Act in haste, repent at leisure

Why UK distributors need to make sure they can get an agreement that works for them.

At the outset of any distribution relationship, an overseas supplier and a UK distributor are often keen to get through the formalities of recording their agreement as quickly as possible and on to the business of building a market for the products in the allocated territory. 

At this stage of the relationship, there tends to be plenty of goodwill between the parties and a tendency (often by the distributor) not to want to rock the boat too much.

 In some countries distributors do have clear rights on termination which are comparable to those which commercial agents enjoy (such as a right to a post-termination ‘compensation’ payment), but this is not the case in the UK. 

As a result, if a UK-based distributor ends up in a dispute with its supplier, the starting point (and often the end point) for any legal analysis of the distributor’s rights will be the wording of the distribution agreement itself – and it will be to this agreement that the limited case law which may assist distributors will be applied.

Negotiating an agreement which works for you is therefore more important for distributors than it is for commercial agents.

Set out below are some key aspects of the distribution agreement on which the distributor should focus:

1. Exclusive, sole or non-exclusive – The wording of the agreement must accurately reflect what has been discussed between the parties.  If the distributor considers itself to be the only party with the right to sell the products to retailers in the territory, then the agreement should state that the distributor is an exclusive distributor.  The supplier can still reserve certain channels (for example DTC) or key retail accounts to itself.  The key for both parties is that the distribution agreement is clear as to what rights are being granted, and what is being kept back for the supplier.
2. Exclusion and limitation of liability clauses – The most likely damage that a distributor will suffer if the supplier breaches the distribution agreement (such as by terminating it early in breach of contract) is loss of profit.  Despite this, many distributors enter into distribution agreements which state that the supplier is not responsible to the distributor for the distributor’s loss of profit.  In some circumstances, it may be possible for a distributor to challenge such a clause, but in other circumstances it will not.  You do not want to be in a situation where you have to challenge an exclusion clause after it has been agreed, as it will add time, expense and hassle to any claim you wish to bring against the supplier.
3. Terms to protect the distributor / express duty of good faith – Most distributors will be presented with an agreement which has been prepared by the supplier and which is favours the supplier.  Distributors should negotiate to try to get to a position where the agreement is more balanced.  One way of achieving this might be to propose that the parties agree to an express duty of good faith in relation to their performance of the agreement.  If drafted properly, such a clause is likely to be of benefit to the  distributor. 
4. Practical points – Last but not least, does the agreement work for the distributor from a practical perspective?  Is the distributor adequately protected from product liability claims in relation to the products, or claims by a third party that the supplier’s products infringe the intellectual property rights of that third party?  Also what rights does the distributor have to sell the stock which it holds when the agreement comes to an end? To answer these question, the supplier’s terms and conditions of sale will also need to be considered by the distributor, as these will govern the terms applicable to each purchase of the products. 

Take home point

Distributors should take the time to ensure that the agreement works for them.  A well-drafted agreement can be a shield against future disputes with the supplier, as well as a sword if any disputes which do arise cannot be resolved.