Distribution agreement

A distributor buys your products and resells them in its own name, for its own account and at its own risk. It carries the credit risk on its customers, which is the commercial attraction, and it owns the customer relationship, which is the commercial cost. Because the distributor is not selling in your name, the Commercial Agents Regulations do not apply and there is no statutory compensation or indemnity when the arrangement ends. That is the main practical difference from an agency.

Exclusivity is allowed, within limits

The Vertical Agreements Block Exemption Order 2022 lets a supplier give a distributor an exclusive territory or an exclusive customer group. What it does not allow is a ban on passive selling, meaning responding to unsolicited orders from outside the territory, or a ban on selling online. Restrictions on active selling are permitted within the limits the Order sets. Clause 3 is drafted on that basis, and adding a prohibition on internet sales or on answering an unsolicited enquiry takes the agreement outside the exemption.

You cannot set the resale price

Fixing the price at which the distributor resells, or setting a minimum resale price, is resale price maintenance and is unlawful under Chapter I of the Competition Act 1998. It is a hardcore restriction, which means it is not saved by the block exemption and can attract a penalty of up to ten per cent of worldwide turnover, with the offending provision unenforceable. This template uses recommended prices and maximum prices, both of which are permitted, provided they do not operate as a fixed or minimum price in practice through pressure or incentives.

This is the point on which otherwise careful businesses get into trouble, usually through an email rather than a contract.

What the agreement settles

The territory and the exclusivity level, how orders are placed and accepted, delivery terms and when title and risk pass, minimum purchase commitments if any, marketing and use of the supplier's trade marks, product liability and recall, and what happens to stock on termination. The stock question is worth attention: a distributor left holding inventory it cannot sell is a distributor that will litigate.

Term and termination

Even without the agency Regulations, a long-standing distributor terminated abruptly may have arguments about reasonable notice, and the commercial cost of losing the route to market is often larger than the legal one. A defined term with a clear renewal mechanism is easier to manage than an open-ended arrangement nobody revisits.

Our commercial contract solicitors handle distribution arrangements including the competition law position, and our regulatory team on product compliance in the territory.