International Distribution Agreements: time to take another look

Posted Thursday 23rd December 2021

Distribution agreements are one of the simplest legal frameworks that can be put in place to support and enhance sales, improve market penetration and build a new international business. They set out the terms that will apply to business transacted between a supplier – typically a manufacturer – and a distributor.

In spite of the fact that many entrepreneurs, commercial directors and business people will exhort their importance, distribution agreements are very commonly neglected, ignored or put off. Worryingly, doing so in some jurisdictions can result in an implied distribution agreement being construed between the parties without anyone actually signing anything. It is wise to periodically review trading arrangements to check whether there are any agreements which need updating, any failing business partners who need to be cut loose or, where there is a need, to get a formal agreement put in place.

To assist with this exercise, we have put this article together with the help of our international lawyer network to act as a guide for both suppliers and distributors on some of the key issues to bear in mind when revisiting distribution arrangements.

1. Is my company bound by a distribution agreement?

Import and export businesses often begin on a very informal basis and it isn’t always essential to have a written distribution agreement in place before trading commences. Sometimes it can be preferable to work on an order-by-order basis until sales start to see some traction and the parties can revisit the matter – that way, if things don’t pan out, no one is tied in and they will be free to explore other opportunities. On the flipside, if a promising business does start to materialise and there is not an agreement in place to set the boundaries then a different set of problems can arise. Distribution agreements improve certainty and create a structure which allows for planning and fosters confidence. If the parties are working on a basic sales/purchase relationship without any stability or certainty then planning for the future can be exceptionally difficult.

Around this time there is a real potential for disputes: for example, another distributor may have noticed the products on the market and want to buy directly from the factory, or perhaps the distributor has registered a trademark in their jurisdiction without consulting with the supplier. Sometimes an impatient supplier is unrealistic about the rate of progress and might want to cut the distributor off. In the face of these problems one (or both) of the parties may want to end the business relationship, but whether this is possible and how this can be achieved can sometimes be a difficult question to answer.

2. Do I need a distribution agreement?

Generally speaking, it is prudent to put a distribution agreement in place at the start of the relationship in order to clearly set out the expectations of each party, the core business terms and, perhaps most importantly, to reduce the scope for future conflicts. The need for a distribution agreement grows once some results start to materialise as the supplier will want to protect and grow their sales and the distributor will want to ensure that they have security of supply and the certainty to invest in marketing.

If no distribution agreement is put in place then the basis of the contract is typically the mutual intention of the parties, or potentially it could be based on the terms set out on the back of a PO or invoice. Salespeople are not always known for paying much attention to these and can unwittingly sign their companies up to agreements with unintended consequences. A well written distribution agreement can ameliorate this issue.

3. Who owns the clients? Who created the goodwill?

It is not unusual for a supplier to indicate in an email or verbally to the distributor that they are the distributor for a certain territory, market channel or range of products. A distributor typically has the right (and potentially an obligation) to promote sales and take care of a market.

In European civil law jurisdictions, the distribution agreement is typically construed as a mix of supply and service agreement (with the service being the promotion of sales) which can lead to further questions, such as who “owns” the clients and What happens to those clients in case of termination? In some jurisdictions when a distribution agreement is terminated the distributor has the right to receive an indemnity or a quantum meruit for the customers base that they built. The indemnity is typically based upon a percentage of the turnover realised during the term of the distribution. In some jurisdictions no payment is required.

4. Internet sales

One common area of contention is cross-border internet sales where the supplier or other distributors despatch shipments to the distributor’s territory. This can be infuriating for a distributor who has invested in building up a market and a brand only to have outside players eat away at the fruits of their labour. It may result in a claim for breach of contract. How should a supplier coordinate its distributors with respect to internet sales? How can the distributor avoid losing its market to grey imports? What will competition law permit? This is best addressed by way of a distribution agreement.

5. The final show-down: litigation

Sometimes business relationships irretrievably break down and reach the end of the road. Things can turn nasty and ‘wronged’ parties may expect to be compensated for their losses. At that point, new questions arise: in which jurisdiction should a legal claim be brought? Who has a right to sue? Is it better to wait for the other side to bring a case? Is it possible to have the advantage of litigating on home soil or are there advantages in bringing a claim elsewhere? Is it possible for the other side to bring a case in their own jurisdiction? At this stage legal assistance is vital, particularly where there is a cross border element.

Joelson, together with its international network, ELN, is able to take its clients through a range of strategies, solutions and advice spanning all major European countries and the US. We can assist both suppliers and distributors and, if the need arises for a standard form document to be used in multiple jurisdictions, then we can consult with our partner firms to take into account the requirements of each jurisdiction.

