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Distribution Agreements
1. Distribution Agreements
Presented by
Stephen Wyer, George Green LLP
Head Office Birmingham Office
195 High Street, Cradley Heath, West Midlands, B64 5HW 43 Temple Row, Birmingham B2 5LS
Tel: (01384) 410410 Fax: (01384) 820065 Tel: (0121) 698 8532
DX: 20752 CRADLEY HEATH
2. DISTRIBUTION
FORCE MAJEURE
A distributor:
•buys goods on his own account from supplier/exporter;
•resells goods to customers in his own territory as an independent
contractor;
•adding a margin to cover his own costs and profit; and
•does not act as a channel of communication between the supplier and
the customer (no authority to create a contract between his own
supplier and the customer).
May be low risk way for supplier/exporter to expand business into new
markets/territories
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3. COMPARISON WITH AGENCY
FORCE MAJEURE
In comparison, an agent;
•is appointed by the supplier/exporter to negotiate and possibly
conclude contracts with customers on behalf of the supplier/exporter;
•is paid commission on the sales he makes, usually on a percentage
basis; and
•benefits from (and is burdened by) on-going relationship with supplier/
exporter.
Supplier/exporter has more control over an agent than a distributor but
retains more risk also
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4. ADVANTAGES
FORCE MAJEURE
• May be able to pass on risk associated with the products
• Not generally liable for any liability incurred as a result of the
distributor's activities (contrast with agency)
• Distributor may be more motivated to sell the stock purchased
(faces greater risk from failure to sell than agent)
• No need to have an established place of business within the
distributor's territory, which will reduce the supplier's administrative
costs (may also be beneficial for tax reasons).
• Only needs to monitor the account with the distributor (rather than a
number of customers)
• No compensation or indemnity is payable to a distributor on
termination of the distribution agreement under UK law (contrast
with agency)
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5. DISADVANTAGES
FORCE MAJEURE
• Less control over the activities of a distributor than an agent - not
suitable for products where contact with the ultimate customer, tight
control over marketing or control of the price of products is
essential
• The entire credit risk in respect of sales into an exclusive territory is
concentrated with an exclusive distributor - rather than with each
customer under an agency
• A distribution agreement is far more likely to be at risk from
competition law problems than an agency agreement (more later!)
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6. CONSIDERATIONS
FORCE MAJEURE
Must investigate financial health and commercial ability of
proposed distributor - Looking for :
•a good knowledge of the product area and a proven track record in the
territory;
•resources to purchase adequate volume of product, promote and
advertise and provide after-sales service;
•creditworthiness;
•no competing commitments which could hamper effective promotion
and sales of the contract products.
•No issue under local laws - laws governing the appointment and
operation of a distributorship vary from country to country
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7. EXTENT OF APPOINTMENT
FORCE MAJEURE
Exclusive: The supplier/exporter will neither sell itself, nor appoint any
other distributor to sell, into the exclusive territory
Sole: No other distributor will be appointed but the supplier/exporter
reserves the right to make its own sales into the territory
Non-exclusive: The distributor may be competing with third parties
and sales by the supplier/exporter
Selective: additional distributors are only appointed if they meet
certain criteria - suitable where enhanced service/advice required at
the point of sale (can cause competition law problems due to their
potentially exclusionary nature but may be justified)
Always ensure there is common understanding
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8. KEY TERMS
FORCE MAJEURE
Purchase and resale:
•Agreed volumes
•Forecasting
•Sales outlets
•After sales service
•Maximum (not minimum) resale price
Advertising and promotion:
•Commitment
•Approach
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9. KEY TERMS
FORCE MAJEURE
Flow of information:
•Sales
•Other relevant matters (e.g. local laws on packaging and labelling)
Intellectual property:
•Use of supplier/exporter IP (e.g. trade marks)
•Retention of ownership
Product liability:
•Pass liability to distributor (by indemnity)
•Supplier/exporter may still be liable under local law/regulation – cannot
be contracted out of
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10. COMPETITION LAW
FORCE MAJEURE
A “vertical agreement” under EU/UK competition law.
Illegal if intent or effect is anti-competitive.
May well benefit from block exemption but must avoid common pitfalls
so as to qualify
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11. TERRITORIAL RESTRAINT
FORCE MAJEURE
Supplier/exporter often seeks to restrict sales by distributor into certain
territories:
•Only permitted where restricted territory is reserved exclusively for
supplier/exporter or third party distributor
•Otherwise the restriction will be an illegal restraint on the free
movement of goods
•May restrict “active sales” only – a ban on passive sales will always
breach competition law (hardcore restriction)
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12. TERRITORIAL RESTRAINT - EXAMPLE
FORCE MAJEURE
Supplier/exporter appoints Party A to distribute in France:
•Blanket ban on A selling outside France = illegal
•Restriction on active sales by A into Germany where Party B has been
appointed as exclusive distributor = permitted
•Restriction on passive sales by A to German customers = illegal
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13. HARDCORE RESTRICTIONS
• Price-fixing or resale price maintenance - fixed or minimum resale
price prohibited (supplier may impose a maximum resale price, or
recommend a resale price) other than in certain limited
circumstances
• Territorial/customer sales restrictions
• Cross supplies between distributors within a selective
distribution system – must be freedom to purchase the contract
goods from other appointed distributors within the network (cannot
force distributors to purchase exclusively from a given source)
• Access to spare parts - the only prohibited restriction on the
supplier/exporter, who must be allowed to sell components as spare
parts to end users
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14. DISTRIBUTION
Proper agreement is crucial!
We can help!
Call Stephen Wyer on 01384 340513 or
e-mail swyer@georgegreen.co.uk.
Thank you!
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