Many foreign companies elect to engage a distributor in the U.S. in order to profit from the distributor’s experience and existing sales channels. It is surprising, however, the confusion that frequently appears in those relationships as to whether the relationship that is being created is with a distributor, which is truly independent from the manufacturer, or an agent, which is an authorized representative of the foreign company. Many foreign business people use the terms interchangeably, but the distinction is important.
In the distributor relationship, the supplier of goods is usually selling those goods to the distributor who buys and then sells the goods for his own account and retains any profit realized. In the distributor relationship, the distributor is usually permitted to use the manufacturer’s trademarks and trade names, and frequently a distributor is given an exclusive territory in which to sell the product. The distributor generally handles questions from clients and end -users in that territory with respect to the product and may be required to handle repair and replacement or warranty issues. While a distributor may be seen in some capacity as a representative for the manufacturer’s product in the territory, the distributor is not a representative or affiliate of the manufacturer. The distributor is not acting for and on behalf of the manufacturer and cannot obligate the manufacturer without the manufacturer’s consent.
An agent appointed by a principal is usually an affiliate of and a representative for that principal or is authorized by the principal to undertake certain actions on behalf of the principal. Usually, the principal will specify a list of actions that the agent is authorized to undertake on behalf of the principal. Besides the actual authority that is bestowed upon an agent by a principal, there is also apparent authority of an agent, which entitles third parties to make reasonable assumptions as to whether the agent was authorized to undertake certain actions and bind the principal.
Based on the foregoing, foreign businesses should understand that an agent’s actions usually are binding on the principal and that the agent may create obligations on the principal’s behalf. A distributor is not authorized to bind the principal, and its actions usually cannot create an obligation on the manufacturer. The distinction of whether a contracting party is an agent or a distributor is particularly relevant in regard to the following issues:
- A distributor generally is not obligated to provide the manufacturer with a customer list. Usually, an agent would be providing its principal with a list of all customers, so that the manufacturer can complete those orders. For a business trying to establish itself in a new territory, it is often critical to know where its products are having the greatest impact. The manufacturer may not be able to discern such information by using a distributor.
- If the employees of the distributor cause an accident or create another liability as a result of negligence or misconduct, such liability would be an obligation of the distributor. If the agent or employees of the agent cause such a liability, it is possible that the liability could be asserted against the manufacturer, as principal.
- A distributor cannot claim to a third party that it is acting on behalf of the manufacturer and create an obligation that would be binding upon the manufacturer. An agent may create an obligation that would be binding on the manufacturer. For example, the agreement by a distributor to a discount on the sale price based upon a certain volume of the product would not be binding on the manufacturer without the manufacturer’s specific consent. A similar undertaking by an agent would be binding on the principal.
- With an agent, the manufacturer is usually entitled to control the agent’s workload and focus. The manufacturer could insist that an agent concentrate on certain products, certain portions of a territory or certain key customers. Generally, the manufacturer cannot control a distributor in that way.
- With an agent, the manufacturer has greater control over the terms of sale, such as pricing, warranty periods and other benefits that will be provided to customers. Unless specifically bargained for, the manufacturer may not be able to control those issues to the same extent with a distributor and is prohibited from controlling the resale price.
- With an agent, the manufacturer has greater control over the performance of warranty work and can assure itself through its control over the agent that such work is performed timely, to a high quality standard and to the satisfaction of the end-user customers. The manufacturer may not be able to exercise similar control or gain insight into customers’ satisfaction with respect to a distributor.
As can be seen from the above examples, it is critical at the outset of what may be a multi-year relationship to get the structure correct and to understand clearly each party’s duties and obligations. The investment of the time to accurately and concisely document those arrangements will pay off by avoiding unexpected obligations or liabilities, which will allow the manufacturer to develop its business in a desired manner.