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Selling: Dealing with a Distributor

Dealing with a Distributor

Role of a Distributor

A distributor will buy your goods from you, as opposed to a sales or commercial agent who simply obtains orders for you to fulfil. Appointing a distributor 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.

You will find further information about distributors and the differences between distributors and agents in the "Agents" section under Expanding the Sales Network

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 a distributorship is exclusive, it can fall foul of EU competition law as Article 101 of the Treaty of Rome prohibits agreements and concerted practices which prevent, restrict or distort competition and which affect trade between EU Member States. 

As exclusive distribution agreements are very common, the European Commission maintains a "block exemption" to cover and allow many such arrangements. If the supplier's and distributor's shares of the relevant market do not exceed the relevant percentage threshold, and the arrangements are kept within the "white list" terms of the block exemption, you are not likely to fall foul of Article 101 but you will need to take legal advice in each case as to whether the block exemption actually applies. If it does, you do not have to apply to the Commission in order to obtain an individual exemption. However, if any terms are included in the arrangements which are on the "black list" referred to in the block exemption, such an application will be necessary.

The UK has similar competition provisions (which also adopt the block exemption) in as much as they control agreements that prevent, restrict or distort competition within the UK or part of it. 

Breach of competition law can result in fines totalling up to 10% of worldwide turnover, claims for compensation by those affected by the anti-competitive arrangements or actions, and the relevant agreement may be held to be void and unenforceable wholly or in part. 

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.

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