A business expanding into a new territory or product line usually reaches for one of two structures without stopping to ask which one it actually needs: a distributor who buys and resells, or an agent who acts on the business’s behalf. The two look similar on paper and are routinely confused in practice, but they carry different risks, different tax treatment, and different exposure under Kenyan competition law, and getting the choice wrong is expensive to unwind once a network of relationships has been built around it.
The legal distinction that actually matters
An agent acts on behalf of a principal and does not take title to the goods being sold; the principal remains liable for the agent’s acts within the scope of the authority given, and the agent is typically remunerated by commission on sales concluded. A distributor, by contrast, buys the goods outright and resells them independently, bearing its own commercial risk on unsold stock and setting its own resale terms subject to whatever the distribution agreement restricts. This is not a drafting nicety. Misclassifying the relationship, calling an arrangement a distribution agreement while structuring it so the supplier retains the risk and control typical of agency, or the reverse, has real legal and tax consequences, since the applicable withholding tax treatment, VAT position, and liability exposure for defective products all turn on which relationship actually exists in substance, not on the label the parties gave it.
Both structures avoid the need for a foreign supplier to maintain an established place of business within the local territory, which reduces administrative and tax complexity, but an agency relationship keeps liability for the agent’s conduct with the principal in a way a genuine distribution relationship does not.
Choosing between exclusive, non-exclusive, and selective distribution
An exclusive distribution agreement appoints a single distributor for a defined territory, with the supplier undertaking not to appoint competitors or sell directly into that territory itself. It suits situations where the distributor must make a genuine upfront investment in building the market, where the territory requires dedicated development, or where the product needs specialist distribution infrastructure such as cold chain logistics or particular technical or regulatory expertise. A non-exclusive arrangement, by contrast, allows the supplier to appoint multiple distributors, or sell directly, within the same territory, and is generally the safer default from a competition law perspective. Selective distribution, common for higher-value or specialised products, lets the supplier choose distributors against defined qualitative or quantitative criteria while still permitting more than one distributor in a territory.
Whichever structure is chosen, the territory needs to be defined with precision, by county, sub-county, customer segment, or sales channel, and if exclusivity is genuinely intended it should be stated explicitly and tied to measurable performance benchmarks, rather than left implicit and later disputed when the supplier wants to appoint a second distributor or the distributor underperforms without breaching anything specific.
Competition Act exposure
Distribution agreements are treated under the Competition Act, No. 12 of 2010 as vertical agreements within the production or distribution chain, and section 21 prohibits agreements, decisions, or concerted practices that have the object or effect of preventing, restricting, or distorting competition. In practice, the clauses that draw the Competition Authority of Kenya’s attention are resale price maintenance, a supplier fixing or setting a floor on the price at which a distributor resells, and exclusive dealing or territorial restrictions that go beyond what is needed to protect the distributor’s legitimate investment. Where a supplier holds a dominant position, meaning broadly a market share the Authority and practitioners commonly treat as a trigger for closer scrutiny once it approaches a third of the relevant market, exclusivity arrangements are more likely to be characterised as an abuse of that dominance rather than an ordinary commercial term. This is not a hypothetical risk: the Competition Authority of Kenya found Crown Beverages Limited, a Coca-Cola-owned bottler, to have abused a dominant position through exclusive distribution agreements that barred distributors from stocking competing beverage brands, foreclosing rival manufacturers from access to the market.
The Act does allow parties to apply to the Authority for an exemption where the agreement can be shown to produce public benefits, such as improved production or distribution efficiency, that outweigh the competition concerns, but the Authority has shown itself willing to reject such applications where the arrangement looks more like protecting the applicant’s own commercial position than delivering a genuine public benefit. A business structuring a genuinely exclusive arrangement in a market where it, or its supplier, holds significant share should treat competition law review as a standard part of the drafting process, not an afterthought triggered only once a complaint is filed.
What a well-drafted agreement should cover
Beyond the exclusivity and competition law questions, a distribution or agency agreement should clearly allocate responsibility for compliance with the Standards Act, where products require Kenya Bureau of Standards conformity marking, and the Consumer Protection Act, since obligations around defective products and misleading representations flow down the supply chain and can expose both supplier and distributor depending on where the fault actually originated. It should also specify the term, renewal, and termination mechanics precisely, since a dispute over whether an arrangement was genuinely terminable, or on what notice, is one of the most common sources of litigation in this area. This is illustrated by the dispute between CMC Holdings Limited and Jaguar Land Rover Exports Limited, arising from six-month no-fault termination notices served on a distributorship running since 1985; the Court of Appeal declined to grant an injunction reviving the arrangement pending appeal, and the parties disputed even which of them was entitled to invoke the agreement’s own arbitration clause, illustrating how quickly a termination dispute can escalate once a contract’s termination and dispute-resolution mechanics are left unclear.
How We Can Help
Clay & Associates Advocates drafts and reviews distribution and agency agreements, advises on structuring exclusivity to withstand Competition Act scrutiny, and represents suppliers and distributors in disputes over termination, territory, and performance. Contact our corporate and commercial practice to structure a new distribution or agency relationship or to review an existing agreement for competition law exposure.
Sources: Competition Act, No. 12 of 2010, sections 21, 25, and 26; CMC Holdings Limited & CMC Motors Group Limited v Jaguar Land Rover Exports Limited, Civil Application 66 of 2013, [2013] KECA 10 (KLR).
Frequently asked questions
What is the core legal difference between an agent and a distributor?
An agent acts on behalf of the principal and does not take title to the goods, with the principal remaining liable for the agent’s acts within its authority. A distributor buys and resells independently, bearing its own commercial risk.
Can a supplier fix the price at which its distributor resells its products?
No. Resale price maintenance, whether a fixed or minimum resale price, is treated as a restrictive trade practice under the Competition Act and exposes both parties to sanction.
When does exclusivity in a distribution agreement become a competition law risk?
The risk rises sharply where the supplier holds a dominant position in the relevant market, commonly flagged once market share approaches a third, since exclusivity can then be treated as foreclosing competitors rather than as an ordinary commercial arrangement.
Can parties apply for an exemption from the Competition Act for an exclusive arrangement?
Yes, under sections 25 and 26, provided the arrangement can be shown to produce public benefits, such as improved production or distribution efficiency, that outweigh the competition concerns, but the Authority has rejected exemption applications it considered primarily self-serving.
