A distributorship agreement is one that is made between the supplier and distributor of goods. The relationship is different in nature to other possible models of supply such as agency or franchise.
KEY CONSIDERATIONS
In deciding whether distributorship is an appropriate form of supply, a business must consider the following characteristics of the distributorship relationship:
LIABILITY
The degree to which the business may remain liable to the end consumer will be a factor influencing the choice of supply model used. A distributor is an independent seller and therefore there is no direct contractual liability between supplier and the distributor’s end customer. The supplier is responsible to the distributor and the terms of that liability can be limited in the agreement made between them. However, it must be remembered that the effectiveness of such limitations regarding liability to the end consumer may be restricted in certain specified cases under the law.
INDEPENDENCE
The distributor is an independent business. This is in direct contrast to, for instance, the use of an agent who acts on behalf of the principal. A distributor is an entity trading in its own right and therefore the degree of control that the supplier will have over the distributor’s actions (for example the content of the agreement with end consumers) must be carefully considered by the supplier.
RISK
The distributor usually buys the goods directly from the supplier and is then responsible for selling them on to his end customer. Therefore the distributor usually accepts the entire risk in relation to non-payment by the end customer. It should be noted though that as there is no relationship between the supplier and the end customer, in the event that the distributor were to enter into insolvency, the supplier would probably have no claim against the end customer.
PRICES
Use of distributors will invariably impact prices of goods. The supplier will need to reduce his profit margin or accept that the price of the goods will increase in order that the distributor makes a profit.
THE IMPACT OF EU LAW
A relationship of distribution must always be considered against the prevailing background of EC competition law. Distribution agreements (and most particularly sole and exclusive distribution agreements) are open to falling foul of EC governing regulations concerning competition, therefore great care must be taken in drafting such agreements.
In drafting any distributorship agreement it is critical that the protection of the block exemption applying to vertical agreements is considered and that the relationship is created in a manner that does not offend competition rules. Amongst other considerations, the relevant market share contemplated must not exceed 30% and the agreement must not include certain, so-called, “hard-core” restrictions listed by law.
THE CONTENTS OF THE AGREEMENT
When agreeing terms, it is important that supplier and distributor agree:
EXCLUSIVITY
Distributorship may be solely applicable to a certain area or exclusive to a certain territory. Conversely the supplier may decide to create a network of distributors none of whom have exclusivity and restrict selection of those distributors to compliance with certain key criterion which are important to him, such as training of sales staff, facilities or location.
PERFORMANCE OBLIGATIONS
The distributor will wish to ensure that the distributor will use his best endeavors to promote the goods.
DURATION
The longevity of the relationship will need to be considered, including when the agreement will terminate and how it will terminate, for example the distributor may wish to have the ability to buy back the outstanding goods at the termination of the relationship.
CONFIDENTIALITY
The distributor will be privy to key information concerning the supplier’s business and therefore it is prudent to include a clause binding him to confidentiality in this regard.
INTELLECTUAL PROPERTY
The distributor may need use of the supplier’s trade materials, trademarks and other intellectual property. Permission for such use should be granted in the agreement governing the relationship.
TERMS OF SALE
The supplier may wish to govern certain terms and conditions with the end customer and if this is the case provision must be made to this effect in the agreement.
REPORTING
Where the supplier requires information from the distributor, a clause providing for regular reporting of such will need to be agreed.
Use of distributors can be an effective tool for businesses seeking to sell products to a wider market. It is highly important when contemplating such an association that EC competition law is considered and that any distributorship relationship does not offend the principles embodied in those rules.
Michael Chambers and Co. LLC’s lawyers are able to advise on every aspect of the distributorship relationship. If you would like to speak to one of our lawyers, then please contact us.
