Distribution Agreements – Globalising your Goods in 2020 and Beyond
Why can we buy Apple iPhones from John Lewis, Amazon or Currys, and Microsoft Office from Apple?
The short answer is – these companies have distribution agreements in place with Apple. But what is a distribution agreement and why would a simple written or verbal agreement not suffice?
What is a ‘Distribution Agreement’?
A distribution agreement is typically used when a supplier of goods has no presence or representation in a particular market or country. Suppliers tend to seek distributors as they can assist with invaluable local knowledge and expertise and provide access to established sales channels. A distributor can either be a simple ‘shifter of goods’ or a ‘VAR’ (a value added reseller) which provide additional services like aftercare and repairs to end users.
A real-world example
The UK based sports TV provider ‘Eleven Sports’ signed a long term distribution agreement with all four TV operators in Portugal last year. The landmark agreements meant that Eleven Sports achieved 100% ‘Pay TV’ distribution in Portugal. Therefore there was no split between providers as we have in the UK, with Sky, BT, ESPN, BBC, ITV, Eurosport and Amazon. Eleven Sports are the one stop shop for your sporting television needs in Portugal.
Distribution Agreement or Agency Agreement?
An agent promotes a contract between the manufacturer and the customer, typically for a percentage commission.
A distributor is a reseller. The distributor makes a mark-up on the re-sold products and the distributor shares a large proportion of the risk in the products, namely their quality.
Type of Distribution Agreement – sole / exclusive / non-exclusive / selective?
Distribution agreements usually apply to a particular “territory” in which the distributor will operate. The distributors then, on occasion, will look for certain protections from the supplier to ensure that other distributors are not encroaching on that territory. In light of this, there are a number of different types of distribution agreement.
Exclusive distributorship is where the supplier agrees to only sell the goods laid out in the agreement to the distributor within a specified territory, and agrees not to contract with other distributors or, importantly, they agree not to sell the applicable goods themselves directly to other customers within the same territory.
Non-exclusive distributorship is where the supplier has the complete freedom to both sell to end users and appoint other distributors within the specified territory.
Sole distributorship is where the supplier appoints a distributor as their only (or ‘sole’) distributor within a specified territory, but unlike the “exclusive distribution” model the supplier is still able to market the applicable goods to the end users as they wish.
Selective distributorship is where the supplier appoints a distributor as part of a ‘selective distribution system’, within which they only appoint additional distributors if they meet certain criteria. This is a unique system and is specifically used so that the supplier can retain control over its distribution network, especially in relation to quality control, and still keep within EU and UK competition regulations. Selective distribution agreements are often utilised by luxury brands to ensure that the quality of the product and goodwill of the brand is maintained. Some of the rules relating to distribution agreements are different when applying a selective distribution model.
It is important to note that the above represent the generally accepted principles of the 4 types of agreement but there is no set legal definition for each of them. Therefore it will not be sufficient to simply label your contract as one of the 4 types of distribution agreement. Instead, the rights, duties and obligations of the parties in respect of exclusivity and the relevant territory will need to be set out clearly in the contract.
What can I put in a Distribution Agreement?
Distribution agreements are fairly flexible documents and the available clauses below are by no means exhaustive. However, when agreeing distribution agreements, parties will often need to have competition law regimes in mind as they will often want to include provisions and protections of this nature in the agreements. This can present challenges from a competition law perspective and some issues can constitute an outright breach of the relevant laws. We have covered this in more detail below.
A list of key provisions usually, but not always, contained within distribution agreements:
– That the distributor will only sell a certain types of goods.
– Where the distributor will sell a certain types of goods.
– That the distributor will not sell competing products.
– That the distributor will purchase a certain minimum quantity of goods from the supplier.
– The price that the distributor will pay for the supplier’s goods.
– The terms that the supplier and distributor can terminate the agreement on and what their maximum liability under the agreement is.
– The laws and regulations that will govern the agreement. It should always be noted that cross border distribution networks amplify the risk as, should there be a dispute (for example the party abroad fails to make a payment to the other party), it would be significantly harder to enforce the payment abroad.
Competition law considerations
There are two main types of anti-competitive activity which are prohibited by UK and European competition law. These are:
1. Anti-Competitive Agreements – agreements between businesses that prevent, restrict or distort competition (or are intended to do so) and which affect trade in the UK and/or EU (e.g. carving up markets or fixing prices for goods or services).
2. Abuse of a Dominant Market Position – a dominant position in a market essentially means that a business is able to behave independently of competitive pressures (such as other competitors) within that market (e.g. charging disproportionately high prices).
If parties are looking to include forms of non-compete and exclusivity provisions then care will need to be taken to ensure that the competition laws are not breached and in some instances it will not be possible to include provisions of this nature at all.
Other key provisions, which could present a risk from a competition law perspective, include: minimum purchase obligations; restrictions on passive sales; and any provisions restricting pricing. The latter can constitute a “hard-core” restriction which increases the likelihood of it falling foul of competition law requirements. These are just a number of the provisions which can fall foul of competition law requirements, but in reality any number of additional clauses could present issues.
It is important to note that the regimes in England and Wales and the European Union apply to both written and oral arrangements. Therefore if your contract is compliant, but in you are in fact undertaking practices which do breach the rules, a compliant written contract will not be enough to save you from a potential infringement action from the relevant authorities.
It is worth noting that these rules and regulations are a real risk for suppliers and distributors, but are less of a concern for suppliers and agents (but it remains a consideration nevertheless), as agents are effectively acting in the supplier’s place.
Businesses involved in anti-competitive behaviour could find their agreements are unenforceable and are at risk of being fined up to 10% of their global turnover. Individuals involved within the business could also find that they are subject to director disqualification orders or criminal convictions for serious breaches of competition law. Given the risks it is imperative that all agreements are checked by lawyers with experience in advising on competition law matters.
Signing up to a distribution agreement can be exciting and fruitful, but we would always advise that you consider all options (e.g. clauses you need included or competition risks) before potentially locking yourself into such an arrangement.
We also find that some of our clients accidentally cross over their agreements between distributors, effectively giving two different distributers exclusivity in the same region, which can result in a supplier immediately breaching both agreements.
Reviews of a company’s distribution agreements, whether they are a large company or not, can save time and money in the long term.
How can we help?
We provide expert advice on commercial contracts and competition law matters – contact the experienced commercial solicitors at Herrington Carmichael LLP for specialist advice as soon as possible.
This reflects the law at the date of publication and is written as a general guide. It does not contain definitive legal advice, which should be sought as appropriate in relation to a particular matter.