In England and Wales

Notice period to terminate a distribution agreement. If no notice period is expressly stated in a written contract, then a “reasonable” period of notice must be given. What is “reasonable” will depend upon the facts and the parties’ business dealings up to the point of termination. A long-standing commercial relationship may require a considerable notice period. If a party terminates an agreement without giving the appropriate notice then they may themselves have committed a breach of the agreement, potentially giving the other side a right to sue.
Goodwill and know-how. Any goodwill or know-how is owned by the person that created it. On the termination of a distribution agreement there is no general right under English law for the distributor to be reimbursed for any of the goodwill that has been created – they will still have this information and goodwill, despite the fact that after termination there may be no value to it. If the parties want to vary this position then it must be done by way of an agreement.
Direct online sales by the supplier. Whether a supplier is able to directly sell into the distribution territory will depend upon the drafting of the exclusivity clause. We typically recommend adding wording to distribution agreements specifically deal with this point. In the absence of any provision prohibiting a supplier from doing so, the supplier would likely have a right to sell online.

If you have any questions on your ongoing distribution agreement or if you require any assistance with the preparation of a distribution agreement in the UK, please contact.

Guy Francis – Associate, Commercial

guy.f@joelsonlaw.com

+ 44 (0) 20 7580 5721

In Germany

Notice period to terminate a distribution agreement. If no notice period is expressly stated in a written contract, no statutory provision for the termination is applicable and the notice must be determined by interpretation in accordance with general principles of the Civil Code. This is in conjunction with having regard to the will of the parties and their interests in a given market. In the automotive sector, for example, case law regularly assumes notice periods of one year.
Goodwill and know-how. According to the prevailing opinion, the provision of the law on agency contract (which grants the agent a compensation for goodwill) is applied to the authorized distributor. If the relationship is not merely on a sale-purchase basis and, on the contrary, the distributor is integrated in the sales organization of the supplier, then there is an obligation to transfer the customers to the supplier at the end of the contract, so that the latter can immediately and without further ado make use of the advantages of the customers base.
Direct online sales by the supplier. No clear solution has emerged in German Courts and therefore the matter must be regulated in an agreement. As a general principle an absolute ban on selling goods via the Internet does not appear to be permissible.

If you have any questions on your ongoing distribution agreement or if you require any assistance with the preparation of a distribution agreement in Germany, please contact

Maximilian Rittmeister – Rechtsanwalt.

Maximilian.Rittmeister@bhp-anwaelte.de

+49-69-79405-210

In Spain

Notice period to terminate a distribution agreement. If no notice period is expressly stated in a written contract, the solution most widely utilised by the Spanish Courts is the application of the criteria of the agency contracts, i.e. for one month’s notice for each year of the contract. This goes up to a maximum of six months and a minimum one month’s notice for contracts with a duration of less than 1 year. Agreements establishing a shorter notice period than the above are, however, valid provided that the ‘good faith’ principle is preserved.
Goodwill and know-how. in the absence of a specific regulation, Spanish Courts have frequently recognised the distributor’s right to compensation on termination of the contract for loss of goodwill or loss of the customer base. In these cases the law on agency is applied which establishes that the compensation may not exceed, in any case, the average amount paid in commission to the agent (or the distributor) during the five years prior to the termination. The burden of the proof as to the existence of goodwill or of new customers is on the distributor.
Direct online sales by the supplier. There is no specific law governing internet sales in a the distribution agreement. Our recommendation is to cover the matter in an express clause, including the reservation of any special online channels (e.g. Amazon).

If you have any questions on your ongoing distribution agreement or if you require any assistance with the preparation of a distribution agreement in Spain, please contact

Cristina de Santiago – Partner

cristinadesantiago@aledralegal.com

+ 34 691301063

In France

Notice period to terminate a distribution agreement. If no notice period is expressly stated in a written contract, any party abruptly terminating an “established business relationship” without prior (written) notice must pay the other compensation corresponding to a “sufficient” notice period. The duration of a “sufficient” notice period can vary and depends on various criteria such as the length of the business relationship, the economic dependence of the terminated party and any financial investments made by the terminated party. A general rule of thumb is that notice is one month per year that the agreement ran, up to a maximum notice period of 18 months.
Goodwill. Under French law distributors are not entitled to any goodwill compensation on termination (“indemnité de clientèle”).
Direct online sales by the supplier. Whether a supplier is able to directly sell into the distribution territory will depend upon the express provisions of the contract, bearing in mind that limiting the ability of other distributors to sell products via their website may be prohibited pursuant to European Competition Law.

