What is the difference between an Agency Agreement and a Distribution Agreement?

Nov 22, 2016 | Commercial Contracts

What is an agency agreement?

Agency agreements allow one party (the agent) to act on behalf of another party (the principal). Agents have a lot of power because they are able to make financial decisions for the principal and they are able to enter into contracts with third parties that legally bind the principal. Agency agreements set out the nature of the agency relationship and provide the scope of an agent’s authority to act on behalf of the principal.
Because agents have so much power, they also have a lot of legal responsibilities when carrying out their duties. This type of relationship is called a fiduciary relationship. For example, agents must always act in the best interests of the principal and they must avoid conflicts of interest. Agents are not allowed to secretly profit from their role as an agent. This means they can’t make business deals for themselves and profiteer when they are acting on behalf of the principal.
Agents must not disclose confidential information about the principal and they must not misuse the principal’s money. Generally the agent must act in person; they cannot delegate their responsibilities. Agents must fulfil their duties with care, skill and diligence and they cannot act or make decisions that fall outside the boundaries of the agreed relationship.

What is a distribution agreement?

A Distribution Agreement is an agreement between a supplier of goods and a person or business that wants to distribute (sell) them. The supplier might be a manufacturer, importer or wholesaler. The distributor is usually a business, or chain of businesses that want to sell the goods.

Distributors cannot contract on behalf of suppliers. The legal relationship is only between the supplier and the distributor. The distribution agreement sets out the terms of the relationship between the supplier and distributor including the products that are being distributed, the area of distribution, sales targets exclusivity, sale price and how the products should be marketed.

What is the difference between them and when should I use them?

Distributors have limited powers compared to agents. Distributors buy a product from the supplier and sell it on to the end user. Distribution agreements can be used for a wide range of goods. They benefit suppliers because it gives them access to a wider market for their product. Distributors like them because it enables them to offer a product that sets them apart from competing businesses or attracts more buyers to their business. They are often useful for situations where the supplier’s brand or product is established in the market.

Agency agreements give agents a lot more power and responsibility. They are also generally much more risky for the principal. Agents can go out and market a good or a service on behalf of the principal. They can also enter into distribution agreements and other contracts on behalf of the principal, depending on the exact terms of the agency agreement and the nature of the good or service. This is useful for companies that have a new product or service and they want to increase market awareness and sales in new territories.

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