Distribution - overviewNature of distribution

A distributor buys goods or services from a manufacturer or wholesaler and resells them on its own behalf. Distribution arrangements are commonly used where a manufacturer needs assistance in bringing products to a particular market (eg in an overseas territory with which it is not sufficiently connected or familiar) or where a distribution arrangement is preferable to an agency channel or to an internal sales and marketing team. The arrangements are long term, with additional incentives to the distributor to develop the sales of the relevant goods (or services) in exchange for a reduced wholesale price, otherwise the distributor would deal on standard terms with the manufacturer or its wholesaler.

Although distribution arrangements can be for goods or services or both, for simplicity in this section on distribution, the Practice Notes and precedents will describe distribution arrangements for goods.

Distribution compared to agency

Distribution has certain features in common with agency, but the legal structure is different. A distributor buys and sells on its own account, rather than for a principal, and the customer relationship is therefore with the distributor, not the manufacturer. The distributor thus assumes legal and commercial risk that (normally) an agent does not.

Types of distributorship

As with agency, a distribution arrangement may be categorised as:

In common commercial usage, a sole distributorship is one where the manufacturer retains the right to sell products into the territory concerned itself, but cannot appoint anyone else (aside from the sole distributor) to do so. In an exclusive situation, only the distributor has such right to the exclusion of all, including the manufacturer. The term 'sole and exclusive' is usually understood to mean that the distributor, to the exclusion of others including the manufacturer, has the right to sell the products or services in the territory. However, the terms are not always used consistently, and the parties' rights and duties should therefore be set out in full within the agreement.

In addition, distribution can be selective, whereby distributors are appointed based on objective qualitative criteria.

Relationship of distributor and manufacturer

A distribution arrangement will typically involve two legal agreements: the distribution agreement itself, and the terms of purchase of the goods (or supply of the services) that are its subject. The latter may well be in standard form. The former normally provides, among other matters, for:

Certain obligations, in particular minimum sales targets, are normally more onerous in exclusive distribution arrangements.

The manufacturer will usually provide assistance in relation to marketing and sales and (where relevant) technical support and training. A manufacturer (or wholesaler, where the distributor purchases through this channel) may appoint different distributors for the same (or different) products in any particular territory.

Subdistributors

A distributor may appoint subdistributors unless the agreement with the manufacturer provides otherwise, as will often be the case. Distribution agreements will often, at the very least, require the manufacturer’s consent to the appointment of a subdistributor.

Status

Distributors, as independent principals, do not enjoy the protection of the Commercial Agents (Council Directive) Regulations 1993, SI 1993/3053. In the UK the terms and termination of the distributorship are therefore purely governed by the parties' agreement. However, where the distributor is located or operates outside the UK, local legal advice should be sought prior to termination. This is because, in some jurisdictions, distributors are given additional legal rights equivalent to those enjoyed by commercial agents, including entitlement to termination payments.

Competition lawEU

As with any arrangement which may affect trade within the European Economic Area, distribution agreements may be subject to the Treaty on the Functioning of the European Union (TFEU (PDF)), art 101 (formerly EC Treaty, art 81). This is because distribution arrangements are necessarily made between undertakings at different levels in the supply chain. The arrangements can easily include terms, such as price fixing, that could distort or prevent competition in the relevant market for the distributed goods. However, the arrangement may benefit from Commission Regulation (EU) No Commission Regulation (EU) No 330/2010 (PDF) of 20 April 2010, which provides a block exemption for vertical agreements satisfying certain conditions. In brief, that Regulation exempts manufacturer/distributor agreements containing certain restrictions where each party's share of its market does not exceed 30%. Additional conditions apply in certain circumstances. There is also a separate block exemption to deal with distribution in the motor vehicle trade, Commission Regulation (EU) No 461/2010 (PDF) of 27 May 2010.

Agreements are not exempt, irrespective of market share, if they contain certain objectionable provisions, generally those limiting a distributor's freedom to decide to whom and at what prices he will resell the product. Certain non-compete and other restrictions may qualify for exemption if specified conditions are met.

UK

Where the agreement has effect only within the UK, the Competition Act 1998, Chapter I applies. Its provisions are similar to those of TFEU (PDF), art 101. However, the vertical block exemptions apply within the UK market.