As part of our DFA practice, we provide advice to businesses on distribution agreements. We also help our clients avoid disputes or – in the worst case – to resolve them.
What is a distribution agreement?
In the case of a distribution agreement a supplier enters into an agreement with a buyer for the procurement and resale of products or the provision of services. A supplier, who is also a producer in practice, supplies goods or services to a distributor. Such a distributor then sells these goods or provides the services to their customers at their own risk and expense. As such, a distribution agreement differs from an agency contract, where the commercial agent does not bind themself but rather their principal .
Unlike a franchise or an agency, the law does not treat a distribution agreement as a special type of contract. Consequently, you will not find any provision of mandatory or other law which prescribes (or could prescribe) part of the substance of a distribution agreement. Nevertheless, the nature of an agreement may conflict with other legal obligations which apply in the case of a contract, for example, those pertaining to cancellation, rescission or unfair competition.
Although the structure of a distribution agreement is discretionary as such, specific matters usually constitute a standard part of such a contract. Usually, a distribution agreement contains provisions pertaining to the purchase and selling prices and conditions, a minimum procurement from the supplier, minimum sales in the market lower down the supply chain and the contract area. In addition, a distribution agreement also stipulates arrangements relating to cancellation and the term of the contract, as well as payment, liability and any exclusivity.
Distribution systems: open, exclusive and selective distribution
A supplier may structure their distribution system in various ways. Open, exclusive and/or selective distribution systems or combinations of them are well-known variants. In the case of an open distribution system every distributor is at liberty to sell products and/or provide services. As part of an exclusive system, the supplier divides their sales area into territories and assigns each one exclusively to one or more distributors. In the case of a selective system the supplier draws up a set of conditions (usually governing quality) for the selection of distributors.
If a supplier opts for an exclusive distribution system, the relevant distribution agreement will include an exclusivity clause. In it the parties will stipulate that the distributor is only entitled to sell the relevant goods and/or provide the services concerned within a specific territory on their own or together with several other distributors.
A distribution agreement may also contain a restraint-of-trade clause, which renders it mandatory for the distributor not to sell or provide a competing supplier’s goods or services, or to do so only to a limited extent. A combination of a restraint-of-trade clause and an exclusive system is not uncommon and may be advantageous to both parties. The distributor will experience little or no competition from other distributors in their territory and the supplier will strengthen their position in relation to competing suppliers.
Unfair competition and the prohibition of cartels
A distribution agreement may conflict with the cartel ban (Article 101 of the TFEU [Treaty on the Functioning of the European Union] and Article 6 of the Mw [Competitive Trading Act]) The cartel ban prohibits any arrangements between businesses whose aim or result is to noticeably restrict competition. Pricing and market-sharing arrangements are the most important example of agreements which usually contravene the cartel prohibition.
With its block exemption for vertical agreements, the European Commission has created a so-called ‘safe haven’ for specific categories of vertical contracts, such as distribution agreements which do not restrict competition or only do so to a limited extent, because they satisfy the conditions governing this block exemption.
Cancellation and rescission
The cancellation of a distribution agreement is not always a straightforward matter and regularly gives rise to debate. For instance, not every distribution agreement explicitly allows for cancellation or debate arises concerning the interpretation of a contractual cancellation provision. Even where such provision is made, compliance with it may be socially unacceptable.
If your contracting party fails to comply with their obligations pursuant to the relevant distribution agreement, in most cases you may rescind it if they are in default and the default constitutes grounds for its rescission. Cancellation and rescission differ from each other in legal terms. Unlike cancellation, in the case of rescission the parties’ performance is reversed. For example, in the case of the purchase and sale of goods it may involve the return of the goods which have been received and the refund of the purchase price. In addition, rescission is regulated by the law (Article 2:265 of the Dutch Civil Code), whereas this does not apply in the case of cancellation.
Conclusion
Properly and carefully safeguarding the interests of your business in a distribution agreement is of paramount importance and may prevent the occurrence of a dispute in the future. In addition, a distribution agreement demands tailored work. Our specialists have extensive experience of drafting distribution agreements and are ready to help you in the unlikely event of a dispute concerning the interpretation or application of such an agreement. You may contact one of our specialists free of obligation for more information or an introduction.
