What is a distribution agreement?
Distribution agreements are usually put in place where a supplier wants to expand their business into a new market or geographical territory at a relatively low risk.
They can also restrict either or both the distributor from selling the products of competitors of the supplier and the supplier supplying to competitors of the distributor. To some extent, this allows both sides to control the supply of products within a market and prevent competition.
Typically under a distribution agreement, the distributor buys the products from the supplier or manufacturer, adds a margin to cover costs and give profit, and then sells to end customers.
The legal arrangement is therefore that legal title (ownership) of the products passes from the manufacturer or supplier to the distributor and then to the customer. In passing title, risk of the products not being sold transfers to the distributor as well. This differs from other types of marketing arrangements such as agency agreements, where the title remains with the supplier until the products are sold.
Advantages to the supplier of a distribution arrangement include being able to benefit from the distributor's existing business infrastructure and know-how, including sales platforms and channels, marketing lists, delivery network and after sales support and servicing. The combination of the supplier's product with another that the distributor already sells may be more attractive to potential customers than the supplier's product alone.
The advantages to the distributor include being able to scale their infrastructure by selling additional products and greater market share in a region or industry, without the cost and risk of developing new products. As an exclusive distributor, competitors can be prevented from entering the same market.
Types of distribution agreement
Other names for a distribution agreement are usually prefixed by the type of deal, and can end by specifying what is being sold, e.g. 'goods'.
In an exclusive distribution arrangement, the supplier agrees to supply only the exclusive distributor within a defined geographical territory or industry and not to others. The supplier agrees not to sell the products themselves.
Exclusivity motivates the distributor to invest in whatever is needed to sell as much of the product as possible (such as additional sales staff or larger or specialist warehouses).
A sole distribution agreement is similar to an exclusive one, except that the supplier appoints only one distributor (known as the only distributor or the sole distributor) and reserves the right to sell the products themselves within the territory or industry or to a particular types of customers such as original equipment manufacturers or value added resellers.
The only or sole distributor is able to build a business within the market knowing that while there might be some competition, it is likely to be limited.
They are usually used where the supplier has some existing important customers in a region and wishes to retain and maintain those relationships themselves.
A non-exclusive distribution agreement gives the supplier the right but not an obligation to appoint other distributors, potentially maximising market penetration if the market is fragmented.
However, for non-exclusive rights, the supplier is likely not to be able to obtain such favourable terms. The distributor would be likely to want to be able to set prices and promotions in order to be able to compete.
Selective distribution agreements are non-exclusive, but additional distributors may only be selected if they meet certain criteria - conditions set by the supplier.
Because of the potentially exclusionary nature of these arrangements, they can fall foul of competition law.
However, in verticals that require an enhanced level of service and advice at the point of sale (such as pharmaceuticals, medical devices and cosmetics) and where the product might need after sales support by the supplier (such as electronic equipment), selective distribution models tend to be allowed.
The governing law in these distribution agreements is that of England and Wales. Provided one party has a principal place of business in the UK, it doesn't matter where the other is located.
In the UK, anti-competitive behaviour is regulated by the Competition Act 1998 and the Enterprise Act 2002.
Anti-competitive agreements are defined as those that prevent, restrict or distort competition or which intend to do any of those things.
Competition rules aim to ensure that end customers (usually consumers) pay a fair price for the products and services they buy. They also aim to stimulate innovation and economic activity by increasing competition.
Agreements are more likely to non-compliant with the law if they
- fix prices, either between the supplier and other distributors or between distributors and the end-customer
- limit production or supply (driving up prices)
- carve up markets (preventing effective competition)
- discriminate between players at the same level of the supply chain (such as imposing different terms on different types of customer)
Abuse of a dominant market position
A dominant market position is one where a supplier controls a majority of the market in some way. It might be that they are able to obtain materials for production at a lower cost, or they might have a large distribution network.
A dominant position allows a business to behave independently of competitive pressures, i.e. be less affected than competitors, or it allows it to affect trade of competitors.
Abuse of a dominant position includes:
- charging 'excessively' high prices
- artificially limiting production
- withholding or refusing to supply an existing long term customer without good reason
- charging significantly higher prices to some customers who are otherwise similar to others who are charged a lower price
- making a contract conditional on the other party doing something that is not related to the subject of the contract
Vertical agreements and the block exemption
Under the UK competition rules, the vertical agreements block exemption gives most distribution agreements the benefit from an exemption to competition law provided that they are vertical agreements.
A vertical agreement is one between businesses that operate at different levels of the economic supply chain. The exemption afforded applies if the the supplier's market share is below 30% and the agreement does not contain specified hardcore restrictions.
Types of agreements that might be exempt include:
- distribution agreements between suppliers and manufacturers
- agency agreements between principals and agents
- franchising agreements between franchisors and franchisees
Hardcore restrictions include price fixing and restrictions on promotion and advertising.
