A distribution agreement will usually contain clauses which protect the supplier’s intellectual property so as to prevent the distributor from building up a competing brand or taking goodwill during the agreement or afterwards. The distributor is licensed to use the supplier’s advertising and promotional material, trademarks and equivalent intellectual property. The distributor may be restricted from using any other branding or intellectual property of a similar nature without prior consent.
The distributor may be restricted from doing anything which might constitute a breach of intellectual property rights. The agreement will define the scope and extent of the licence/ consent to use intellectual property rights. There may be an obligation to notify the supplier of infringements encountered and to take steps and or co-operate in proceedings in order to assert and enforce these rights.
The supplier is likely to have to indemnify the distributor regarding his intellectual property rights. In particular, an indemnity is commonly given in respect of third-party claims for breach of intellectual property rights.
There is likely to be obligations to protect confidential information, supplementing intellectual property rights. The protective terms will usually extend to know how and information regarding the supplier’s business and methods, acquired during the course of the agreement.
IP Clauses I
The supplier grants to the distributor a right (exclusive or non-exclusive), in the territory, to use the suppliers’ trademarks and other intellectual property in the promotion, advertisement and sale of the goods and/ or services for the duration of the agreement.
Trade marks in this context will usually relate to goods, but may also relate to services. Trade marks may be defined to include all attendant intellectual property rights.
The goods and/ or services must be sold under the trademark. It may be required that all containers and advertisements for the goods and/ or services the trade mark.
All representations of the trademarks that the distributor intends to use may be required to be submitted to the supplier for approval before use. The distributor may not, without the prior written consent of the supplier, alter or make any addition to the labelling or packaging of the goods and/ or services displaying the trademarks. It may not alter, deface or remove any reference to the trade marks.
IP Clauses II
The supplier may, but more likely may not, make a representation or warranty as to the validity and enforceability of the trade marks nor as to whether they infringe any intellectual property rights of third parties in the territory.
The distributor must not do, or omit to do, anything in its use of the trade mark that could adversely affect their validity. It must not sub-license, transfer or otherwise deal with the rights of use of the trademarks granted under the agreement.
The distributor may be obliged to take steps to record, register or otherwise safeguard the supplier’s trademark rights for the marketing of the goods and/ or services under the trade marks in the territory.
Each party is usually obliged promptly to give notice in writing to the other if it becomes aware of any infringement or suspected infringement of the trademarks or any other intellectual property rights relating to the goods and/ or services within the territory; or any claim that the use or sale of the goods and/ or services, within the territory, whether or not under the trademarks, infringes the rights of any third party.
IP Clauses III
The Supplier may usually decide what action to take in respect of infringement (if any). It will usually wish to have the conduct and sole control over any action that it deems necessary will pay all costs in relation to that action and will be entitled to all damages and other sums that may be paid or awarded as a result of that action. Alternatively, the costs of the action may be paid, and any sums that may be paid or awarded as a result of that action may be shared equally or proportionately by the parties.
Each party shall, at the request and expense of the other, may undertake to provide any reasonable assistance to the other (including the use of its name in, or being joined as a party to, proceedings) provided that that party is given such indemnity as it may reasonably require against any losses, costs and expenses it may incur as a result of or in connection with providing such assistance.
There will usually be clauses which protect commercial secrets and other confidential information. Each party may undertake that it shall not at any time during this agreement and for a specified period of years after termination of the agreement, disclose to any person any confidential information concerning the business, affairs, customers, clients or suppliers of the other party or of any member of the group of companies to which the other party belongs.
There are usually a number of exceptions to the confidentiality requirement. Each party may disclose the other party’s confidential information to those of its employees, officers, representatives or advisers who need to know such information for the purpose of carrying out that party’s obligations under the agreement;
Each must ensure that its employees, officers, representatives or advisers to whom it discloses the other party’s confidential information, comply with these obligations. Disclosures may be made as are required by law, court order or any governmental or regulatory authority.
No party shall use any other party’s confidential information for any purpose other than to perform its obligations under this agreement.
Indemnity for Claims
The distributor may receive an indemnity from the supplier in respect of product liability claims. Commonly, the supplier agrees to indemnify the distributor against any liability incurred in respect of damage to property, death or personal injury arising from any fault or defect in the materials or workmanship of the goods. It will also cover any reasonable costs, claims, demands and expenses arising out of or in connection with that liability, except to the extent that the liability arises as a result of the action or omission of the distributor.
