This article is written by Suhasani Kamble who is pursuing a Diploma in Advanced Contract Drafting, Negotiation and Dispute Resolution from LawSikho.

Introduction

A supplier/manufacturer, when he has to do a distribution of goods, considers whether he needs to appoint an agent or a distributor for doing the same as it’s an important decision and makes an agreement accordingly. There are many features that are required to be considered while making such a decision. So there is a need to know the differences between agency agreement and 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. 

Next, we need to know who is a distributor. Here the distributor purchases the goods from the supplier/manufacturer and then he resells them in the market in a particular place where there is demand that too on his own description and he has total control on the pricing and gaining profit from it. Let’s read further in order to understand in depth about the differences between agency and distribution agreement. 

Agency agreement

The agency agreement is a legal document in which the supplier/manufacturer and the agent with some specific agreeable terms and conditions get into a contract and the agent on behalf of the supplier mediates between the main supplier and client for selling of the goods to the market. It creates a fiduciary relationship between the agent and the manufacturer and indirectly makes the relationship between the manufacturer and customer. 

Advantages

• Firstly the supplier can regain control of the terms sales of the goods, mainly the pricing and methods of marketing. 
• Can also make direct contact with the needy customers on their own, no middle man required for sales and there will be fewer competition issues. 
• As compared to the margin distributors earn, the agent typically gets a lower 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 document in which the supplier/manufacturer allows distributors to deliver goods to resell in a certain place. In such a contract, a joint partnership of two businesses is required to distribute the goods. It is done through the supplier’s permissions or business methods. The distributor is exclusively authorized to do such activities and allowed to gain profit by applying the cost on the goods. No unified jurisprudence on analogicality of both civil and commercial law is applicable to the distribution agreement as it lacks legal regulation. 

There are different kinds of distribution agreements like exclusive rights, sole rights, non-exclusive, selective distributorship agreements etc. Exclusive rights agreements are those which prevent the supplier to seek sale in his area and appoint any other distributors in the same area. Sole rights allow the supplier to seek sales but not allow appointing any other distributor in the same area. Non-exclusive rights are those in which the supplier can appoint as many distributors and seek direct sales in the same area. Selective distributorship agreements are those where the supplier will appoint distributors as per his own requirements. 

Advantages

• Here most of the risk of the supplier passes to the associated goods. 
• The distributor is inspired to sell the bulk of goods purchased from the supplier assuming the risk of not making sales and the distributor will be liable for the issues arising if any. 
• The supplier will have to verify and check accounts only with the distributor. 
• As per the applicable law, on termination of the agreement the supplier shall not be liable to pay any compensation or indemnity. 

Disadvantages

• Here the supplier cannot control the activities of the distributor as in the agent agreement.
• All the risk related to the place where the distributor is appointed goes to the distributor with the credit risk rather than with each client/customer. 
• In this agreement the distributor is always at risk for breaching competition law then relationships of the agency.

Differences between agency and distribution agreement

Mainly to differentiate the agency agreement and distribution agreement both are totally different from each other. Firstly, an agent is appointed to support the supplier/manufacturer to negotiate and conclude contracts on behalf of him but the distributor is appointed to solely resell the goods of the supplier on its own terms. Secondly, an agent is a paid person that too on a percentage basis commission by the supplier and distributor purchases and owns the goods from the supplier, sells them in the market and takes the risk on his own, and adds profit margin to cover its costs and profit from it.

Thirdly, the agent doesn’t have the ownership of the goods but the distributor owns the goods and also takes the risk of the goods which doesn’t get sold in the market for any reason. Fourthly, an agent makes the relationship with the customer on behalf of the supplier/manufacturer but the distributor makes a direct relationship with the customer and the supplier doesn’t even know to whom his goods/products were sold. 

When there is a need to expand the business into a new market or place distributorships are used as a means of low risk. He owns his legal responsibility for his own acts or omissions related to the sale of goods. In the course of his business, the distributor takes a high level of risk than the agent. The customer knows the distributor so if in any event there is an issue with the product/goods he can file a suit against the distributor as he has not known the supplier. 

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. 

Case laws

Brand Studio Ltd v. St John Knits, INC [2015] EWHC 3143 (Agency agreement termination provisions)

In this case, the agreement by an agency in which, if any provision of a clause to be held invalid or unenforceable was to be mentioned providing that it should be treated as a separated and the residue of the agreement given full force and outcome, the agreement should be read as if the valid or unenforceable provision was not in it.

Bhowrilal Mahesri v. State of Assam High Court of Gauhati, 1960 (Consequences of an unlawful act done in good faith)

A creditor who required an officer of the law to take specified goods, he pointed them as the goods of the debtor and made him his agent, he must indemnify him even if acting in good faith, he committed a trespass by obeying the commands. Where working charges were reasonably incurred by a person for another of dealing with other’s property, he was entitled to such expenses when his bonafide are established by proven facts. Therefore, a person was entitled and compelled to pay those expenses that fell and cut the trees for the owner of the forest. 

Conclusion

Through the above discussion, we come to know the various differences between the agency and distribution agreement. Both work totally for a different purpose and different methodology. Considering and looking into formalizing these agreements in a written form prior to beginning the relationship is important. Failure to this can create ambiguity and the relationship would result into litigation other than the growth of the business. So the vital part to consider the importance and differences of such agreements before getting into any business contracts is a must. 

The Indian courts have drawn a clear picture of the distinction between non-competent covenants after the terms and post the term of the agreement. The courts consider whether the covenant is or is not in limitation of trade to determine the enforceability. To enhance the level of service to the customers and efficiently manage the sale of products and management of pricing, necessary restrictions are to be put as per the Contract law and Competition law.

References

• https://www.ilpabogados.com
• https://www.ouryclark.com
•  https://en.wikipedia.org
• https://www.legalmatch.com
• https://www.icaew.com
• https://www.roythorne.co.uk
• https://www.lexology.com

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