Differences between agency and distribution agreement

When a supplier/manufacturer wishes to distribute products, he examines whether he needs to select an agent or a distributor to do so, as this is an essential choice, and forms an agreement accordingly. There are several factors that must be considered while making such a decision. As a result, it is necessary to understand the distinctions between an agency agreement and a distribution agreement.

Now we need to know who is an agent. An agent is defined in section 182 of the Indian Contract Act, 1872. He is a middle man or a mediating person who is involved in making a contract between the primary supplier and the primary client. There are two types of agents where goods are sold i.e. the sales agent who does the sales work and a marketing agent who does the marketing of goods. The sales agent has the authority to enter the agreement on behalf of the supplier and the prescribed agreement is binding to the supplier as well. Unlike the sales agent, the marketing agent doesn’t have the authority to bind the supplier but he can market and endorse the supplier’s goods and articles to potential clients. Now when there is a demand or wish in the market by the client to make a purchase of goods the supplier completes the contract. 

The next step is to determine who is a distributor. In this case, the distributor gets the products from the supplier/manufacturer and then resells them in the market in a specific location where there is demand, on his own description, with complete control over the pricing and profit. Let us continue reading to learn more about the distinctions between an agency agreement and a distribution agreement.

Agency agreement

The agency agreement is a legal document in which the supplier/manufacturer and the agent enter into a contract with certain particular acceptable terms and conditions, and the agent, on behalf of the supplier, mediates between the primary supplier and the client for the sale of products to the market. It establishes a fiduciary connection between the agent and the manufacturer, as well as an indirect link between the manufacturer and the customer.

In this contract, the self-regulating body assumes all the risks in the work and makes all the choices on behalf of the first-party as stipulated in the contract. This contract is defined and controlled by the Agency Agreement Legislation, and it also has the rights of agents specified in the Contract law under sections 217, 219, 225, 222, and 223 and in the Sales of Goods Act, 1930. Agency arrangements might be exclusive, non-exclusive, or sole.

Advantages:

  • To begin, the supplier can reclaim control of the conditions of sale of the goods, namely the price and marketing tactics.
  • Can also establish direct contact with needy consumers on their own, eliminating the necessity for a middleman in sales and reducing competition.
  • In comparison to the margins earned by distributors, the agent generally receives a lesser commission.

Disadvantages:

  • The Commercial Agents (Council Directive) Regulations 1993(the “Commercial Agents Regulations”) shall apply and impart certain legal necessities benefiting the agents wherein the parties cannot exclude the agents. 
  • During the contract, the agent will be entitled to commission and under certain situations, after its termination too as per the Commercial Agents Regulations. 
  • The supplier regains all of the monetary possibilities of those goods which are not sold. 
  • Tax-related issues can arise wherein sometimes a supplier can be held as a dealing person in a place where an agent is based so tax liabilities can lead to him. 
  • An agent would be working for several manufacturers/suppliers so he carries several goods from them. So if some goods of any supplier are not selling well, the agent focuses more on the saleable goods of other suppliers. 

Distribution agreement

This agreement is a legal contract in which the supplier/manufacturer authorises distributors to distribute products for resale in a certain location. A combined partnership of two firms is necessary in such a deal to distribute the goods. It is accomplished through the authorization or commercial practises of the provider. The distributor is the sole authorised party to engage in such operations and is permitted to profit by putting the cost on the goods. As there is no legal regulation, no unified jurisprudence on analogicality of both civil and commercial law applies to the distribution agreement.

There are several types of distribution agreements, such as exclusive rights, sole rights, non-exclusive, selective distributorship agreements, and so on. Exclusive rights agreements forbid the supplier from seeking sales in his region and appointing any other distributors in the same area. Sole rights permit the supplier to seek sales but do not permit the appointment of any other distributor in the same region. Non-exclusive rights are those in which the provider may designate as many distributors as he wishes and pursue direct sales in the same geographic region. Selective distributorship agreements are ones in which the provider appoints distributors based on his own needs.

Advantages:

  • The majority of the supplier’s risk is transferred to the connected items in this case.
  • The distributor is encouraged to sell the majority of the items acquired from the supplier, taking the risk of not generating sales, and the distributor will be held accountable for any difficulties that arise.
  • The supplier will simply be required to validate and check accounts with the distributor.
  • According to the current law, the provider is not obligated to pay any compensation or indemnity upon termination of the agreement.

Disadvantages:

  • Under this case, unlike in an agent arrangement, the supplier has no influence over the distributor’s operations.
  • All risk associated with the location where the distributor is appointed is transferred to the distributor with the credit risk rather than to each client/customer.
  • In this arrangement, the distributor is constantly at danger of violating competition legislation, which jeopardises the agency’s connections.

Differences between agency and distribution agreement

To distinguish the agency agreement from the distribution agreement, both are completely distinct. To begin, an agent is hired to assist the supplier/manufacturer in negotiating and concluding contracts on his behalf, but the distributor is appointed exclusively to resale the supplier’s goods on its own terms. Second, an agent is a paid person who is given a percentage commission by the supplier and distributor to buy and own the products from the supplier, sell them in the market, bear the risk on his own, and add a profit margin to cover its expenses and profit from it.

Third, the agent does not own the products, but the distributor does and also bears the risk of commodities that do not sell in the market for any reason. Fourth, an agent interacts with the client on behalf of the supplier/manufacturer, whereas the distributor interacts with the consumer directly, and the supplier has no idea to whom his goods/products were sold.

When it is necessary to extend the firm into a new market or location, distributorships are utilised as a low-risk method. He accepts legal responsibility for his own conduct or omissions in connection with the sale of products. The distributor assumes a higher amount of risk than the agent in the course of his operation. Because the consumer knows the distributor, if there is a problem with the product/goods, he can sue the distributor rather than the provider.

On the other hand, the agent is a self-employed mediator who negotiates with the customer for the sale of the goods and concludes the deal on behalf of the supplier/manufacturer. He has no ownership of the goods so no risk for any legal issues it remains with the supplier itself. 

Conclusion

We learned about the numerous distinctions between the agency and distribution agreements in the preceding session. Both operate for very distinct purposes and employ entirely different methodologies. Prior to commencing the partnership, it is critical to consider and investigate formalising these commitments in writing. Failure to do so may result in uncertainty, and the connection may result in litigation rather than commercial progress. So, before entering into any commercial contracts, it is essential to evaluate the significance and differences of such agreements.

The Indian courts have made a clear distinction between non-competent covenants after the terms of the agreement and beyond the duration of the agreement. To assess enforceability, the courts consider whether the covenant is or is not a trade limitation. To improve customer service and efficiently manage product sales and price, relevant limitations must be imposed in accordance with contract law and competition law.