Getting Product to Market - Distributors

Posted on: 23/03/2022

Category: For your business

This is Part 2 of the series of articles exploring how businesses can maximise their sales of products (whether goods or services) to customers and looks into the appointment of distributors.

Distributors are not concerned with the transport of products as their principle business (such as a transport and logistics set ups) but the actual sale of the products.

Distributors may be appointed within the UK or for an overseas presence where knowledge of local law, custom and practice and contacts can be a significant advantage.

Unlike an agent, a distributor acts on its own behalf. The manufacturer or supplier sells its products to the distributor who then sells the products to customers, adding a margin. The supplier has less control over the distributor, which can be a disadvantage. Safeguarding reputation and how the product is seen in the market, is to some extent outside of the supplier’s control. However, in using a distributor, the supplier also passes on a large amount of risk to the distributor and gains local knowledge.

A supplier and distributor arrangement is heavily governed by the specific, sophisticated contract agreed between them. It is governed also by competition law principles and needs to be properly drafted to ensure risk and liability is fairly and correctly apportioned and the commercial terms are properly recorded in accordance with the law. There may well be foreign law or EU law implications if the products are sold outside the UK and local legal advice is usually recommended.

When drafting a Distribution Agreement there are many factors to consider. These include:

• Is the appointment exclusive, non-exclusive or a sole appointment for the territory? Can the supplier also sell in the territory or appoint others to do so?
• Does the distributor have minimum purchase obligations and the benefit of a most favoured customer clause where they can benefit from favourable prices and supply terms offered to others.
• Is the distributor to be restricted from selling competing products or selling outside their territory? Such provisions need careful thought due to competition law considerations.
• Forecasting, supply, delivery and stocking of product all need to be dealt with to ensure continuity of supply and maximum possible sales.
• Product liability and recall is a risk that needs to be covered. If something goes wrong and is a manufacturing fault the distributor needs protecting.
• Branding, reputation, knowhow and Intellectual Property protection will be key issues for the supplier.
• In long term agreements, often around 5 years, pricing will needs to allow for movement either way according to increases or reductions in costs of either party.
• Termination provisions also need to be thought through in case either party underperform or the arrangement is not working.
• Law of the agreement can also be important as in a dispute being governed by non-English legal principles is expensive.

These are just a few of the considerations for what is often a complex and weighty contract which is necessary to make sure that both parties are properly protected.