Selling: Dealing with a Distributor

Dealing with a Distributor

Role of a Distributor

A distributor will buy your goods from you, as opposed to the sales agent who simply obtains orders and may be particularly suitable if you deal in low value, high volume goods. A full-service distributor can carry out a wide range of services for you, including stockholding; sales forecasting, promotion, sales, after-sales and sales reporting.

The advantages of using a distributor over an agent include fewer credit risks and less need for supervision. Possible drawbacks include the effect on your margins and reduced control over the distributor's local market.

Terms of a Distribution Agreement

Key provisions in a distribution agreement include the following:

  • Whether the distributorship is exclusive within the territory;
  • the goods involved; the distributor's rights to repackage or alter the goods;
  • the distributor's performance criteria including any minimum purchase obligations;
  • the price to the distributor and payment terms; the territory (e.g. part of the UK or an overseas territory);
  • the duration of the appointment;
  • the services to be performed by the distributor;
  • the parties' respective product promotion obligations;
  • the supplier's responsibilities for the goods (warranties, quality, delivery, etc.);
  • the distributor's confidentiality obligations and any restrictions on his dealings with competitors;
  • termination provisions and rights on termination;
  • the law applicable to the contract and dispute resolution issues.

Exclusive Distribution and Competition Law Restrictions

Where an EU-based distributorship is exclusive, it can fall foul of EU competition law as Article 81 of the Treaty of Rome prohibits agreements and concerted practices which prevent, restrict or distort competition and which affect trade between EU Member States. However, where the parties together have a turnover of less than 200 million ECU or 5% of a relevant market, the agreement is unlikely to be caught.

As exclusive distribution agreements are very common, the European Commission has introduced a block exemption to cover such arrangements. Keeping within the permitted terms (white list) means you do not have to apply to the Commission in order to obtain an individual exemption. If the inclusion of black-listed clauses is required, such an application will be necessary.

The UK has similar competition provisions in as much as they control agreements that prevent, restrict or distort competition within the UK or part of it. However, 'vertical' agreements (those between businesses at different levels in the supply chain such as distributorships) are generally prohibited.

Breach of competition law can result in fines totalling up to 10% of worldwide turnover and claims for compensation by those affected by the anti-competitive action. This is not an area for 'do-it-yourself' and it is therefore important to discuss at the outset any distribution agreement with your lawyers to confirm that it does not need to be notified to the UK/EU competition authorities and how competition law can affect its intended terms.