If you have any questions on your ongoing distribution agreement or if you require any assistance with the preparation of a distribution agreement in France, please contact

Laurent Dolfi – Avocat

dolfi@domisic.com

+ 33(0)1 56 59 88 00

In The Netherlands

Notice period to terminate a distribution agreement. If no notice period is expressly stated in a written contract then the longer the duration of the agreement, the longer the notice period is and/or the larger the obligation to compensate damages. Distribution agreements with a duration of less than two years need a notice of approximately three months; distribution agreements of a duration of between two and four years need a notice of approximately six months and distribution agreements with a duration over ten years, may require a notice of between one and two years.
Goodwill. Only agents and not distributors have the legal right to compensation for goodwill (klantenvergoeding) at the end of the agreement. The agreement, whether verbal or written, must be checked carefully to determine whether it is a mix of the two, as recently held by certain Court judgments.
Direct online sales by the supplier. As a general rule the supplier is allowed to sell their products into the territory of the distributor, including online, although this position may be varied by way of an agreement. If agreed, an IP-address blocker can be installed on the website of the supplier to prevent access from customers in the distributor’s territory, but European competition law must be considered carefully.

If you have any questions on your ongoing distribution agreement or if you require any assistance with the preparation of a distribution agreement in The Netherlands please contact

Gemmy van der Valk – Partner

g.van.der.valk@vissers-legal.nl

+31(0)73-6911979

In Belgium

Notice period. If no notice period is expressly stated in a written contract, the notice period is determined by the duration of the relationship. However Belgian law, quite uniquely in Europe, has specific provisions for distribution contracts which provide for a minimal protection of the distributor. An “exclusive sales distribution of unlimited duration” can be terminated only giving a “reasonable notice period”. If a notice period set out in a distribution agreement is considered to be “unreasonable” then it is not enforceable against the distributor.

The criteria used to appreciate the reasonableness of a notice period are the duration of the relationship, the size of the territory, the importance of the distribution in the overall turnover of the distributor, the difficulty that the distributor might face in finding a new business, the specificity of the client base, the size of any investments made and the scope of any reorganisation that may be required. A refusal to renew an “exclusive sales concession” of a limited duration also requires notice to be served no less than three months and no greater than six months before the expiry of the initial term, without which the agreement is deemed to be renewed. An “exclusive sales concession” of a limited duration that is renewed twice is then deemed to become of a unlimited duration for the purposes of the application of mandatory rules related to notice period and goodwill compensation.

Goodwill and know-how. Belgian law provides for a mandatory goodwill compensation payment to be made in respect of any “exclusive sales concessions of unlimited duration” (or any agreements which are deemed to be the same according to the criteria set out above) and also to commercial agents in specific circumstances.

When it comes to “exclusive sales concessions of unlimited duration” (including deemed agreements), the distributor is entitled to receive compensation in respect of three different components: (i) client compensation if the distributor has created value in terms of acquiring clients which will benefit the supplier after termination; (ii) compensation for costs borne by the distributor which will benefit the supplier following the termination of the agreement; and (iii) a termination indemnity which covers part of the costs that the distributor will incur as a result of the termination, such laying-off of their employees.

Direct online sales by the supplier. As a general rule the supplier is allowed to sell its products in the territory of the distributor, unless agreed otherwise.

If you have any questions on your ongoing distribution agreement or if you require any assistance with the preparation of a distribution agreement in Belgium, please contact

Jerôme Terfve – Avocat/Advocaat

+32 (0)2 535 73 30

Jerome.Terfve@tetralaw.com

In Italy

Notice period. If no notice period is expressly stated in a written contract then “reasonable” notice must be given or an indemnity paid to the distributor. Italian Courts have applied the same criteria to agency contracts, i.e. one month’s notice for each year of the contract, up to a maximum of six months, but for very long contracts (particularly in the car retail market) claims for a notice period of one year notice are not unusual. The duration of the relationship, the distribution terms and any fixed asset investments are often considered as well. If there has been a ‘malicious’ termination of the agreement on the part of the supplier, for instance, a termination when the supplier knew that the distributor was carrying out significant investments, then the value of the indemnity would be increased.
Goodwill. Under Italian law distributors are not entitled to compensation for goodwill (although lawyers acting for distributors will often try to make this claim.)
Direct online sales by the supplier. Whether a supplier is able to sell directly into the distribution territory will depend upon the express provisions of the contract, bearing in mind that limiting the ability of the distributor to sell products via its website may be prohibited pursuant to European Competition Law.

If you have any questions on your ongoing distribution agreement or if you require any assistance with the preparation of a distribution agreement in Italy please contact

Fabio Weilbacher – Avvocato

fweilbacher@quorumlegal.com

+ 39 02 87213237

This Newsletter does not contain legal advice and is for general information only.

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This article is for reference purposes only. It does not constitute legal advice and should not be relied upon as such. Specific legal advice about your specific circumstances should always be sought separately before taking or deciding not to take any action.