The provisions governing the collaboration between a supplier and a distributor are contained in an agreement, and the EDA is an example of such an agreement.
Exclusive Distribution Agreement guide
The Exclusive Distribution Agreement consists of a number of clauses. The most complicated of these are explained here.
A distribution agreement generally consists of two parts:
- One part lays down the conditions governing the distributor's right to resell the supplier's products.
- The second part contains the conditions governing the distributor's purchase of products from the supplier.
The EDA is structured in such a way that the conditions on which the distributor is entitled to resell the supplier's products are set out in the EDA, while the conditions governing the distributor's purchases of products from the supplier are regulated by the supplier's General Terms and Conditions of Sale (GTCS).
2 (a) Appointment
You must decide whether the distributor should be granted an exclusive or non-exclusive right to sell your products. If the distributor is to sell your products on an exclusive basis, it means that you will not be able to sell the products within the agreed geographical area except via the distributor.
Granting the distributor a non-exclusive right to sell your products means that you are free to appoint other agents who may sell your products within the agreed geographical area. Also, you are free to sell your products directly to customers within this area.
Right of resale
Moreover, you must decide:
- which products the distributor should be entitled to sell;
- which geographical area should be comprised by this right of distribution;
- whether the distributor should sell your products to end-users only or also (or only) to subdistributors who then resell the products;
- whether the distributor should sell your products to certain customer segments only or for particular applications only.
2 (b) – Restrictions on distributor’s activities
The opposite of granting the distributor a right to distribute your products within a particular geographical area is precluding the distributor from actively seeking out customers outside such an area.
You may have appointed other distributors within other geographical areas, and all distributors will expect to have 'their' geographical area to themselves.
Under this item you must decide whether your distributor should accept an anti-competition clause stipulating that the distributor must not manufacture, market or sell competing products during the term of the EDA.
Anti-competition clauses are generally legal, but national law may impose certain restrictions on their contents, for example as regards the duration and geographical applicability of the clause.
2 (c) Restrictions on supplier’s activities
This provision stipulates that once you have granted the distributor an exclusive right to sell your products within a certain geographical area, then you may not yourself or throughout others actively seek out customers within the distributor's geographical area, thus exposing the distributor to competition.
If you enter into an EDA with other distributors within other geographical areas, you must ensure that each individual distributor undertakes an obligation corresponding to Clause 2 (b). Otherwise, you risk breach of the agreements with your exclusive distributors.
2 (d) Reservation of rights by supplier
In some lines of business, there may be a need for suppliers to reserve the right to sell their own products to certain customers or certain customer segments.
This could apply in the case of global chains which are best served centrally by the supplier himself.
Some suppliers decide to agree with their distributors that if they sell products to such customers or customer segments within the distributor's geographical area, then the distributors will receive some of the sales income, possibly in return for carrying out technical after-sales service on the products.
The provisions mean that you grant the distributor the right to use your trademarks in the distributor's marketing, sale or servicing of your products within the agreed geographical area. It is important that you ensure that your distributors do not register the trademarks which you use in respect of your products, and not as domain names either.
You can keep an eye on your distributors' activities – and those of others – by commissioning a trademark agency to monitor your trademarks. If anybody attempts to register any trademarks being monitored, you will automatically be notified and will be able to take immediate action.
Before it is too late
Often you do not realise that a distributor has registered your trademark until your collaboration is terminated. This may give rise to problems for your continued activities in the country in which the trademark has been registered. Sometimes a distributor will offer to transfer the trademark to the supplier, but in return for the payment of a substantial sum of money.
You can always decline such an offer, but often the prospect of a long court case on the right to use the trademark is enough for suppliers to simply pay up.
4 Distributor’s obligations
These provisions are examples of the obligations which your distributor should undertake, but other obligations may be relevant.
Minimum purchase quantities
As regards Clause 4 (h), the purpose of the provision is to ensure that your distributor devotes reasonable efforts to selling your products. If your distributor does not purchase the minimum quantities agreed per calendar year, you can cancel the EDA, cf. Clause 9 (c) (iii).
Binding resale prices
Clause 4 (i) has been included to remind you that the fixing of binding resale prices which a distributor must follow when distributing a supplier's products is illegal and in violation of EU competition law. On the other hand, you are free to fix recommended resale prices, but it must be up to the distributor whether he wants to follow these or not.
5 Supplier’s obligations
These provisions are examples of the obligations which you can or should undertake in relation to your distributor in order for your distributor to be able to fulfil his obligations, but other obligations may be relevant.
It is a good idea never to undertake more obligations than what your organisation can actually handle. You may have a vision of the ideal distribution of your products, but it is generally a good idea to do things in stages and develop the EDA in step with the development of your business.
As regards this provision, please refer to the guidelines on the Mutual Confidentiality Agreement.
9 (a) Term
When entering into an EDA with a distributor, the distributor will expect to be able to act as your distributor for a certain minimum period, for example three years. If the distributor is not guaranteed a certain minimum period, there is no incentive for him to invest in the distribution of your products as he never knows when the agreement may be terminated.
And from your point of view, a very short minimum period may result in a poorer performance on the part of the distributor than what you could otherwise expect.
It is therefore important to think carefully about how much time your distributor will need to cultivate the market and to generate a reasonable level of earnings, and to adjust Clause 9 (a) accordingly.
9 (c) Termination for cause
This provision mentions a number of examples of situations where you are entitled to terminate the EDA at short notice. Other situations may be relevant.
If you have first and foremost chosen a company as your distributor because of the personal qualities of the owner, manager or other employees, it may be a good idea to write in the EDA that you are entitled to cancel the EDA if the person(s) in question resign as owners or employees, fall ill or die.
In some situations, it may also be a good idea to agree that you are entitled to cancel the EDA if the company which you have chosen as your distributor is transferred to new owners or is taken over by, for example, one of your competitors.
9 (d) No compensation
Under the laws of some countries, a distributor may be entitled to compensation for the investments etc. which he has made, and the customer base (goodwill) which he has built in connection with the marketing and sale of the supplier's products within the agreed geographical area.
Depending on the circumstances, the compensation may be quite substantial, and it is therefore a good idea to always ensure that the issue is addressed in the EDA.
The specific wording assumes that no compensation will be paid to the distributor, but depending on the circumstances, it may be a good idea to agree that the distributor is entitled to some sort of compensation upon termination of the collaboration.
This may work as an incentive for him to make the investments etc. which are desirable or necessary to ensure the optimum promotion of your products.
10 - Sell-off period; repurchase of inventory
In the EDA, it is important to decide what should happen with the products which the distributor has in stock at the time of the cessation of the collaboration.
A frequently used model is for the distributor to be allowed to sell the products after the termination of the agreement, but on the terms and conditions set out in the EDA.
Buying the products
However, this is not always the best solution. If the distributor has been fired and is unhappy about it, he can use his 'sell-off period' to make life difficult for the distributor who is taking over. The EDA always allows the supplier to demand to repurchase the products as an alternative to the distributor's 'sell-off period'.
15 – Governing law and dispute resolution
What rules are relevant in relation to the EDA may vary from country to country. If you enter into an EDA with a foreign partner, it is therefore a good idea to ensure that it is valid under and complies with the governing law agreed, and that the EDA is enforceable vis-à-vis your partner, if necessary.
And please note that, depending on the circumstances, a delivery agreement may violate national or EU competition law if it contains provisions restricting competition.
Arbitration may be used as an alternative to national courts of law, and if the parties want to use arbitration proceedings, Clause 15 must be amended accordingly.