In our practice we often receive the question whether a certain commercial relationship qualifies as agency or distribution. The follow-up question is usually whether it makes any difference. This last question can in any event be answered in the affirmative. The legal distinction between agency and distribution brings about different rights and obligations. In this article, we will shortly explain what agency and distribution entail and we will highlight the most important differences between these two commercial relationships.
What is agency?
Agency is the commercial relationship in which an intermediary, the agent, tries to bring in contracts or sales for its principal. The agent is therefore tasked by its principal to attract clients. The agent can be engaged for the sale of goods as well as services.
An important characteristic of agency is that the agent will act as an intermediary only and will therefore not become a party to the final agreement itself. The agreement for the sale of goods or services will therefore be concluded between the principal and the final customer, meaning the buyer of the goods or services. As soon as the agent brought the (potential) customer in contact with its principal (whether or not paired with possible negotiations), the agent withdraws from this relationship and will incur no liability for the agreement that was eventually concluded.
If the agreement was concluded as a result of the agent’s efforts, then the agent is entitled to a commission. This usually comes down to a certain percentage of the final price agreed upon in the sales contract (the order value). The final customer has nothing to do with this commission. The principal is the party that needs to pay the commission to the agent. The agency agreement is special agreement that is included in Book 7, Chapter 4 of the Dutch Civil Code. The applicable law for agency is largely imposed on a European level, meaning that the most important rules on agency are alike within the entire European Union.
What is distribution?
Distribution is a commercial relationship where a dealer, the distributor, buys certain goods from a manufacturer, supplier or brand owner in order to resell these goods. The distributor therefore becomes the owner of these goods at some point in time and will maintain its own stock in order to sell and deliver these goods to its customers. The distributor thus bears its own risks for these goods. The distributor becomes a party to the final sales agreement entered into with the buyer of the goods.
The distributor does not make its money by means of commission, but rather by the margins it receives when on-selling the goods.
There are no specific laws that deal with the distribution relationship. This means that parties are free to make their own agreements. However, parties do need to take into account applicable competition law rules when dealing with distribution agreements. For example, a seller may not require the distributor to charge a specific on-sale price, as this would result in an illicit pricing agreement. Often, the parties agree on a specific geographical area where the distributor may sell the goods.
Most important differences between agency and distribution
Risks in the commercial relationship:
- The agent acts for the principal’s risk and account and will bear no economic risk itself for the concluded transaction. The only risk that the agent has to face would be not to receive any commission if the transaction finally does not happen. Further, an agent can be liable if it brings in clients for its principal of which he was or could reasonably have been aware that they were insolvent.
- The distributor on the other hand, does act for its own account and risk: if its final customer does not pay for the sold goods, this will be the distributor’s problem alone as the contractual counterparty to the transaction in question.
Applicability of competition law:
The aforementioned risks to be borne are also a determining factor when assessing if a certain commercial relationship qualifies as agency or distribution under competition law. The name of the agreement is not decisive in this regard, but the contents of the agreement are.
- In principle, (European) competition law does not apply to agency agreements. This means that for example, it is allowed to make certain pricing agreements with the agent. However, if in practice the ‘agent’ is bearing significant financial risks (for example: he needs to make substantial investments under the agency agreement), then such relationship will not qualify as a ‘genuine’ agency relationship, which means competition law rules may apply after all.
- A distribution relationship, on the other hand, will always be subject to the rules of competition law. For this reason, a principal may not impose on-sale pricing obligations on its distributors. Further, certain geographical restrictions imposed on the distributor can also be contrary to competition law rules.
Termination of the relationship and compensations due:
- When terminating an agency agreement, mandatory notice periods need to be taken into account, which notice period will be longer if the agency agreement lasted longer. Under certain circumstances, an agent will also be entitled to a goodwill compensation when the agency relationship is terminated. Such goodwill compensation will have to be paid if the agent brought in new, lasting clients for the principal, from which the principal still benefits after the termination of the agency agreement.
- In a distribution relationship, parties are free to make specific agreements on the termination of the relationship. Only under special circumstances, such as a long-term relationship or a great level of dependency on the side of the distributor, a judge could decide that a longer notice period should be taken into account when terminating a distribution agreement, or, alternatively, that the distributor has a right to compensation of damages, all to be assessed according to the principles of reasonableness and fairness.
Whether you should opt for an agency or a distribution relationship depends on your specific wants and needs.
More information
Should you wish to obtain advice on these different forms of trading, or require assistance with drafting or reviewing an agency or distribution agreement, please do not hesitate to contact our specialist on this subject, Céline Goedhart (cg@kneppelhout.nl).
