Many businesses operate through distribution agreements. These agreements set the framework for the commercial relationship between suppliers and distributors.
However, a poorly-drafted agreement can cause problems and risk a break down in the supply chain.
So, how can your business avoid these issues? We have given a brief overview of key issues for you to consider when entering into distribution agreements, whether as a supplier or distributor.
Commercial terms of the agreement
Businesses can often spend a great deal of time focused on the distribution aspect of an agreement and forget to consider the commercial terms of supply. Such terms would include the delivery obligations, passage of title or risk and pricing. These should be carefully drafted to ensure every aspect of the relationship is correctly governed. Other issues to consider include:
- Exclusive rights – these can relate to territory, customers, other retailers or products. Although a supplier may want to limit the rights granted, it is important to keep the restrictions reasonable and clear. Suppliers or distributors can accidentally restrict themselves beyond their intention, if contracts are not carefully drafted;
- After sales and warranties – as a supplier, you may have your own warranties or after sales procedure which you want your distributor to provide to customers. However, many EU countries have strict consumer regulations. Suppliers need to ensure that distributors are aware of these requirements and are complying with the relevant local rules. Failure to do so could have a negative impact on a supplier’s brand and reputation; and
- Duration – you should consider what happens when the agreement ends. Suppliers may want to include run off provisions within the agreement setting out instructions on how to deal with surplus stock. For example, suppliers may want the option to buy back stock at an agreed price. Alternatively, suppliers could set out pre-authorised retail channels, beyond the distributor, for surplus stock to be sold through.
Distribution agreements operate across different levels of the supply chain. Typically, they will involve a supplier (who can also be a manufacturer) and a distributor. Competition law refers to these as vertical agreements. Provided they do not contain certain ‘hard core’ restrictions, they will generally not raise competition law concerns.
The hardcore restrictions under UK and EU law to avoid include:
- Retail price maintenance – suppliers are prohibited from fixing the retail price for the goods which the distributor will be selling. This also includes setting minimum prices and/or maximum discounts. Recommended retail prices (RRPs) are acceptable, as long as in practice they do not amount to fixed prices.
- Prohibition of online sales – suppliers should not prohibit their distributors from selling online; and
- Territorial restrictions – suppliers cannot prohibit their distributors from making ‘passive’ sales to customers. Active sales restrictions are only acceptable in the context of exclusive distribution structures.
In addition, non-compete restrictions should be limited to five years and should not go beyond the term of the agreement.
Brexit and Covid-19
Looking ahead, you should also consider current and potential macro-economic issues that could impact your agreement:
- If you have existing agreements, will the definitions of territory be suitable post-Brexit? Do your agreements define the UK as part of ‘Europe’ and how might the definitions need to change? Have you considered additional tariffs or duties which may be imposed on trade? See Bird & Bird’s Brexit Briefings for more details.
- Is your supply chain diverse enough to cope with Covid-19 lockdowns in different countries? Are you too heavily reliant on one distributor or supplier which could expose you, if they faced difficulty?
Key takeaway: a clear distribution agreement, addressing these points, will give both suppliers and distributors peace of mind on their rights and obligations in a commercial relationship.