Guidance For Negotiating Distribution Agreements
Unlike a commercial agent, a distributor purchases products from the manufacturer or supplier to resell as an independent trader to customers, usually in a defined territory. A distributor will be in control of pricing and receiving the benefit of any mark-up in price applied by it to those products. A distribution agreement can contain conditions under which the manufacturer or supplier wants the distributor to sell its goods, therefore retaining some control over its products. More business services include:
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Distribution agreements are typically used as a relatively low-risk means of expanding a business into new markets or territories. When deciding whether to act as an agent or distributor for a supplier or manufacturer of goods (known as the “principal”), it will be necessary to consider the advantages and disadvantages of each relationship.
As a distributor, you will have much more control over the marketing and sale of products in the agreed territory. You may even have exclusive rights to market/sell in that territory which means less chance of competition to your business. However, it is worth noting that there is also more risk attached to being a distributor than an agent. Unlike an agent, a distributor has more autonomy but is also liable for any losses incurred in the onward sale to end customers. Also, as the distributor purchases products to sell on as an independent trader there is inevitably financial risk too.
Some key terms that will be negotiated as part of any distribution agreement, including brand protection, intellectual property rights and limitation of each party’s liability. It is also important to note that there is a need to carefully consider and pay particular attention to the possible risk arising under any competition law relevant to the distribution relationship.
At Tinsdills, we have an expert team of business law solicitors who have experience in a wide range of industries and sectors, both nationally and internationally, for the distribution of goods and services. This means we can offer you and your business legal comfort in the negotiation and preparation of distribution agreements.
A distributor purchases the goods or services of a manufacturer or seller (known as the principal) and resells them to its own customers. Unlike in an agency relationship, the contract for sale to the end customer is between the end customer and the distributor, not the principal. The distributor will own the goods (having already purchased them, or agreed to purchase them, from the principal) before they pass to the end customer. Distributors are sometimes referred to as ‘resellers’.
It is important to ensure that any distribution agreement you enter into includes all those terms and conditions which are required to meet the needs of your business. These will often include: appointment provisions (including the scope of the agreement, the territory and the duration/term of the agreement); the obligations of each party, any conditions of supply or sale; price and payment terms; any provisions (or restrictions) relating to the promotion and marketing of goods; anti-bribery provisions; protection of intellectual property rights (including any trade marks) and the right to use the brand name; limitations of liability; termination provisions and the consequences of any such termination; and dispute resolution provisions.
Competition law is designed to stop companies in a dominant position in any given market from abusing that position and to prevent anti-competitive behaviour that distorts, restricts or prevents competition/trade.
In the UK, anti-competitive behaviour which affects trade (in the UK) is prohibited by both the Competition Act 1998 and the Enterprise Act 2002. In addition, if either party is situated in an EU member state, then the EU competition policy set out in Articles 101 and 102 of the Treaty on the Functioning of the European Union (TFEU) (formerly Articles 81 and 82 of the treaty establishing the European Community) will apply. However, it is often possible to draft a distribution agreement so that it falls within an exemption (known as a vertical block exemption) and so that a specific exemption for the agreement/relationship is not required from the relevant competition authorities.
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