The striking difference between an Agency Agreement and a Distribution Agreement, is that an Agency Agreement confers certain powers on the Agent to act on behalf of and bind a Principal.
This generally equates to the Agent finding purchasers for goods or services of the Principal and entering into sales contracts (in their capacity as agent of the Principal) with the purchaser. The Principal then delivers the goods or services to the purchaser and pays the agent a fee.
The Agency Agreement will set out the rights and responsibilities of each party and the scope of the Agent’s authority (the ways in which the Agent can act which will be binding on the Principal). There is a great deal of flexibility in Agency Agreements and these contracts can be used for a variety of purposes.
An Agent will not usually be required to purchase goods or services upfront from the Principal. The Agent is generally reimbursed by way of a fee, sometimes represented by a percentage of the sales it makes on the Principal’s behalf.
This is distinct from a Distribution Agreement. Under a Distribution Agreement a manufacturer gives another the right to sell goods, sometimes within a designated “exclusive” area on certain terms and conditions.
A distributer usually pays for the goods upfront and then on-sells those goods within the territory.
Unlike an Agent, a Distributor is not granted rights to act on behalf of and bind the Principal in its dealings with purchasers or in the course of its business.
It is important to choose the correct setup for your business and even more important to put your arrangement in writing so that each party understands their obligations.