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CML - WS 7 & WS 8 - Distribution Agreements and EU & UK Competition Law
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CML - WS 7 & WS 8 - Distribution Agreements and EU & UK Competition Law
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WS 7 – Distribution Agreements and EU Competition LawDRAFTING A DISTRIBUTION AGREEMENT
At this stage (as with an agency agreement) the solicitor is likely to be asked to advise on two related areas:
(a) What sort of marketing arrangement is most suitable for the business? and
(b) What factors should it take into account when looking for a trading partner?
Relevant factors that point to the use of a distributorship agreement
No customising is necessary for the products.
A trading partner needed in target territory which has a different language and business practices.
The marketing of the goods does not need much supervision.
The business does not want to be liable in contract to the ultimate customers.
Here, a distribution agreement is likely to be the cheapest and most efficient way to market these goods.
Preliminary considerations
Agency and distribution agreements: similarities and differences
It is important to note that the relationship of distributor and supplier is created and defined by the
distribution agreement.
Many of the clauses already discussed in relation to agency agreements are equally relevant to distribution
agreements: these include interpretation, appointment, duration and many of the ‘duties’ clauses
However, a distribution agreement is essentially an agreement for the sale of goods from the supplier to
the distributor, and so matters relevant to drafting a sale of goods agreement must be considered
Distribution agreements and EU competition law
Briefly, however, a distribution agreement is more likely than an agency agreement to infringe Article 101(1)
TFEU as, depending on the terms which the parties include and the circumstances in which the agreement
operates, its potential for affecting trade and competition is greater.
Several ways of avoiding the impact of Article 101(1) TFEU – the agreement may be ignored by the
Commission if it falls within the NAOMI. Or exemption with relevant block exemption.
PLANNING, FORM AND CONTENT OF A DISTRIBUTION AGREEMENT
A distribution agreement is likely to follow the structure set out in the table below.
, WS 7 – Distribution Agreements and EU Competition Law
Date, parties, recitals, interpretation
This part of the agreement is likely to be very similar to the corresponding section of a sales agency agreement
Appointment
The appointment clause will be vitally important, in particular the question of exclusivity.
How much protection will the distributor get against competition from others in its territory?
The distributor may want such protection in order to benefit as much as possible from its investment in the
distributorship.
The agreement should also define the limits of the distributor’s freedom to operate outside the defined
territory
The appointment clause may also deal with the duration of the agreement, although this can be done
elsewhere in the agreement.
Fixed term – may be good as will allow the distributor to build up business.
The distributor’s duties
Some of the distributor’s duties will be similar to those in an agency agreement (eg in relation to confidentiality,
transmission of information, training and availability of the distributor’s representatives). However, other duties are
likely to be significantly different because of the different nature of the agreement.
Minimum target obligations
The supplier will normally want to impose some form of minimum target obligation on the distributor to
ensure that the distributor exploits the relevant market to the full, especially where the distributor has been
granted exclusivity
A minimum target obligation can be either for:
(a) a minimum level of sales by the distributor to its customers; or
(b) a minimum level of purchases by the distributor from the supplier.
Page 148 for more.
Advertising and promotion
The distributor is normally made responsible for advertising and promotion.
However, the supplier may wish to reserve the right to vet the distributor’s activities, especially if it wants to
keep a reasonably uniform brand image over several different territories.
The supplier may also wish to provide that the distributor spends a minimum sum each year (or quarter, or
month as the case may be) on advertising and promotion.
Stock
The distributor will inevitably hold stock – it has actually bought the products from the supplier. The agreement
will therefore need to provide for numerous matters relating to stock, including the following:
1. How much stock should the distributor carry?
2. What procedure should the distributor follow when it orders and pays for the goods?
3. What procedure should the distributor follow for returning unsatisfactory goods? (d) When are title and risk
in the goods to pass to the distributor?
4. Is it necessary to insure the products (eg, while they are in transit from supplier to distributor)? If so, who
should do this?
5. What is to happen to stock if the agreement is terminated . The supplier often faces a dilemma here,
especially when Article 101 TFEU could apply to the agreement. If the distributor is still holding stock after
termination, it may deal with it in ways which could damage the brand’s reputation (eg, sell it cut-price in
markets or through discount shops). However, because the stock is the distributor’s own property, to deal
with as it sees fit, any clause in the agreement which obliges the distributor to sell the stock back to the
supplier on termination potentially restricts competition, and could infringe Article 101 TFEU. In most cases,
the supplier will have to decide whether the risk of competition law problems is greater than that of harm to
the supplier’s reputation. However, note that a clause which gives the distributor the option of selling the
stock back to the supplier (rather than forcing the distributor to do this) should not cause competition law
problems, as the distributor is not then obliged to deal with its own property in a particular way. Subject to
these points, any clause dealing with the fate of stock on termination is more likely to be an aid to
negotiation than anything else.
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