As the needs of a business change, so too can the structure through which it sells. A supplier may begin with an agent and later shift to a distributor or start with a distributor and later appoint an agent. This can reflect changes in the level of control a business wants to exercise, the geographical spread of end-user customers, or the way it needs to respond to market performance.
But whatever the future may bring, the business has to start somewhere. That starting point usually involves the decision of whether to appoint an agent or a distributor and understanding the issues that distinguish the two.
Although the terms “agent” and “distributor” are often used interchangeably in the commercial world, they are legally distinct. The distinction matters because it shapes the supplier’s level of control, the risks it assumes, the enforceability of terms, and, sometimes, the costs of ending the relationship.
What is an agent?
An agent is someone who acts on behalf of the supplier, often called the principal. The contract for the sale of goods or the supply of services is always between the supplier and the end customer, with the agent serving purely as an intermediary. Depending on the agency agreement, the agent may have authority to conclude contracts directly on the supplier’s behalf, will have no contractual liability for performance, and will be remunerated by way of commission calculated as a percentage of sales. The supplier sets the price and other terms of supply to the customer and bears the risk of bad debts if the customer does not pay.
In other words: the agent provides a service to the supplier rather than reselling goods or the provision of services.
What is a distributor?
A distributor, by contrast, is a business that purchases goods or services from the supplier and resells them in its own name and on its own account. There are two separate contracts: one between the supplier and the distributor, and another between the distributor and the customer. The supplier typically has no direct contractual link with the customer, and the distributor profits from the margin between the purchase and resale price but also bears the risk of bad debts from customers. In contrast the supplier’s risk is channeled into a single debtor – the distributor itself.
In this model, the distributor has no authority to bind the supplier contractually and is effectively a customer of the supplier.
Why does the distinction matter?
The choice between agency and distributorship has significant practical and legal consequences and the supplier should decide at the outset which model best suits its objectives.
A supplier seeking maximum control over prices, terms, and brand positioning will often find agency preferable. A supplier seeking simplicity and protection from customer credit risk may prefer distribution.
There are also important legal consequences. In Great Britain, the Commercial Agents Regulations apply to agents but not distributors. These Regulations provide valuable protections for agents, especially when their agreement is terminated, which can significantly affect a supplier’s costs and flexibility. In contrast the national law of a number of countries within the EU and wider afield specifically protect distributors when the distribution agreement comes to an end.
Competition law and vertical agreements
Both agency and distribution agreements are considered vertical agreements, meaning arrangements between businesses at different levels of the supply chain. For example, a supplier and its distributor, or a principal and its agent.
Competition law in both the UK and EU scrutinises such agreements, with practices such as fixing resale prices or restricting markets often prohibited. The risks are lower for agents, as the supplier sells directly to the customer and therefore can lawfully set customer prices. For distributors, the law is stricter. A supplier usually cannot dictate the resale price, except in limited circumstances such as recommended or maximum prices.
Businesses concerned with consistent pricing in the market may therefore prefer agency.
Good faith obligations
Both types of agreement raise the issue of good faith.
The Commercial Agents Regulations impose an express obligation on both principal and agent to act dutifully and in good faith. Whilst no such statutory duty applies to distributors, the courts sometimes imply a duty of goth faith into long-term distribution agreements based on trust and cooperation called relational contracts.
In both models, commercially unacceptable conduct includes diverting customers to a competitor, withholding key information that affects sales, refusing to co-operate with agreed marketing efforts or acting dishonestly to undermine the shared purpose of the agreement.
Terms of appointment
Suppliers also need to decide whether the agent or distributor will be exclusive, sole, or non-exclusive. Subject to the terms of the agreement, where the agent or distributor is appointed on an exclusive basis only it can sell in the defined territory or to the defined target market or through the stated channels to market. Sole arrangements permit the supplier to sell directly but not appoint third parties to do so. Non-exclusive arrangements allow the supplier to appoint several agents or distributors in the same territory.
Each type of arrangement carries commercial implications: exclusivity can incentivise greater investment by a partner, while non-exclusive or sole arrangements preserve supplier flexibility.
Poor drafting in this area is a frequent source of disputes!
Ending the relationship
Perhaps the most striking difference between agents and distributors appears at termination. Agents are protected by the Commercial Agents Regulations, including an entitlement to compensation or indemnity depending on the agreement. Unless the agreement specifies indemnity, the agent will automatically be entitled to compensation.
Compensation is calculated by reference to the value of the agency to a notional third party purchaser at the time of termination, while indemnity is capped at the average annual commission of the preceding five years and requires that the agent has brought in new customers or increased business from existing ones, and that the supplier continues to benefit from those customers after termination.
Under English law distributors, by contrast, have no statutory rights on termination. Unless their contract includes buy-back or compensation provisions, they have little protection.
Other risk considerations
For both types of relationships, suppliers must also consider non-compete restrictions, supply chain liability, and intellectual property use.
Both agents and distributors may face enforceable non-compete clauses depending on reasonableness and equality of bargaining power. In contrast to agents, distributors often use a supplier’s intellectual property and branding more extensively despite the supplier having less control over how their IP is used. Therefore, when appointing a distributor, clear contractual boundaries on how intellectual property is used are essential.
Summary
Agents offer suppliers strong commercial control over pricing, payment terms, conditions of supply and brand, as well as direct contractual links with customers, but they also bring statutory obligations and potential termination costs. Distributors offer the supplier insulation from customer credit risks and avoid statutory compensation, but at the expense of control over commercial factors such as resale terms.
Suppliers that prize control, luxury brands, for example, often prefer agency. Suppliers that value reach and insulation from customer credit risk may lean towards distribution. The right choice depends on what the supplier values most: the ability to maintain brand consistency and price control, or the simplicity of a resale arrangement that passes customer risk further down the chain.
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Fox Williams’ agent and distribution law specialists are available to help you prepare and protect your interests.
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