Distribution agreements are frequently used between suppliers and distributors to reach new or larger sales markets. A distribution agreement is an agreement between a supplier of products and a distributor that purchases and resells these products. The distributor purchases the products at its own expense and risk.

What to pay attention to?

There are no specific statutory rules for distribution agreements, as a result of which the agreement can largely be structured according to the parties’ own wishes. We recommend that you include the arrangements in the agreement clearly and in detail. Arrangements can be made on, among other things: the type of product, the (minimum) number of products to be purchased, the prices, the sales market, the degree of exclusivity, whether or not the appointment of sub-distributors is permitted, advertising, the term of the agreement, the possibility of terminating or dissolving the agreement, the minimum turnover, possible discounts and liability. If the cooperation also has international aspects, it is important to carefully consider which law is declared applicable to the distribution agreement.

Products, sales markets and prices

A distribution agreement usually contains arrangements about the types and quantities of products to be supplied, which sales markets are served, and the terms and conditions under which the products are supplied. In addition, it may be advisable for the supplier to have the products delivered to the distributor subject to retention of title. This means that ownership of the products will not be transferred until the distributor pays the purchase price. In that case, if the distributor goes bankrupt, the products will not be part of the bankrupt estate, thus providing the supplier with a degree of security.

Suppliers cannot compel the distributor to apply fixed sale prices; only target prices or recommended prices can be agreed. The distributor must be allowed the opportunity to pursue its own pricing policy. Arranging maximum prices (if desired) is permitted.

Extent of exclusivity

A distribution agreement may provide a form of exclusivity. For example, it may be agreed that the distributor is the only party entitled to sell the products in that area (exclusive distribution), that a selective number of distributors are entitled to sell the products (selective distribution) or that a maximum number of suitable sales outlets are selected (intensive distribution).

It may also be advisable to include a provision in the distribution agreement stating whether the distributor is permitted to sell competing products and, if so, under what conditions. It should be borne in mind that the inclusion of a non-competition clause is not always permissible.

Appointing sub-distributors

The supplier and the distributor may agree that the distributor be permitted to appoint sub-distributors. In this way, products can be distributed on an even larger scale across the various sales markets.

Advertising

Arrangements can be made in the distribution agreement regarding the manner in which products are marketed. One of the options is to agree that the supplier will contribute to this. In addition, it is advisable to make arrangements on how the trademarks of the products and any domain names may be used by the distributor.

Termination, dissolution and term of the agreement

A distribution agreement may be concluded for a definite or indefinite period of time. A distribution agreement entered into for a definite period of time cannot in principle be terminated. A distribution agreement entered into for an indefinite period of time can in principle be terminated. It will then have to be ascertained whether the requirements of reasonableness and fairness, in connection with the nature and contents of the agreement and the circumstances of the case, entail that the termination requires a sufficiently serious ground for termination, that a notice period must be observed or that the termination must be accompanied by the payment of damages.

In addition, it is possible to allow for dissolution of a distribution agreement if a contracting party has failed in the performance of its obligations to such an extent that dissolution of the agreement is justified. Dissolution requires the contracting party to be in default, unless performance is permanently or temporarily impossible. The parties may also contractually exclude the possibility of dissolution.

Minimum turnover and discounts

The distribution agreement may include a provision that the distributor must achieve a minimum turnover. However, it is not always possible to estimate in advance what turnover can be achieved with the products in a particular territory. The distributor may take the position that it does not wish to agree to a minimum turnover to be achieved. An intermediate solution may be that the supplier and distributor agree that the distributor will receive a discount on the purchase price if it purchases a certain number of products.

Liability

Another topic that may not be left undiscussed in distribution agreements is the liability of the supplier and the distributor. In principle, the starting point is that the manufacturer is liable for damage caused by a defective product. Further arrangements on the distribution of risks between the supplier and the distributor in the production and distribution chain can be made in the distribution agreement.

Applicable law

In the event of an international distribution agreement, the question is which law is applicable to the agreement. The Dutch court will determine the applicable law according to the Rome I Regulation. According to Article 3 of the Rome I Regulation, the parties themselves may choose which law applies. The benefit of including a choice of law clause is that advantageous legislation and regulations can be chosen. In principle, if the parties have not included a choice of law clause in the distribution agreement, the law of the country where the distributor has its habitual residence applies.

Need advice?

Regardless of how many matters are laid down in a distribution agreement, disputes may still arise between the parties. The attorneys at bureau Brandeis have extensive experience with (impending) disputes regarding distribution agreements and their settlement. We will be glad to help.

If you have any questions or would like any advice, please contact Michelle Krekels.