There may be obligations on the supplier regarding product recalls and defects. The distributor may be obliged to notify the supplier of the alleged defect in the goods and of claims. Follow-up procedures may be provided for. The distributor is likely to be required at the supplier’s cost, to give any assistance that the supplier may reasonably require, in order to recall, as a matter of urgency goods from the retail or wholesale market.
The distributor may be obliged, as soon as it becomes aware of a matter which may result in a claim, to do the following:
- give the supplier written notice of the details of the matter;
- give the supplier access to and allow copies to be taken of any materials, records or documents as the supplier may requireit to take action;
- allow the supplier the exclusive conduct of any proceedings and take any action that the supplier directs to defend or resist the matter, including using professional advisers nominated by the supplier; and
- not admit liability or settle the matter without the Supplier’s written consent.
The supplier may be obliged to maintain product liability insurance with a reputable insurer of no less than a stated amount for any one occurrence for a claim that the goods are faulty or defective. The supplier may be obliged to provide a copy of the insurance policy [and proof of payment of the current premium to the distributor on request.
The distributor may undertake to maintain appropriate, up-to-date and accurate records to enable the immediate recall of any goods and/ or batches of goods from the retail or wholesale markets. These records may include records of deliveries to customers (including batch numbers, delivery date, name and address of the customer, telephone number, fax number and e-mail address).
The supplier or distributor, as the case may be, may have rights to terminate the agreement, if
- there is a material change in the control of the distributor;
- breach of intellectual property rights;
- un-remedied material breaches,
- termination of the term.
- insolvency of another party
Breaches may be deemed material and allow the other party to terminate if they are serious or persistent. This may, for example, occur,
- if the other party commits a material breach of any material term of the agreement other than failure to pay any amount due under this agreement;
- if such breach is remediable, fails to remedy that breach within a specified period of days of being notified in writing fails to do so;
- if the other party repeatedly breaches any of the terms of the agreement in such a manner as to reasonably justify the opinion that its conduct is inconsistent with it, having the intention or ability to give effect to the terms of this agreement;
- the other party suspends ceases, or threatens to suspend or cease, to carry on all or a substantial part of its business; or
- the other party, being an individual, dies or, by reason of illness or incapacity (whether mental or physical), is incapable of managing his or her own affairs or becomes a patient under any mental health legislation.
Termination Issues I
The termination of the agreement for any reason does not usually affect any rights or liabilities of the parties accrued at the date of termination.
Provision will be made for the termination of the agreement, whether by the expiry of the term, by notice or by reason of fault. The procedure on termination of the agreement may be provided. The distributor may be permitted to sell the remaining stock, perhaps at a discount. The supplier may have a right to repurchase them. The price may be the same price which the distributor paid for them or such price as the supplier reasonably considers to be their current market value.
If the supplier does not exercise its option to buy back the goods or purchases only part of them, the distributor may be entitled to or obliged to dispose of its remaining stocks of goods over a set period following the termination of the agreement.
Termination Issues II
The distributor must promptly return to the supplier, or dispose of as the latter directs, any samples, technical pamphlets, catalogues, advertising materials, specifications and other materials, documents or papers sent to the distributor that relate to the supplier’s business other than the correspondence between the parties.
It may be confirmed, that the termination of the agreement does not of itself make the supplier liable to pay any compensation to the distributor, including, for loss of profits or goodwill.
There is likely to be a restriction for a period, commonly a year, against competing with the supplier or being involved in the manufacture or distribution in the territory of relevant goods, competing with the product for (for example), a year after the end of the term.
The agreement is usually personal to the parties. The distributor may not usually, without the prior written consent of the other supplier, (which consent might be provided is not to be unreasonably conditioned, withheld or delayed), assign, transfer, mortgage, or deal in any with the agreement or any of its rights and obligations.
The distributor may be restricted without consent, from sub-contracting or delegating in any manner, any or all of its obligations under the agreement to any third party or agent.
The supplier is likely may retain the right to transfer or novate the agreement to a successor. The distributor must be given reasonable notice. Novation or a new agreement will be required.
Law and Jurisdiction
The agreement and any dispute or claim arising out of or in connection with it or its subject matter or formation (including non-contractual disputes or claims) are commonly governed by and construed in accordance with the specified law.
Similarly, the parties specify a jurisdiction which has exclusive to settle any dispute or claim that arises out of or in connection with the agreement or its subject matter or formation (including non-contractual disputes or claims.
This will be of great practical importance. Each is likely to seek that that his home country laws and jurisdiction apply. A third jurisdiction may be chosen.
There may be provision for arbitration in the event of a dispute.
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