Distribution Arrangements

Distribution Agreements

A distributor is often given the exclusive right to sell a product within a particular territory.  This is an exclusive distributorship. By selling to a distributor, the supplier passes on a greater degree of risk in relation to the sale of the product relative to a direct sale or a sale through an agent.

A distributor is in business on his own account and may be more motivated, as he takes on additional business risks.   A supplier will generally not be liable for the distributor’s activities, in contrast to the position with an agent.

A distributorship arrangement may be a low-risk means of expanding businesses abroad. Appointing a distributor may avoid the need for a supplier to establish a base within the foreign territory. This will reduce administrative overheads and may be beneficial from a tax perspective.  The supplier does not need to monitor accounts with customers, but with one distributor only.

The supplier provides the distributor with the local knowledge and an established business base.   The distributor agrees to take on the risk and costs associated with promoting the product.  The exclusive distributor benefits from the supplier’s sales and promotion efforts and his existing infrastructure.   The supplier can use the threat of withdrawing this facility if target sales are not met within certain periods.

Common Obligations

Typically, the distributor will be obliged

  • to purchase the goods from the supplier only;
  • not to deal in competing goods;
  • to use best endeavours to promote the goods;
  • not to manufacture goods of the same or similar type.

There will be an obligation to sell the goods under the supplier’s trademarks and get up and not interfere with the goods or their packaging. There are likely to obligations in relation to the publicity, advertisements and marketing efforts required.

There is likely to be an obligation not to seek customers from outside the territory or to establish any branch or subsidiary outside the territory.

Legal Relationships

In the supplier-distributor relationship, the distributor and the supplier stand at arm’s length in a commercial relationship. Subject to certain competition law restrictions, they have considerable freedom to decide the terms and conditions of their relationship.

A distribution agreement will set the relationship between distributor and supplier. The sale of goods under the arrangement may be commonly the subject of a separate contract. Sale and supply contracts are made between the distributor and end-user. There is no contractual relationship between the supplier and the end user. In accordance with general statute and common law, the supplier has statutory liability for defective goods and may owe a duty of care to end users.

An advantage of a distributorship is that the supplier need deal with one party only. The supplier does not need to expand by establishing itself in the relevant territory.The arrangement eases the management of credit risk.

The supplier will have a limited degree of control over the distributor. This will contrast with, for example, with an agent where a much higher degree of control would be available. The supplier should be satisfied that the distributor is able, financially and commercially, to meet its undertakings and that it will not damage the brand or goodwill.

Agency Contrasted I

Unlike a commercial agent (under a commercial agency arrangement), a distributor is an independent operator. It takes its own risk and trades on its own account with third parties. It will generally own the goods which it receives, subject to such retention of title arrangements as may apply. The distributor contracts both with the supplier and with his customers.   He is not a representative of the supplier.

In contrast, the agent represents the person appointing it, typically in the relevant territory.  It will typically have authority to negotiate and conclude contracts on behalf of the person making the appointment (the principal).  An agent is usually paid a commission on the basis of sales made.

Commercial agents are subject to mandatory rules under European Union law.   An advantage of a distributor is that these rules do not apply.   The rules can be onerous an include obligations to pay compensation on termination of the agency. There is no compensation or indemnity payable to a distributor on termination of the distributorship agreement unless it is specifically agreed in advance.

 Agency Contrasted II

Distributorships are more regulated than agencies under from EU competition law.  Where a commercial agent bears no financial or commercial risk, the EU competition rules will not generally apply.

The supplier has less control over the distributor’s activities than is the case with agency. The supplier cannot usually determine the pricing of products to the retailer’s customers.  The supplier is not liable for the distributor’s actions.  Because of the higher level of risk which it undertakes, the distributor will usually require a higher level of margin relative to an agent.

There is less scope for maintaining control over the method of marketing and prices, than is the case with agency.  The credit risk in respect of sales is concentrated on the distributor rather than with each customer, as would be the case with an agency.

Types of Distributorship

An exclusive distributorship gives the distributor exclusivity in relation to the supply of the supplier’s products or services within the defined territory.   The supplier agrees not to appoint other distributors or sell products directly within that territory.

Sole distributorships are arrangements by which a single distributor is appointed within a territory, but whereby the supplier reserves the right to sell directly.  This gives greater freedom to the supplier. The sole distribution agreement may provide that the distributor must to buy the seller’s goods as his sole supplier.

A non-exclusive distributorship gives the supplier the freedom to sell and appoint other distributors. The terms of the appointment will be usually less onerous on the distributor, relative to an exclusive distributorship..

Selective distributorship is an arrangement whereby a number of distributors are appointed as part of a selective scheme.  The supplier agrees with the distributor to appoint additional distributors only if they meet certain criteria.  This may be appropriate where the nature of the product requires enhanced service or advice at the point of sale or where after sales support is required.

Export Distribution I

A sole distribution agreement may be entered between an exporter and a manufacturer.  In this case, the exporter is the export distributor and may be granted exclusive rights of distributing the relevant product in a particular market abroad.

Under one form of export distribution agreement, the distributor undertakes to place orders of a fixed amount annually with the manufacturer.  In another, he merely undertakes to place such orders as he receives from his customers abroad.  In both cases, the export distributor undertakes to place the order in his own name and not on behalf of the overseas customer.

The exporter and distributor negotiate the distribution agreement on terms that is adapted to the particular requirements of the product and its market.

Export Distribution II

A non-exclusive export distribution agreement involves the supply of goods by the manufacturer to the exporter / distributor without exclusivity. The supplier may appoint other distributors or sell directly. Lesser obligations will be undertaken by the distributor under a non-exclusive agreement.

The distributor is likely to be obliged to buy the products concerned from the supplier and not to buy or deal in competing products. The distributor will be obliged not to seek customers or establish branches etc. outside the territory. The broad provisions will be broadly the same but with lesser obligations in terms of advertising spend etc.