Our Trade, Industry and Logistics team regularly publishes articles as part of the series “Ten Frequently Asked Questions About…”. Through this series, we aim to provide accessible and practical information on specific legal concepts, topics and current developments. Should you have an eleventh question after reading these ten frequently asked questions, we would of course be happy to assist you. You can contact one of our TIL (Trade, Industry & Logistics) colleagues for further information.
In a previous article on our website, we discussed the differences between agency and distribution: Agency and Distribution: what are they and what are the differences? In this article, the focus is on distribution.
The ten most frequently asked questions about distribution.
1. What is distribution?
Distribution is a form of cooperation under which a distributor purchases products from a supplier and resells them independently to its own customers. The distributor becomes the owner of the products, determines its own sales strategy and earns its margin from the difference between the purchase and resale price.
2. How does distribution differ from agency?
In an agency relationship, the agent acts as an intermediary for the principal and receives commission, without becoming a party to the sales contract with the customer. In a distribution relationship, the distributor purchases the products for its own account and risk and concludes the sales contract with the customer itself. As a result, inventory and credit risks lie with the distributor rather than with the supplier.
3. What rights and obligations does a distributor have?
Distribution is not specifically regulated by law. This means that parties are largely free to agree on their own terms, subject to compliance with competition law. The distributor typically purchases products, maintains its own stock and ensures proper sales to end customers. The distributor operates independently and in its own name.
4. What is a distribution agreement?
A distribution agreement governs the cooperation between a supplier and a distributor. It is a continuing agreement without a specific statutory framework. Parties therefore define the terms of their relationship themselves in the agreement.
5. Which topics are typically addressed in a distribution agreement?
Key topics in a distribution agreement may include the products supplied, the distribution territory, exclusivity, use of trademarks and marketing materials, service and warranty arrangements, minimum purchase requirements or targets, reporting obligations, and the conditions for termination or expiry. Subject to agreement between the parties, a distribution agreement can include any provisions they consider appropriate.
6. What types of distribution exist?
Distribution relationships generally fall into three main models. Each model determines the level of cooperation between the parties, the distributor’s commercial freedom and the extent of market coverage.
- Intensive distribution: Products are offered through as many sales outlets as possible. This model is commonly used for products that require wide availability, such as food, cosmetics or household goods. The supplier prioritises maximum visibility and reach.
- Selective distribution: The supplier works with a selected network of distributors or resellers that meet certain quality or presentation standards. This model is often used for luxury goods, high-end electronics or brands seeking to safeguard a specific customer experience.
- Exclusive distribution: One distributor is granted exclusive rights within a specific territory or for a particular customer group. The supplier does not supply other distributors within that scope. This model often provides the distributor with commercial certainty and encourages long-term investment in the brand.
7. How does pricing work in a distribution relationship?
A supplier may recommend resale prices but may not impose fixed resale prices. The distributor must retain the freedom to determine its own resale prices. A supplier may, however, impose certain quality or performance standards or make arrangements to protect the brand, provided these remain within the boundaries of competition law. Particular caution is required for agreements that may restrict competition.
8. Can a distribution agreement be terminated?
As discussed above, it is advisable to include termination provisions in the distribution agreement. An agreement for an indefinite period may in principle be terminated at any time, subject to a reasonable notice period. What constitutes a reasonable notice period depends on factors such as the duration of the relationship and the investments made by the parties.
In the case of an agreement for a fixed term, termination is generally only possible if the parties have agreed on this. If no such provision exists, the agreement will continue until the agreed end date. In addition, termination for cause remains possible under the applicable national law, provided there is a sufficiently serious breach that justifies termination.
9. Is a distributor entitled to compensation upon termination of the distribution agreement?
Unlike a commercial agent, a distributor does not have a statutory right to goodwill compensation. This does not mean that a distributor can never be entitled to compensation upon termination. In certain circumstances, damages may be appropriate, for example if the notice period was too short or if the distributor was unable to recoup its investments. Whether compensation is due depends entirely on the circumstances of the case and the arrangements laid down in the distribution agreement.
10. Why is legal guidance important in distribution relationships?
At first glance, a distribution agreement may appear straightforward, but in practice it involves many legal considerations. Since distribution is not governed by specific statutory rules, parties enjoy significant contractual freedom. While this offers flexibility, it also entails risks, as vaguely drafted provisions may lead to disputes later on.
For example, in light of potential sanctions risks for producers or suppliers of certain goods, it is important to monitor where products ultimately end up and with whom, via distributors (read: ‘No re-export to Russia’). In addition, competition law rules apply, which may easily be breached without parties being aware of this. Legal guidance helps ensure that agreements are clearly drafted and risks are effectively managed.
More information
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