2.4 Supply chain: distribution and agency

Main Idea: This section covers the sales or distribution channel of a company. In addition to the company’s own sales activities, it may engage a commercial agent or sell to a distributor, in order to increase its turnover.

Rationale. A main reason to appoint a distributor or agent is that the supplier is unable to carry out distribution or sales in a particular territory alone, or is unwilling to invest in the infrastructure required for distribution. The supplier will wish to be assured that the sales and distribution of the goods will be undertaken in an efficient and vigorous manner.

Agency vs. distributorship. It is extremely important to distinguish between (commercial) agency, on the one hand, and distributorship, on the other hand. A (commercial) agent is a representative of its principal (who sells to the customers found by the agent), whereas a distributor buys the goods from the supplier and resells them (for the risk and at the account of the distributor itself) to its customers (who are often also the end-users).

Commercial agency Distributorship
·         An agent does not buy or sell. ·         A distributor buys and resells.
·         An agent acts for risk of principal. ·         A distributor is a sales channel for the supplier.
·         A termination indemnity is based on the volume of generated business and goodwill. ·         Termination is ‘free’, unless the distributor made investments in reasonable reliance on continuation.
Commercial agency Distributorship
·         An agency is a sales channel for the supplier. ·         A distributorship is a sales channel for the supplier.
·         An agency can be exclusive, sole or non-exclusive. ·         A distributorship can be exclusive, sole or non-exclusive.
·         An agency must follow the instructions of the principal (legal duty, contractually reconfirmed). ·         A distributor must (or should) follow certain instructions of the principal (contractual basis).
·         An agency must use advertisement materials as indicated by the principal. ·         A distributor should use advertisement materials as indicated by the principal.

Appointment for a territory or market. The appointment of an agency or distributor is usually limited to a certain geographical area (i.e. a country or part of a country), a specific market segment (e.g. supermarkets, fitness centres, swimming pools, shopping malls, petrol stations), or a type of promotion or customer channel (e.g. general consumers, tv-broadcasting, printed magazines, luxury brand shops). Note that from a competition (antitrust) law perspective, it is not permitted to restrict a distributor from selling passively to customers from outside the appointed territory, and it is also not permitted to forbid a distributor to sell through the internet.

It is important to note that the principal/supplier may wish to exclude certain key customers which have their main place of business outside the territory from the scope granted to the agent or distributor. Especially in commercial agency contracts, it is possible that the principal does not want the agent to conduct sales activities with (affiliated companies of) such key customers (and become entitled to commission). This is because decisions to buy from a supplier are often made on corporate (holding) level; whereas the sales activities are focused on that level, it would be inappropriate to reward sales locally (i.e. pay commission to the agent because incidentally, the formal buying entity was in its territory).

Exclusivity of appointment. An agent or a distributor will be appointed “exclusively”, “non-exclusively” or as “sole” representative for the principal/supplier. “Exclusive” means that neither the principal/supplier nor a competitor of the agent/distributor is entitled to (be appointed for and) conduct sales activities in the agreed territory, market segment and customer channel. The distributor or agent will usually seek assurances that its efforts will be protected in some way, possibly by being appointed as the sole or the exclusive distributor, in a given territory. Conversely, a supplier may wish to ensure that the distributor’s efforts are concentrated in only the granted territory (Article 1).

Sole appointment. If the appointment concerns a ‘sole’ agency or distributorship, the principal/supplier may not appoint another agent or distributor for the same territory, market segment or customer channel. Nonetheless, the principal/supplier itself remains entitled to sell into that area. In other words, the appointed agent or distributor will be the only (sole) agent or distributor for that area, but will be operating alongside the principal/supplier.

Important incompatibilities. Both exclusive and non-exclusive arrangements may severely restrict the freedom of the principal or supplier in undertaking sales activities or appointing potentially more successful agents or distributors, because:

  • The appointment of an exclusive distributor for a certain market segment prohibits the subsequent appointment of a non-exclusive distributor in the same territory for a broader market.
  • The appointment of a non-exclusive agency for a certain territory prohibits the subsequent appointment of an exclusive agent in that same territory (even though the former is not de facto active in the market segment or customer channel covered by the latter). In such cases, the second appointment must contain a carve-out permitting the agent appointed first to continue its activities.
  • If an agent is appointed with an exclusivity arrangement for a term of five years and the agent does not generate any sales, the territory and market segment for which the agent is appointed will effectively be ‘blocked’ for alternative sales efforts during that period of five years.

Interchangeability of contract clauses. Some clauses in the ITC Model international distribution of goods contract can be used in the ITC Model international commercial agency contract, and vice versa. You could essentially copy-paste the following Articles from the distribution of goods Model into the commercial agency Model[1]:

  • Article 7 (actions to be taken by the distributor);
  • Article 8 (support and training); and
  • Article 9 (intellectual property rights).

Conversely, you might want to use the following agency clauses in a distribution contract[2]:

  • Article 4 (minimum orders); and
  • Article 5 (advertising, fairs and exhibitions).

[1]           The term Distributor must be changed to “Agent”; and the term Supplier to “Principal”.

[2]           The term Agent must be changed to “Distributor”; and the term Principal to “Supplier”.