Distribution Agreements I

Nature of Agreement

The agreement should define its character as an exclusive distributorship, sole distributorship or non-exclusive distributorship. This will be reflected by the presence or absence of clauses which provide for exclusivity and other key rights and obligations. The clauses described in this and the following sections will vary in accordance with the type of agreement involved.

An exclusive distributorship agreement gives an exclusive right to sell the relevant goods and/ or services in the territory concerned. The supplier agrees not to appoint another distributor nor to sell in direct competition with the distributor within the territory.

A sole distributorship agreement incorporates an undertaking by the supplier not to appoint another distributor. However, the supplier retains the right to sell the goods directly, in competition with the distributor. It may be advantageous where the supplier already has a certain amount of sales in the territory concerned.

Selective distribution agreements involve the appointment of a number of selected distributors in the relevant territory. They may be appointed in accordance with defined criteria and qualitative considerations. The arrangement may be similar to a franchise, but would not have all of its characteristics.


Appointment

The supplier appoints the distributor as its exclusive or non-exclusive distributor to distribute the relevant goods and/ or services in the relevant territory. The right be may be the exclusive right to import and distribute.

The distributor agrees to purchase the relevant goods and/ or services from the supplier only. It will typically undertake not to distribute or manufacture any goods which compete with the goods or services during the term of the agreement.

The distributor may agree to refrain from actively seeking customers for the relevant goods and/ or services in other exclusive territories. It may be precluded from establishing any branch or maintain any distribution depot for the sale of the relevant goods and/ or services, in those other territories.

The distributor may be authorised to describe itself as the authorised distributor (or even the supplier) of the relevant goods and/ or services in the case of an exclusive agreement. It may not represent itself as an agent of the supplier for any purpose.

The Distributor may not without the Supplier’s prior written consent make any promises or guarantees about the relevant goods and/ or services beyond those contained in the promotional material supplied by the Supplier, or otherwise incur any liability on behalf of the Supplier.


Product and Territory

The agreement will specify the goods concerned.  It may refer only to certain types of goods or to a range of products.  The agreement may allow for extensions to new kinds of related goods. In other cases, the goods concerned may be defined narrowly.

The distributor may wish to ensure that the agreement embraces improved versions of the same goods. The supplier may wish to retain a greater degree of flexibility regarding future variations and developments of the goods.

Where, as is usual, the agreement is applicable a geographical territory, it must be specified in the agreement.  Sometimes an extension of the territory in the future may be allowed or contemplated.

The supplier is usually obliged to refer direct enquiries by consumers in the territory to the buyer.  The distributor is usually obliged to pass enquiries from outside the territory to the supplier.


Duration

The term / duration of the agreement is a matter for commercial agreement. There may be an initial trial period with break clauses, if minimum sales are not achieved. There may be successive contractual periods, which are renewed from time to time.

There may be a fixed term with options for successive rollovers and continuation.There may be an agreement which can be terminated by either party by notice.

At common law, in the absence of any specified term, it is usually implied that a continuing agreement may terminate by giving reasonable notice.


Pricing I

The distributor’s profit is the difference between the selling price and the purchase price.  He does not earn a commission.

The distribution agreement may contain provisions in relation to the price which the distributor must pay when ordering the goods and/or services.  The agreement may refer to a definite price or to criteria for fixing the price.  It may specify that the distributor shall pay the most favoured customer price. The initial price may be set out.

The agreement may provide for the price for a period with increases, perhaps linked to inflation. In other cases, the pricing is prescribed or agreed on an ongoing basis. The supplier may be able to give notice of rises in the prices for the relevant goods and/ or services.


Pricing II

The supplier may retain title pending payment. The general principles in the Sale of Goods Act, apply. The title will not pass where such clause is provided until payment is made.

The distributor may be obliged to purchase a minimum amount from the supplier. The provisions for purchase may require ongoing review in light of the circumstances. The supplier may reserve a right to terminate the agreement if the minimum purchases are not achieved.

The terms of payment / credit will be specified.The distributor is likely to be obliged to pay the full amount invoiced to it by the supplier in a specified period after the issue of the invoice. Interest is usually chargeable on late payment. All sums payable is usually exclusive of VAT, which is also payable on that sum.


