Distribution agreements and competition law

A distribution agreement is more likely than an agency agreement to be affected by competition law rules (the Competition Act). This is because in a distribution agreement, the manufacturer often imposes certain terms that affect the distributor's sale contracts with their own customers. The distribution agreement therefore has the potential to affect trade and competition. (See Overview of agency and distribution agreements for more information.)

Key clauses in a distribution agreement

Recitals and interpretation, and appointment

For an explanation on the recitals, interpretation and appointment clauses, see the discussion of these in Agency agreements.

The distributor's duties

Some of the distributor's duties will be similar to those of the agent in an agency agreement.

Their primary duty will be to market the goods in their territory. You should also have clauses in your distribution agreement requiring the distributor to:

• Get licences or permits for the sale of the products in the territory or to comply with local legislation
• Keep proper records and give information to you, e.g. sales and feedback from customers
• Separately store stock that still belongs to you so that it won't be counted as part of their assets and can't be claimed by the distributor's creditors if the distributor becomes insolvent.

Other duties are likely to be significantly different from those of an agent because of the different nature of the agreements. The following clauses can be found in a typical distribution agreement.

Minimum target obligations

You can impose a minimum sales target obligation on the distributor to make sure they try to sell to as many customers in the relevant market as possible. Or you could impose an obligation on the distributor to buy a minimum quantity of goods from you.

Note that a minimum target may amount to a non-compete obligation. Competition law restricts how long you can impose this obligation. (See Drafting a distribution agreement according to vertical agreements block exemption for more information.)

You should specify in the agreement what will happen if the distributor doesn't meet the minimum targets. You could agree to end the agreement completely.

Alternatively, if they're a sole or exclusive distributor, you could state that if they fail to meet the target, you'll end the protection and hire (or 'appoint') another distributor. Or you could state that you'll sell in the territory yourself.

Advertising and promotion

The distributor is normally responsible for advertising and promotion.

Stock

The distribution agreement will contain terms found in a normal sale of goods agreement, since the supplier is selling the goods to the distributor. The agreement should deal with matters such as:

• How the distributor orders and pays for goods
• How to return them if they're unsatisfactory
• When the ownership of the goods passes to the distributor
• What will happen to unsold stock that the distributor holds when the agreement ends.

The agreement should also deal with when risk in the goods passes to the distributor. This is the point after which they're responsible for any loss or damage to the goods. Ideally, risk should pass to the distributor when the goods are delivered to them, and the agreement should identify the point of delivery.

It should also make the distributor insure any stock they hold that still belongs to you.

Confidentiality and Intellectual Property

If you need to give the distributor confidential information about the products or the marketing process, you should make sure that they agree to keep it confidential. You might also need to let them use your business's intellectual property, e.g. its trademark in the advertising and promotion of the goods. You should say how you want the distributor to use and safeguard your intellectual property.

Competition

You might want the distributor to agree not to sell any products that could compete with your products. These non-compete obligations are restricted by competition law (see Drafting a distribution agreement according to vertical agreements block exemption).

Your duties

The list of your duties is likely to be comparatively short. These may include whether you're responsible for giving the distributor anything to help them market the goods, e.g. information, promotional materials or samples. You should also consider whether you're willing to offer the distributor any indemnity, or compensation, against defects in the products.

Termination

This refers to the act of ending an ongoing agreement, as well as to a fixed term coming to an end.

You can handle the termination of the agreement and its consequences in a number of ways. You could start with a fixed term, or have an indefinite agreement that can be ended if either side gives notice. You'd need to decide on the period of notice. You should also provide for termination in other circumstances, e.g. if the distributor becomes insolvent or if they breach the agreement. In particular, you'll need to highlight how the stock will be disposed of when the agreement ends.

Miscellaneous

A distribution agreement will usually have standard, miscellaneous provisions, referred to as 'boilerplate'. Typically, these include clauses on arbitration, the choice of law and jurisdiction governing the agreement, the nature of the agreement and other administrative issues. These also include clauses dealing with events that are outside anyone's control, otherwise known as 'force majeure'.