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Distribution Agreements

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Distribution Agreements

  1. 1. Distribution Agreements Presented by Stephen Wyer, George Green LLPHead Office Birmingham Office195 High Street, Cradley Heath, West Midlands, B64 5HW 43 Temple Row, Birmingham B2 5LSTel: (01384) 410410 Fax: (01384) 820065 Tel: (0121) 698 8532DX: 20752 CRADLEY HEATH
  2. 2. DISTRIBUTION FORCE MAJEUREA distributor:•buys goods on his own account from supplier/exporter;•resells goods to customers in his own territory as an independentcontractor;•adding a margin to cover his own costs and profit; and•does not act as a channel of communication between the supplier andthe customer (no authority to create a contract between his ownsupplier and the customer).May be low risk way for supplier/exporter to expand business into newmarkets/territories www.georgegreen.co.uk
  3. 3. COMPARISON WITH AGENCY FORCE MAJEUREIn comparison, an agent;•is appointed by the supplier/exporter to negotiate and possiblyconclude contracts with customers on behalf of the supplier/exporter;•is paid commission on the sales he makes, usually on a percentagebasis; and•benefits from (and is burdened by) on-going relationship with supplier/exporter.Supplier/exporter has more control over an agent than a distributor butretains more risk also www.georgegreen.co.uk
  4. 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 distributors 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 distributors territory, which will reduce the suppliers 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. 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. 6. CONSIDERATIONS FORCE MAJEUREMust investigate financial health and commercial ability ofproposed distributor - Looking for :•a good knowledge of the product area and a proven track record in theterritory;•resources to purchase adequate volume of product, promote andadvertise and provide after-sales service;•creditworthiness;•no competing commitments which could hamper effective promotionand sales of the contract products.•No issue under local laws - laws governing the appointment andoperation of a distributorship vary from country to country www.georgegreen.co.uk
  7. 7. EXTENT OF APPOINTMENT FORCE MAJEUREExclusive: The supplier/exporter will neither sell itself, nor appoint any other distributor to sell, into the exclusive territorySole: No other distributor will be appointed but the supplier/exporter reserves the right to make its own sales into the territoryNon-exclusive: The distributor may be competing with third parties and sales by the supplier/exporterSelective: 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. 8. KEY TERMS FORCE MAJEUREPurchase and resale:•Agreed volumes•Forecasting•Sales outlets•After sales service•Maximum (not minimum) resale priceAdvertising and promotion:•Commitment•Approach www.georgegreen.co.uk
  9. 9. KEY TERMS FORCE MAJEUREFlow 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 ownershipProduct liability:•Pass liability to distributor (by indemnity)•Supplier/exporter may still be liable under local law/regulation – cannotbe contracted out of www.georgegreen.co.uk
  10. 10. COMPETITION LAW FORCE MAJEUREA “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 pitfallsso as to qualify www.georgegreen.co.uk
  11. 11. TERRITORIAL RESTRAINT FORCE MAJEURESupplier/exporter often seeks to restrict sales by distributor into certainterritories:•Only permitted where restricted territory is reserved exclusively forsupplier/exporter or third party distributor•Otherwise the restriction will be an illegal restraint on the freemovement of goods•May restrict “active sales” only – a ban on passive sales will alwaysbreach competition law (hardcore restriction) www.georgegreen.co.uk
  12. 12. TERRITORIAL RESTRAINT - EXAMPLE FORCE MAJEURESupplier/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 beenappointed as exclusive distributor = permitted•Restriction on passive sales by A to German customers = illegal www.georgegreen.co.uk
  13. 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. 14. DISTRIBUTIONProper agreement is crucial!We can help!Call Stephen Wyer on 01384 340513 ore-mail swyer@georgegreen.co.uk.Thank you! www.georgegreen.co.uk

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