A distribution agreement is a contract between a supplier of products and a party that purchases and resells those products, known as a distributor. The distributor purchases the products at its own expense and risk and then sells them. Notably, Dutch law does not regulate distribution agreements, leaving the parties free to structure these relationships according to their preferences. Nevertheless, certain principles and considerations are essential for a fruitful partnership.
Content of the Distribution Agreement
An effectively drafted distribution agreement serves as a strategic tool to help suppliers expand their distribution networks, particularly in the European market. This agreement should comprehensively outline various elements to create a tailored and bespoke document. Essential aspects to be included are the specification of the products to be supplied and the definition of the terms of supply.
Negotiating the purchase price is a critical component of the distribution agreement. The difference between the purchase price and the selling price determines the distributor’s profit margin. While suppliers may attempt to impose fixed or minimum prices, these practices are not in compliance with competition laws and result in invalid agreements. However, suppliers may provide target or recommended prices to the distributor, although the distributor is not required to follow them. However, setting a maximum price is permissible, provided that consumers are not disadvantaged.
Suppliers may designate a single distributor for one or more countries. In such cases, the supplier agrees to supply exclusively to the designated distributor in that territory, while the distributor agrees to sell the products exclusively in that territory. However, the Distributor retains the right to supply customers outside its territory if orders are received from outside the territory, such as via the Internet. The supplier cannot prevent this, but can restrict the distributor from actively targeting another territory.
Competing Products and Advertising
It is advisable to include provisions regarding the sale of competing products by the distributor, both during and after the term of the distribution agreement. The distribution agreement should also outline methods for advertising the products. It is beneficial for the supplier to maintain control by requiring the distributor to prepare and discuss a marketing plan. This allows the supplier to maintain control over how the products are presented to the public. The agreement may also address the supplier’s contribution to the distributor’s marketing efforts.
Duration and Termination
The distributor benefits from a distribution agreement of a duration that allows it to recoup its investment. Suppliers may also prefer longer relationships, but often want some flexibility to terminate the agreement, especially if the distributor’s sales performance falls short of expectations. Therefore, an article dealing with the termination of the distribution agreement is necessary, as many disputes between distributors and suppliers involve the manner of termination.
At the outset of a distribution relationship, it is often difficult to determine the demand for products in a particular territory. As a result, distributors are typically reluctant to agree to minimum sales requirements. Instead, an alternative might be to offer the distributor a discount on the purchase price for a certain volume of product purchases to incentivize higher sales.
There are several issues not covered here, such as liability arrangements if either party fails to perform under the distribution agreement. It is also important to determine the applicable law in the contract, usually the law of the supplier’s country. The choice of court or arbitrator is important, especially when doing business outside the EU, as judgments from EU courts may not be enforceable in certain non-EU countries, such as the United States.
While Dutch law provides considerable flexibility in structuring distribution agreements, it is important to respect fundamental principles that cannot be overridden by contracts. Therefore, it is strongly recommended to consult legal experts when drafting a distribution agreement. What may initially appear to be a “distribution agreement” may actually be an “agency agreement. Drafting a carefully structured distribution agreement is key to establishing a solid foundation for a fruitful business relationship. Need assistance drafting or reviewing your distribution agreement? Or do you have other distribution agreement questions? Please do not hesitate to contact the lawyers of Valegis Advocaten’s corporate law team.