What is a distribution agreement?
A distribution agreement is an agreement under which a supplier sells products to a distributor, who subsequently resells those products in its own name and for its own account and risk to its customers. Unlike an agency agreement (see our previous article on agency agreements, the distributor does not act as an intermediary. The distributor becomes the owner of the products and bears, among other things, the inventory risk, credit risk and market risk.
A distribution agreement is not subject to a specific statutory regime under the Dutch Civil Code. As a result, the parties generally enjoy a broad degree of freedom of contract. At the same time, this freedom means that clear contractual arrangements are essential in order to prevent disputes.
For the differences between distribution and agency, we refer to our previous article on this subject.
Key provisions of a distribution agreement
1. Distribution territory and exclusivity
One of the first questions the parties must address is the territory within which the distributor may operate. It is often agreed that the distributor will serve a particular country, region or specific customer group. In addition, the parties may opt for exclusive distribution, selective distribution or non-exclusive distribution. In an exclusive distribution system, one distributor is granted exclusive rights to sell products within a defined territory. In a selective distribution system, the supplier works exclusively with distributors that meet pre-established objective criteria. In a non-exclusive distribution system, multiple distributors may operate alongside each other.
2. Products, purchase obligations and sales targets
The parties are well advised to specify which products fall within the scope of the distribution agreement. In addition, it may be agreed that the distributor will purchase a minimum quantity of products annually or achieve certain sales targets. Such arrangements provide the supplier with greater certainty regarding the sale of its products and may provide the distributor with clarity regarding the expectations applicable during the cooperation. Where purchase obligations or sales targets are agreed, it is advisable also to make arrangements regarding the consequences if those targets are not achieved.
3. Prices and payment terms
The distribution agreement generally contains arrangements regarding purchase prices, payment terms and any price adjustments. In this respect, it is important to take competition law into account. For example, a supplier may generally use a recommended resale price, but, in principle, may not require a distributor to apply a fixed resale price towards customers. The distributor must retain sufficient freedom to determine its own resale prices
4. Marketing, brand use and intellectual property
In many distribution relationships, the supplier’s brand plays an important role. For that reason, a distribution agreement often contains provisions regarding the use of trade names, trademarks, logos and marketing materials. In addition, arrangements may be made regarding the manner in which the products are presented, the marketing activities to be carried out by the distributor and the manner in which brand assets may be used. Proper arrangements in this respect contribute to a consistent market position and the protection of the brand’s reputation.
5. Warranties, service and liability
As the distributor is in direct contact with the end customer, it is important to determine who is responsible for warranty claims, complaint handling and after-sales services. It is also advisable to make arrangements regarding product liability, product recalls and the allocation of risks where products prove to be defective. By clearly defining these responsibilities in advance, disputes at a later stage can be limited.
Please note! Termination of the cooperation
Many disputes arise not during the cooperation itself, but rather when the parties part ways. Since distribution is not specifically regulated by statute, arrangements regarding termination are of great importance. In this regard, attention should be paid, among other things, to the term of the agreement, the possibilities for termination and the applicable notice period.
In principle, distribution agreements entered into for an indefinite term may be terminated. Depending on the circumstances of the case, however, a reasonable notice period or even additional compensation may be required. Relevant factors may include, among other things, the duration of the cooperation, the mutual dependence of the parties and the investments made by the distributor.
Unlike a commercial agent, a distributor does not, in principle, have a statutory right to customer compensation or goodwill compensation. This does not mean, however, that no compensation can ever be payable upon termination. Under certain circumstances, a distributor may nevertheless be entitled to damages, for example where the termination is carried out in an improper manner or where an excessively short notice period is applied.
A timely legal assessment of the manner in which a distribution relationship is terminated can therefore prevent considerable disputes and costs.
Conclusion
A distribution agreement forms the legal basis of what is often a long-term commercial relationship. Precisely because distribution is not specifically regulated by statute, it is important to make clear arrangements regarding matters such as exclusivity, purchase obligations, brand use and termination.
More information
Would you like to have a distribution agreement drafted, reviewed or terminated? Our specialists of the Trade, Industry & Logistics department advise both suppliers and distributors on all aspects of distribution law.
