21 Questions and 4 Definitions You Need to Be Clear About in a Commercial Distribution Agreement

distribution-agreement

Are you a supplier or distributor needing a few pointers about distribution agreements?

In this piece I will look at some key areas to consider when having a distribution agreement drafted as supplier, or when you are a distributor thinking about taking on a new product line for distribution.

Definitions

The first essential part of your distribution agreement, or any well drafted agreement, is the definitions. Getting the necessary definitions correct from the outset will make the agreement easier to draft, and understand for both parties.

Critical definitions will be:
1. The products which will be the central focus of the distribution arrangement
2. The prices of those products
3. The term of the agreement
4. The territory to be covered by the agreement.

Questions/Issues to consider

Important questions to consider include:

  • Is the distributor to be appointed as an exclusive or non exclusive distributor in the territory?
  • You will need a clause setting out clearly that there will be no activities carried on outside the territory, if that is the agreement
  • It should be clearly stated that the distributor will carry on the business in his own name and not as an agent of the supplier
  • Will there be minimum orders to be placed? Will there be minimum orders for each product or range of products?
  • Will there be an exclusive purchase requirement, that is, is the distributor bound to buy all his products from you as supplier or is he free to shop around?
  • The conditions of sale from supplier to distributor will need to be clearly set out
  • Will sales be on no less favourable terms than sales to other distributors or will this be at the discretion of the supplier?
  • What are the terms in relation to price and payment, specifically will there be a discount for, say, early payment?
  • What are the methods of payment?
  • What are the payment/credit terms?
  • When will invoices issue?
  • There should be a “no deductions” clause also which will set out that no deductions or set off are permissible by the distributor
  • What liabilities has the supplier after sale to the distributor, if any?
  • There should be a clause dealing with trademarks and intellectual property of the supplier
  • How can the agreement be terminated? In what circumstances?
  • What are the consequences of termination?
  • A Force Majeure clause will also be required in any effective agreement
  • Who are notices to be addressed to and in what language?

Like any agreement, commercial or otherwise, its value will only be apparent when there is a dispute or threatened dispute.

So don’t cut corners when you need one drafted as supplier or need advice as a distributor before binding yourself legally.

Considering the above questions and definitions will set you on the right track, but this is not an exhaustive list.

Distribution Agreements and Agency Agreements-What You Really Need to Know

distribution-agreements

Distribution agreements, agency agreements and franchising agreements are three very common types of commercial agreement entered into by companies and individuals.

It is vitally important to recognise the differences between them.

All three agreements are, from a competition law perspective, known as vertical agreements.

When entering into these types of agreements the key considerations to be factored in include

  • Normal commercial considerations between the contracting parties
  • Competition law in terms of the restrictions placed on one of the parties by the agreement
  • Agency agreements need additional consideration as there is an EU Commercial Agents Directive and Commercial Agents Regulations to consider.

Elsewhere on our site you can read more about franchise agreements.

This piece will focus on distribution agreements and agency agreements.

The key difference between a distribution agreement and an agency agreement is that in a distribution agreement title to the goods passes from the supplier to the reseller. (In an agency agreement title does not pass)

Distribution agreements

Distribution agreements are generally for 5 years or less and are agreements between suppliers and resellers.

There are three types of distribution agreement:-

  1. Selective agreements
  2. Exclusive agreements
  3. Non-exclusive agreements.

Selective agreements

Selective agreements are where the supplier has applied some selective criteria in choosing a distributor. They are commonly used in the supply of luxury goods and allow the supplier have some control over how the goods are sold.

Exclusive agreements

Exclusive agreements are where the reseller has exclusive distribution rights in a geographical area and the supplier is restricted from supplying other distributors.

Non-exclusive agreements

Non-exclusive agreements arise where the supplier is not restricted from supplying other resellers.

Distribution agreements considerations

Some considerations to keep in mind when entering into a distribution agreement, apart from the normal commercial factors, include

  • The territory covered in the agreement
  • The use of the intellectual property rights of the supplier by the reseller
  • The terms and conditions concerning purchase and sale of the goods
  • The selection criteria in selective agreements together with any training/support to be given, any sales targets/criteria and the restriction on the distributor from supplying unauthorised distributors
  • The restrictions on the supplier from supplying other distributors in exclusive distribution agreements.

This is not an exhaustive list and if entering or negotiating a distribution agreement the normal commercial negotiating should take place to ensure that you get the best deal.

Agency Agreements

The Commercial Agents Regulations and Directive

Agency agreements are commercial agreements which see the agent sell goods or services on behalf of the principal.

Unlike a commercial distribution agreement, title to the goods does not move from the principal to the agent.

If you are considering entering into an agency agreement the key considerations will be under the heads of

  • Normal commercial principles and contract law
  • The Commercial Agents Directive and
  • Competition law.

Competition law

Competition law will only need to be carefully considered if the principal and agent are considered to be two separate “undertakings” and this will depend on the amount of risk borne by the agent.

Generally however, an agent is considered to be part of one undertaking with the principal; if this is the case then there should be no concerns in relation to the prohibition on anti-competitive agreements.

The Commercial Agents Directive

The Commercial Agents Directive (Council Directive 86/653/EEC) has been implemented in Ireland with the Commercial Agents Regulations of 1997 and 1994.

This law favours the agent to a large extent as it seeks to balance up the strength between the typically larger principal and more dependent and smaller agent.

This is given effect by imposing conditions in an agency agreement under three important headings:-

  1. How the agent is remunerated
  2. The notice required to terminate the agency agreement
  3. Any compensation to be paid to the agent for the termination of the agreement.

What is a commercial agent as defined by this legislation?

There are 3 broad criteria to be satisfied:-

  1. The agent must be self employed
  2. The agent must have authority to act on behalf of the principal
  3. The agent negotiates and concludes transactions on behalf of the principal.

It is important to note also that the Commercial Agents Regulations defines a commercial agent as someone selling goods, not services, on behalf of a principal.

Furthermore there are some important exclusions in the legislation as to who is a commercial agent, for example a partner in a partnership and an officer of a company who is authorized to enter agreements on behalf of the company.

In Ireland it is also necessary to have an agency agreement evidenced in writing to be covered by the Commercial Agents Regulations.

Remuneration of the Agent

The Commercial Agents Directive and Regulations contain some important provisions in respect of remuneration of the agent.

For example,  how the agent is to be remunerated where the agency agreement does not provide for this and the circumstances where the agent  is entitled to be paid after the termination of the agreement and requirements that the principal provide regular statements of the amount of commission due to the agent.

Termination of Agency agreement

The law in this area sets out

  • The necessary notice periods required before termination
  • Compensation for damage to be provided to the agent on the termination of the agreement
  • Compensation where the agent dies.

Summary

Clearly the Commercial Agents Directive and Regulations require careful consideration and legal advice prior to entering into such an agreement, either as principal or commercial agent.

In fact, any agreement which places obligations on you should be carefully considered by your solicitor or legal advisor.
By Terry Gorry
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