There are various methods for a manufacturer or wholesaler to get its products to market. However, two of the most tried and tested methods are agency and distribution arrangements. Business people often use the terms "agent" and "distributor" interchangeably. However, there are important legal and practical distinctions between the two. This article discusses the differences, as well as the similar issues that can affect both types of relationships.

If a person or entity is an "agent", it represents the manufacturer and usually has the right to conduct business under the manufacturer’s marks and name. Legally, it often means that the agent can bind the manufacturer contractually with a third party. An agent never takes title to the manufacturer’s goods. Instead, it enters into agreements with customers who then receive title to the goods directly from the manufacturer. The agent’s profit comes from the commission that is earns from the manufacturer on each sale. Any agency agreement must make clear the basis for calculating the commission and how returns or refunds are treated.

A "distributor" is an independent person or entity that cannot (unless contractually permitted to do so) bind the manufacturer contractually to third parties. The distributor buys the goods from the manufacturer and then re-sells its inventory to the customers. Its profit is derived from the mark-up or difference between the price that it purchased the goods from the manufacturer and the price that it charged its customers for the same goods.

1. Territory. An agent or distributor will want a large territory. Additionally, they will probably want the territory to be exclusive (i.e., no other agent or distributor can be appointed in the territory). From the manufacturer’s standpoint, great care should be taken in granting a large territory or exclusivity, unless the agent or distributor has a verifiable track record. One option is to allow for the "earning" of additional territory or exclusivity. For example, if the agent or distributor meets certain sales goals, they will "earn" a larger territory and/or exclusivity.

2. Distribution Channels. What distribution channels will the agent or distributor be able to use? Will the manufacturer reserve certain distribution channels for itself? For instance, will the manufacturer be able to sell via the Internet to customers located in an agent’s exclusive territory?

3. Products. Which products will the agent or distributor have the right to sell? Often, it will be all of a manufacturer’s product line. However, if the manufacturer has diversified product lines, it may be limited to those products which the agent or distributor has experience selling.

4. Term. How long will the agreement last? Will the agent or distributor have an option to renew the agreement? A manufacturer will probably want a shorter agreement, with performance standards for any renewal right. On the other hand, the agent or distributor will probably want a longer agreement with several renewal options.

5. Termination. The agreement needs to be clear as to the conditions under which either side can terminate the agreement. A termination provision may range from a simple "30 days notice" by either side to "for cause" termination only. If the agreement only allows termination for cause, then the definition of "cause" needs to be expressly stated in detail. In this regard, you should consult a lawyer in the local jurisdiction of the agent or distributor to make sure that local law does not impose a "for cause" requirement, regardless of what the agreement says – this is particularly an issue in Latin America.

6. Effect of Termination or Expiration. The agreement should spell out what will happen when the agreement expires or is terminated. For instance, in the case of an agent, will the agent continue to receive commissions on pending sales or future sales to existing customers? Similarly, will the distributor be required to re-sell his inventory to the manufacturer? The agreement should also make clear that the distributor or agent will no longer be able to use the manufacturer’s trademarks.

7. Minimum Sales/ Purchase Requirements. Will the agreement contain minimum sales requirements? In the case of a distributor, the manufacturer should take care to ensure that it has the right to reject orders from the distributor. This is particularly an issue when the manufacturer suspects that the distributor is stockpiling products just to meet the minimum purchase requirements. While the manufacturer gets its sale, the market is not being developed if the distributor just sits on the products.

8. Warranty Service and Defective Products. The agreement should make clear who is responsible for warranty and repair service in the territory. In doing so, the agreement should state the terms under which the agent or distributor will be compensated for performing warranty or repair service. Similarly, the agreement should also address defective products and how they will be handled. This might be a simple continual discount for products, to cover any potential defective ones. Alternatively, it might require the return of the defective products to the manufacturer followed by a corresponding credit.

9. Trademarks. Chances are that the manufacturer will produce products under certain trademarks. If this is the case, then the manufacturer needs to make sure that it has adequately protected those trademarks in the jurisdictions in which it is selling. This will usually be accomplished by registration of the trademark with the intellectual property authority in that country. Failure to register the mark may result in third parties registering it before you (trademark piracy is still an issue in many parts of the world) or, even worse, your agent or distributor registering the mark(s) in their own name.

Assuming that the mark has been registered properly, the agreement should contain a trademark license that specifies the terms and conditions under which the agent is entitled to use the mark(s). The agent or distributor should also make sure that the agreement provides an indemnification, whereby the manufacturer will indemnify the agent or distributor if they are sued for trademark infringement by a third party (while using the marks in accordance with the license).

11. Confidentiality/Non-Compete. The agreement should contain a provision requiring each party to maintain the confidentiality of information that it learns from the other party. This is especially important if the manufacturer will be providing marketing plans or other confidential information to the agent/distributor.

The manufacturer may wish to require the agent/distributor not to sell competing products during the term of the agreement and for a period of time thereafter. Care should be taken in drafting such a provision. In particular, local laws should be examined to determine the legality of non-competes in that jurisdiction.

12. Market Development. Will the agent or distributor be required to take affirmative marketing efforts to develop the market for the manufacturer’s products? If so, will the manufacturer provide any financial support for advertising or other marketing?

13. Choice of Law and Dispute Forum. Which jurisdiction’s law will apply to the agreement? How will disputes be resolved – in court or by arbitration? In which jurisdiction? The foregoing questions should be addressed in the agreement. In doing so, local laws should be reviewed. For instance, some foreign jurisdictions do not recognize an agreement to litigate a dispute abroad.