For suppliers of goods, distribution arrangements can be a relatively low-risk means of expanding into new markets and territories. In such an arrangement, a distributor will purchase the supplier’s goods in order to sell them on to its own customers. The benefit for the supplier is that it can make profit and increase brand awareness without spending capital on establishing a market presence. The benefit for the distributor is that it can sell a successful or established product in a new market.
A distribution agreement is a legal agreement governing the relationship between the supplier and the distributor and covering practical and commercial issues. There are different types of distribution agreements including:
Exclusive distribution – where the supplier agrees not to appoint another distributor and is precluded from selling goods directly to a specified territory or customer group
Sole distribution – where the supplier agrees not to appoint another distributor within a specified territory but reserves the right to sell goods directly to those in the territory
Non-exclusive distribution – where the supplier can sell to customers directly and appoint further distributors within the specified territory
Selective distribution – where a network distribution system is established and distributors will need to meet certain criteria before being appointed
These agreements need to be carefully drafted due to the risk to both parties and the close relationship between the two, akin to a franchise. There are also competition issues to be considered with exclusive and sole distribution agreements.
UK competition law prohibits anti-competitive behaviour which may affect trade. The two main types of anti-competitive activity are:
anti-competitive agreements – where agreements prevent, restrict or distort competition
abuse of a dominant market position – where business are able to behave independently of competitive pressures in the market
The consequences of breach of competition law can be quite serious and if found in breach, companies and directors may be subject to both civil and criminal sanctions. However, where an agreement restricts competition, it does mean that the agreement is automatically prohibited. There may be exemptions available, depending on the circumstances of each party.
Another means of expanding into new markets and territories is through an agent who may have extensive knowledge of a particular sector or area and who can introduce customers to the supplier or to purchase the supplier’s goods. The agent acts an intermediary between the customer purchasing the goods and the supplier (the principal).
An agency agreement is a legal agreement governing the relationship between a principal and an agent. As with distribution agreements, there are different types of agreements depending on exclusivity. An agent will often be given authority by the principal to do certain things on the principal’s behalf e.g. take orders from or negotiate sales with customers.
The main difference between a distribution agreement and an agency agreement is that a distributor enters into contracts with the customers on its own behalf (the supplier only being involved from a product liability perspective) whilst an agent will enter into contracts with the customers on behalf of the supplier.
In this way, an agent-principal relationship is much more regulated. An agent’s rights will depend on the agency agreement but will usually include a right to be paid for services and a right to be insured.
Whether you are a supplier, distributor or agent, we can work alongside you to assist you in achieving your strategic objectives. We can advise on the types of agreements best suited to your requirements, negotiate terms that are fair and right for your business and help you understand the legal framework around these arrangements.