Distributor’s undertakings

The terms of the distributor’s obligations to the supplier are determined by the circumstances and the commercial terms which are reflected in the agreement. The following is illustrative of key undertakings by the distributor, that are commonly provided.

The distributor may undertake with the supplier that during the term of the agreement:

  • use its best or all reasonable endeavours to promote the distribution and sale of the relevant goods and/ or services in the Territory;
  • employ a sufficient number of suitably qualified personnel to ensure the proper fulfilment of the distributor’s obligations under this agreement;
  • submit written reports at regular intervals to the supplier, showing details of sales, (or services), stock, outstanding customer orders and orders placed by the distributor with the supplier that are still outstanding, and any other information relating to the performance of its obligations under this agreement that the supplier may reasonably require from time to time;
  • maintain, on its own account, an inventory of the relevant goods (or services capacity equivalent) at levels which are appropriate and adequate for the distributor to meet all customer delivery requirements for the relevant goods and/ or services throughout the territory;
  • keep full and proper books of account and records clearly showing all enquiries, quotations, transactions and proceedings relating to the relevant goods and/ or services;
  • allow the supplier, on reasonable notice, access to its accounts and records relating to the relevant goods and/ or services for inspection;
  • keep all stocks of the relevant goods and/ or services which it holds under conditions appropriate for their storage, and provide appropriate security for the relevant goods and/ or services, all at its own cost;
  • insure with a reputable insurance company all stocks of the relevant goods against all risks which would normally be insured against and produce to the supplier on demand full particulars of that insurance and the receipt for the then current premium;
  • provide to customers an after-sale repair and maintenance service in respect of the relevant goods and/ or services; this may be in accordance with the terms of the service and maintenance manual provided by the supplier; and
  • inform the supplier immediately of any changes in ownership or control of the distributor company and of any change in its organisation or method of doing business that might affect the performance of the distributor’s duties.

The Distributor may be obliged to buy the relevant goods and/ or services for its own account for resale under the agreement. There may be provision for the purchase of a minimum quantity in each period.


Supply of products

The agreement is likely to provide for the physical supply of the relevant goods. It may be provided that the distributor may notify the supplier in writing of its forecast of the quantities of each type of goods that it expects to buy for delivery during the ensuing period, by a certain date before.

The supplier may undertake to use its best or all reasonable endeavours to meet all orders for the relevant goods forwarded to it by the distributor in accordance with its terms of delivery. This may be to the extent the orders do not exceed the forecast for each type of goods given.

The Supplier may make changes to the specifications of the relevant goods and/ or services, provided that the changes do not adversely affect their quality. The Supplier shall give notice of any changes to the product specifications to the distributor as soon as reasonably practicable.

It may be provided that by giving notice to the distributor, the supplier may exclude one or more of the relevant goods from the agreement as it thinks fit if the relevant goods and/ or services have been permanently discontinued for any reason.


Supplier’s undertakings

The terms of the supplier’s obligations to the distributor are determined by the circumstances and the commercial terms which are reflected in the agreement.

The supplier may undertake to supply the relevant goods and/ or services only to the distributor for resale in the territory and not to supply the relevant goods and/ or services to customers in the territory, in the case of an exclusive distribution agreement.

The supplier may retain the right to supply the relevant goods and/ or services directly to customers in the territory, in the case of a non-exclusive agreement. He might or might not undertake not to solicit orders from customers in other cases actively.

The supplier may agree to provide any information and support that may reasonably be requested by the distributor to enable it to discharge its duties under this agreement properly and efficiently. He may agree to supply spare parts requested by the distributor that are required to enable it to fulfil its repair and service obligations under the agreement, subject to availability.


References and Sources

Comercial Law Fidelma White  2nd Ed 2012 Ch 4

Enclylopaedia of Forms and Precedents Vol. 16 (4)

International Commercial Agency and Distribution Agreements: Case Law and Contract Clauses (AIJA Series) (2011) H
Distribution Agreements under EC Comptetition Law: Viktoria Robertson (2008)
International Agency, Distribution and Licensing Agreements (Commercial) Christou
Distribution Agreements Under the EC Competition Rules  2002   Korah  O’Sullivan