Price fixing is requiring the distributor to charge a fixed or minimum price when they resell the products.
Limiting a maximum resale price (MRP) or giving a recommended resale price (RRP) is allowed.
Restrictions on active sales within a territory are allowed only where there is an exclusive arrangement. Active sales are those where the customer has been approached directly, such as by direct mail, personal appointment or targeted advertising.
A supplier is not allowed to restrict passive sales, which is general advertising or promotion to non-specific groups that might also reach customers in the distributor's exclusive territory or industries of other distributors or the supplier itself. For example, the supplier cannot insist that a distributor does not make its website available and sell directly to people in a particular country.
Anti-competitive behaviour would mean that distribution agreements would be unenforceable. Businesses that engage in particularly severe or damaging behaviour also risk fines of up to 10% of their global turnover. They may also expose themselves to possible damages actions from customers.
Although with Brexit, the UK has left the European Union, EU competition rules continue to apply to UK companies operating in the EU. Since UK competition law is based on EU law, until it is changed by Parliament, EU law effectively applies to UK businesses only operating in the UK (except that since 1 January 2021 the Competition and Markets Authority (CMA) enforces UK law rather than the European Commission (EC).
Because the EU no longer has any jurisdictional power in the UK, No EU authority can carry out site investigations of a business in the UK. Instead of such dawn raids, they are limited to making written requests.
In time, most EU competition law is likely to be written into UK law in order to have 'alignment' between the UK and EU countries. In particular, vertical block block exemption will be retained in UK law.
About our documents
Net Lawman distribution agreement templates cover many angles. We include many options to cover the elements of your deal that are important to you, and allow you to add any industry-related terms or special compliance you want the other side to follow.
These distribution agreements can be used for any business selling goods of any type at home or abroad.
Any of our templates can be used for any arrangement, including to create an exclusive distribution agreement.
Each agreement has been drawn to favour one particular party. However, it will not help your long term relationship if you ride rough shod over your business partner. So every document takes some account of what the other side will want.
Generally, it is the supplier or manufacturer who sets the terms of what they want from the distributor, but this can change as the distributor becomes more powerful. Our consignment and distribution agreement has been drawn for a large, modern distributor whose marketing strength and reach possibly justifies more favourable terms of which a smaller distributor can only dream.
A final contract or a basis for negotiation of heads of terms
Whether you are the distributor or the merchant, there will be many areas where you would like the other of you to do things your way. As a result there will be a lot to negotiate. By setting everything down in a document like one of these, before you start to talk, you have a head start and the agenda is yours.
Each of these is a comprehensive agreement, but as always with Net Lawman documents, you can reduce it easily to the exact terms you need.
The law relating to these agreements is largely common law, not statute law (with the exception of competition law previously discussed). That means you have great freedom to make your own deal.
If the distributor operates outside of the UK, there may be additional local laws with which they must comply. We assume that the distributor takes responsibility for all aspects of compliance with local law, whether relating to the product, the customer, importation or duties and taxes.
Before you start negotiations, it is a good idea to have thought about some fundamental aspects of the deal.
What our agreements cover
Each distribution agreement covers, as appropriate:
Extent of the geographical territory, industry or customer group
The extent needs to be defined clearly. It may be ambiguous whether the UK includes the Channel Islands, or whether 'solicitors' as a customer group include those not working under the regulations of the Solicitors Regulation Authority.
Basis of the arrangement
Although terms such as 'exclusive' have a common meaning, you should be specific about what they are.
Usually the distributor is solely responsible for expenses incurred once they receive the goods from the supplier. These might include local marketing costs, handling costs (including for warehousing and delivery)
marketing costs, handling costs, delivery costs, and other expenses once they receive the goods from the supplier. Since these can significantly influence the profitability of the arrangement for either party, it should be clear in the distribution contract to what the distributor agrees to do at their own expense.
Rights of the distributor
You should consider what rights the distributor might have. These might include marketing rights - to use images, logos, trade marks, service marks and trade names of the product, supplier or manufacturer in marketing materials. They might also include rights to use the marketing materials of the supplier, for example, to translate such materials into different languages.
It may be that trade secrets or other such confidential information is passed either way. You may want to restrict as far as possible what either party can do as a result.
For example, if the distributor creates a particularly well run distribution network in its region, can the supplier apply the same processes itself in other geographical areas?
Likewise, if the distributor learns that one of the company's products sell well because of a particular feature, could it enter into an agreement to sell another party's products with the same feature?
Duration and rights to renew
You should consider how long the relationship should initially last, how both sides might cancel, and how the distributor might renew.
Products to be distributed
A distribution agreement gives a right to be a supplier, so you need to be clear about the subject matter of that supply. You need to think not only about the products that might be supplied now, but those that might de developed in the future. The wording should also cater for potential changes to brand or product names and changes to technology used