in question passes to and from the distributor.

Often, the distributor provides services such as product marketing and support to the manufacturer or supplier.

There are four types of distribution systems: (i) sole distribution, (ii) exclusive distribution, (iii) non-exclusive distribution and (iv) selective distribution. In a selective distribution system, the supplier may sell the goods or services only to distributors selected on the basis of specific criteria and provided these distributors undertake not to sell the goods or services to unauthorised distributors in the geographical area reserved by the supplier to operate the system.

Distribution agreements are more likely than genuine agency relationships to engage competition law provisions prohibiting anti-competitive agreements and abuse of dominant position. Exclusive distribution systems and selective distribution systems especially can give rise to a number of competition law issues and should always be thoroughly examined for competition law compliance.

Comparison

Agency is considered preferable when the principal may wish to:

• have more control over the pricing and marketing of the product or service;
• retain close contact with the ultimate customer; and
• place more trust in the other party.

Distribution is considered preferable when the supplier may wish to:

• pass on a substantial part of the risk associated with the products;
• guarantee certain levels of stock are held and purchased by the distributor in a certain period of time;
• keep the distributor at arm’s length and not have to assume obligations such as to pay compensation on termination of the distribution agreement.

Reliance on agents and distributors is common practice in many industries such as food and beverage, fashion and apparel, consumer electronics, pharmaceuticals, automotives and industrial equipment. When forging such business relationships, it is important to consider risks relating to anti-competitive and corrupt practices, tax, and cyber security, to name a few. Due diligence should be carried out to establish not only the mutual benefits to each party but also to assess the other party’s financial viability, risk and business continuity management. The exact type of relationship (agency or distribution) and all legal and commercial terms should be carefully considered and formalised to ensure optimal commercial and legal outcomes.