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Distribution Agreement and the impact of Brexit

Are you a manufacturer who wants a distributor to resell your products? Does your company have a distributor that wants to buy your products and sell them to clients within certain geographical areas?

Business relationships can sour if based on verbal agreements, therefore having a written distribution agreement can enable you to protect your rights.

A Distribution agreement is an agreement whereby the manufacturer appoints the distributor on a “sole” or “non-exclusive” basis) to resell the manufacturer’s products in a particular territory/ies. In this case, the ownership of the goods is transferred to the distributor prior to the marketing and sale of the goods which means that the distributor may hold stocks of goods which they pay for and own – they therefore bear the risk as to whether they can resell the goods. A distributor buys goods from a supplier to sell on to customers. They can earn a profit margin based on the “mark-up” they add to the original sale price.

There are different types of distribution agreements e.g. sole, exclusive and non-exclusive agreements.

1. What is a sole distributor agreement?

2. What is an exclusive and non-exclusive distribution agreement?

3. What should be included in a distribution agreement?

4. How will Brexit impact distribution agreements?

1. What is a sole distributor agreement?

A sole distributor agreement is formed when the supplier appoints a distributor as their only or sole distributor within a territory. The distribution will not have to face competition from other distribution companies in the region. The distributor will not be able to sell/distribute or sell for competitors with the same type of goods. This enable the distributor to be the only producer of particular goods, especially when those goods are successful and carry a high profit margin.

2. What is an exclusive and non – exclusive distribution agreement?

An exclusive distribution agreement is formed when the supplier agrees to sell the contract goods only to the distributor with a certain agreed territory and agrees not to appoint other distributors or sell the goods directly to other customers within the territory. An exclusive distribution agreement helps secure a long- term distributor.

On the other hand, a non- exclusive distribution agreement is formed where the supplier has complete freedom to sell directly and to appoint other distributors within the territory. Within an non- exclusive distribution agreement a supplier can sell directly to end-users and appoint other distributors within a defined territory.

EU Competition Rules

It is important to note that these types of agreements remain legal mainly because the business agreement occurs between non competitors. However, they can become illegal when they begin to influence the market in ways that will create monopolies or diminish competition. In fact, if a distribution agreement includes a ‘hardcore restriction’ such as price fixing, limited production or the charging of different prices discriminately. This will always be considered to be illegal. It will therefore not benefit from the protections contained in the EU competition rules such as the vertical agreement block exemption. This exemption enables businesses to operate at different levels of the supply chain provided that the supplier’s market share is below 30% and the agreement does not contain specified hardcore restriction. Failure to comply with EU competition rules may result in the non-enforceability of the distribution agreement and the business may risk being fined up to 10% of their turnover.

3. What should be included in a distribution agreement?

A well written distribution agreement is important because it will reduce the risk of a future dispute. When preparing a distribution agreement the parties should focus on the following clauses:

  • Exclusive/non- exclusive: in an exclusive relationship the supplier needs to make sure that he/she not tied to an exclusive arrangement where little or no product is being sold. On the other hand, if the arrangement is a non- exclusive one the distributor must consider whether there is sufficient incentive to invest resources in distribution if the supplier has the ability to appoint additional distributors.

  • Territory: the distributor will need to look for a large territory to increase her potential to exploit the distribution of the product.

  • Product: the parties will need to decide on the products that will be offered by the supplier to the distributor.

  • Pricing: the supplier will need to discuss flexibility in amending the price should the manufacturing costs increase.

  • Liabilities: the parties will look to restrict their liabilities and cap liability at an agreed amount.

Other clauses to include:

1. marketing;

2. pricing;

3. passing of risk;

4. warranties;

5. Trademark;

6. confidentiality.

4. How will Brexit impact distribution agreements?

From 1 January 2021 the Competition and Markets Authority (CMA) in the UK will take over from the European Commission (EC) in enforcing competition law. The CMA will replace EU authorities as the central enforcer of competition law in the UK investigating anti-competitive agreements and any potential abuse of dominant position. Therefore, as most of the UK competition law come from EU regulations Brexit will likely impact how businesses can legally compete with one another. However, the majority of EU competition will be transferred into UK law hence the vertical agreement exception will still be used in UK law meaning that distribution agreements can continue to benefit from it.

How can Pure Business Law help?

We are specialist Distribution Agreement Solicitors based in Bedford and operating nationally. We draft Distribution Agreements, and we deal with the resolution of Distribution Agreement issues and disputes.

If you would like to discuss the preparation of a Distribution Agreement for your business, any issues or disputes concerning your Distribution Agreement, or anything raised in this article please contact us and speak with one of our solicitors. Pure Business Law is regulated by the Solicitors Regulation Authority and is a licensed member of the Law Society of England & Wales.

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