Agency or distribution, what's the difference?

Agency and distribution agreements are often confused with each other. Both agreements are very similar, as they both involve a long-term relationship between two parties, where one party (a commercial agent or distributor) aims to sell the products of another party (the principal or supplier).

However, since the risks in each agreement are divided entirely differently between both parties, it is important to think carefully beforehand about which agreement is best suited to your type of business.

Note: when drawing up an agreement, the actual name given to that agreement is not the crucial factor! It’s all about what the parties have actually agreed and how this is implemented in practice.

AGENCY

In an agency agreement, a commercial agent and a principal (the seller of products) agree that the commercial agent will act, for a fee, as broker for a fixed or indefinite period of time in bringing about agreements. This fee, also known as commission, is often calculated as a percentage of the value of the agreements in which the commercial agent has acted as a broker. It is important to note that the agent is merely a broker, and the agreement itself is concluded between the principal and the customer. The agent therefore runs no risk under the agreement that it has facilitated.

 DISTRIBUTION

In a distribution agreement, the party that concludes the agreements (the distributor) acts at its own risk, and also bears the economic risk of the agreement to be concluded. The distributor purchases goods or services and sells them on. It may determine its own procedures, conditions and prices.

DIFFERENCES

Within the European Union a mandatory directive provides for agency agreements and has been incorporated by our legislator into a Dutch law which applies to all agency agreements. If an agency agreement is terminated, the parties must therefore take account of a statutory notice period and the agent’s entitlement to clientele compensation.

This plays no role when terminating distribution agreements, so that termination of distribution agreements is often much more advantageous to the client and less advantageous to the distributor.

CLIENTELE COMPENSATION

If, after the agency agreement has been terminated, the principal continues to use customer contacts brought about or intensified by the commercial agent, the principal may be required to pay clientele compensation to the commercial agent.

 It follows from the law and court rulings that the clientele compensation and its amount is determined in three steps as follows:

• quantifying the benefits that the principal derives from the new customers introduced by the commercial agent or customer contacts significantly extended by it;
• assessing whether there is a reason to adjust the clientele compensation, in view of the fairness and all circumstances of the case, specifically the commission the commercial agent will miss out on due to termination of the agreement;
• where the clientele compensation may not be higher than the commercial agent’s average annual remuneration during the last five years or, if the agency agreement has been for a shorter period, the average of the entire duration of that agreement.

For the first step, a forecast must be made of future developments of the principal’s business. All kinds of factors may play a role here, such as a cessation of business activities, an economic recession or the costs of maintaining existing business contacts.

In the second step, all circumstances of this specific case will play a role, such as the commission the agent misses out on, the duration of the agency agreement and the financial situation of the commercial agent and the principal.

All in all, termination of an agency agreement can become quite expensive. Despite this disadvantage such an agreement entails upon termination, it may of course still be the best choice for your specific business in order to market your goods.

As a rule, termination of a distribution agreement does not involve an obligation to compensate the distributor, certainly not if the distribution agreement is properly drawn up and leaves scope for its termination.

Our experienced legal counsels will be happy to advise you on this subject and are highly skilled at drawing up both types of agreements.