Distributorship Vs. Sales Representative: Determining the Relationship

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Often suppliers and resellers tend to enter a symbiotic relationship for the sale of products usually within a jurisdiction. The effect of this is that while the supplier tends to enjoy the latitude of exposure and reaching a wider customer base through appointed resellers for their products thereby increasing sales output, on the other hand, resellers may either have the monopoly of distribution of the said products or opportunity to act independently of the initial reseller subject to agreed terms with regards to the products depending on the intention of the parties as contained in the agreement.

The two concepts of distributorship and sales representative are often confused with each other but a distributorship is a relationship between a supplier and reseller where the supplier grants a licence to the latter to sell its goods in a defined jurisdiction usually on a wholesale or retail basis at a predetermined cost which may be independent of the supplier. On the other side of the divide, a sales representative is an autonomous source for the sale the supplier’s goods at a price usually predetermined by the supplier. A key point to note here is that unlike a distributor, a sales representative may earn a commission which may take different forms, for their activity with the supplier.

In Canada, a distributor or reseller is protected by the Competition Act where price maintenance arises. Price maintenance occurs where a supplier precludes a distributor from selling the supplier’s goods below a marked price. However, for the Competition Act to apply, such supplier must have threatened, discriminated against, or refused supply of its goods to such reseller because of its low pricing strategy. Therefore, clauses in a distributorship agreement in Canada must be guided by the governing laws. On the Contrary, a sales representative agreement is divulged of any of the above stated formalities.

To adequately understand the two concepts, it is imperative to note that in a distributorship arrangement, the reseller takes title of the goods upon payment of consideration or such agreed terms. There is ownership of goods finalized upon sale and such reseller does not have the authority to bind the supplier but in the case of a sales representative, ownership of goods does not pass on to the sales representatives however, the sales representative has the authority to bind the supplier to a contract for the supply of goods.

Where there is a blur line between a distributorship and a sales representative agreement, the intention of the parties must be had recourse to. To illustrate this- Let us assume that A is a manufacturer and A gives its goods to B and C to resell. If B takes on the all or substantial portion of the goods and engages others in a distribution chain to resell the goods of A to consumers, then B is most likely a distributor of A but if C is engaged by A to resell the goods to consumers for a fee or other arranged incentives and C reports to A, we can conclude that C is most likely a sales representative of A. This illustration is subject to exceptions which are not discussed in this write up.

Although the two concepts are sometimes used interchangeably in commercial transactions, distributorship and sales representative have separate connotations and before a reseller enters a binding contract for the sale of goods on behalf of a supplier, such reseller ought to understand the nature of the relationship it has with the supplier to avoid a relationship that was not intended from the outset.

 

This article is intended for informational purpose only and does not constitute legal advice or a client-lawyer relationship.