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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
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




                          www.georgegreen.co.uk
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




                            www.georgegreen.co.uk
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)




                              www.georgegreen.co.uk
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!)




                              www.georgegreen.co.uk
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




                           www.georgegreen.co.uk
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

                            www.georgegreen.co.uk
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




                         www.georgegreen.co.uk
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


                            www.georgegreen.co.uk
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




                               www.georgegreen.co.uk
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)




                             www.georgegreen.co.uk
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




                            www.georgegreen.co.uk
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




                          www.georgegreen.co.uk
DISTRIBUTION


Proper agreement is crucial!

We can help!

Call Stephen Wyer on 01384 340513 or
e-mail swyer@georgegreen.co.uk.

Thank you!
                 www.georgegreen.co.uk

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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 www.georgegreen.co.uk
  • 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 www.georgegreen.co.uk
  • 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) www.georgegreen.co.uk
  • 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!) www.georgegreen.co.uk
  • 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 www.georgegreen.co.uk
  • 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 www.georgegreen.co.uk
  • 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 www.georgegreen.co.uk
  • 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 www.georgegreen.co.uk
  • 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 www.georgegreen.co.uk
  • 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) www.georgegreen.co.uk
  • 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 www.georgegreen.co.uk
  • 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 www.georgegreen.co.uk
  • 14. DISTRIBUTION Proper agreement is crucial! We can help! Call Stephen Wyer on 01384 340513 or e-mail swyer@georgegreen.co.uk. Thank you! www.georgegreen.co.uk