What to record in a distribution agreement

An international distributor is the link between a supplier in one country and customers in another country. As a local partner, the distributor helps a foreign supplier look for new customers in the local market. An entrepreneur in the Netherlands can be a supplier who delivers to distributors in other countries or can act as a distributor for foreign suppliers.

The purpose of a distribution agreement

A distributor buys goods or services from foreign suppliers at their own risk, with the goal of selling them locally. With a distribution agreement, the distributor agrees to a long-term business relationship with a foreign supplier. An agreement gives the distributor more certainty. For example, when the supplier is the only one supplying a particular product. And so the distributor has no other suppliers for the goods.

"Some suppliers also benefit from that same security", explains Sjaak van der Heul, attorney at Dirkzwager (in Dutch). “For example, if the distributor has a strong position, such as a large supermarket chain or an e-commerce company. In that case, you as a supplier located in the Netherlands are dependent on your foreign distributor. So, an agreement that binds the distributor to you benefits you.”

Negotiate agreements

The distributor and the supplier draw up the distribution agreement together. The distribution agreement can include subjects like:

1. Exclusivity

In an exclusivity agreement, the supplier assigns a geographic area or a certain group of customers exclusively to the distributor. Then the distributor is  the only party allowed to sell the products. “For example: distributors of computer chips, where one distributor is allowed to sell chips for use in tablets, and the other is allowed to sell them for use in mobile telephones.”

2. Dividing the market

A distributor and supplier may both offer products in the same market at the same time. For example: the distributor supplies local wholesalers and end users, while the supplier sells directly to government organisations. You can record agreements like this in the distribution agreement. “In this case, the agreement gives you a stronger position as a distributor. Because without an agreement, you cannot prevent a supplier from competing with you directly. With an agreement, you can.”

3. Setting the price

With a distribution agreement, you can set the purchase prices for products or groups of products, along with the discounts for the distributor. You can also include a price list in the agreement. The agreement often says that the supplier may change the prices at a certain moment.

Competition

The agreement may not include binding sale prices for the distributor. That means a distributor may offer discount prices for a product, for example. “This may be a different price from the one you recommend as a supplier. You may give recommended prices, but the distributor may choose a different price. You cannot require a resale price for the product, because that is in conflict with the competition regulations.” These are EU regulations that protect free competition.

Cartel prohibition

Making binding price agreements is an example of cartel formation. This is not allowed by Article 101 of the EU Treaty on the Functioning of the European Union. “But there are some exceptions. For example, when you as a supplier want to set up a marketing campaign for a specific period. Then you are allowed to make agreements for a discounted price with your distributor for a few weeks. Because if a distributor has a standard advertising campaign that says a product costs €10, then it is irritating if the distributor only charges €9.” 

4. The distributor’s tasks

A supplier aims to earn income in the foreign market together with the foreign distributor. So make agreements about what you expect from your distributor as a supplier. For example:

• The distrubutor keeps a minimum inventory.
• An overview of planned marketing activities, such as taking part in a trade fair or a minimum number of sales visits that a distributor must make.
• The distributor provides local service and warranties for products.
• Reporting on the activities completed per quarter. For example: income earned or offers waiting for approval.

5. The supplier’s tasks

A distributor will also expect the foreign supplier to do things to help the distributor, such as offering:

• General support, such as delivering samples, folders, advertising materials and helping at trade fairs.
• Training. Technical knowledge and marketing advice will help sell more products.
• Timely communication. If the supplier has problems with inventory or production, the distributor will want to know in time.

6. Applicable law

Suppliers and distributors usually agree which country’s law applies to their agreement. This is referred to as the ‘applicable law’. They can also agree on which court can decide on conflicts if they cannot reach an agreement. If you agree that Dutch law is the applicable law, then a Dutch court will deal with the case. If you do not include an applicable law in the contract, then in the EU, the law for the distributor’s country is the applicable law. This is stated in Article 4 of EU regulation 593/2008.

“If you do business outside the EU, you can ask how that country’s law applies if you do not include an applicable law in your contract. Or you can include which country’s law applies in the contract itself. I always advise my clients to make Dutch law the applicable law, and to authorise Dutch courts to resolve disputes”, explains Van der Heul.

7. Contract term

The term of the contract is also one of the agreements you should make. This can be for a limited time, or an unlimited time. A fixed-term contract ends after the agreed time. For example, after 2 or 3 years. “In Dutch law, if a contract is for an unlimited term, then in principle you can end the contract at any time.”

Sometimes you agree on a period of time that you use to cancel a contract. This is called the notification period. “If you do not include a notification period in your contract, then the period depends on the length of your business relationship. The length of the notification period often depends in part on the length of your relationship.”

Imperative law

In principle, the parties have contractual freedom. That means the distribution agreement can include any terms, except for terms prohibited by law. Both the supplier and the distributor must also comply with imperative law (dwingend recht). These are laws that the contract parties may not deviate from to the disadvantage of one of the parties. “For example, in some countries imperative law requires the supplier to pay distributors a goodwill compensation when they end the contract. You cannot put in the contract that you will not pay this compensation."”

In the Netherlands, this imperative law for goodwill compensation applies to contracts like franchise contracts. “In a franchise, the franchiser is usually the supplier and the franchisee is the distributor. When you end that relationship, the franchisee can demand a goodwill compensation.” In the Netherlands, this imperative law is part of the Franchise Act (in Dutch). Imperative law often benefits the distributor over the supplier.

Using a standard contract

You can also choose to use a standard distribution agreement. For example, those offered by the International Chamber of Commerce (ICC)or the Association of Dutch Trade Agents and Importers (VNHI). Van der Heul thinks these contracts are a good place to start. “As an entrepreneur just starting out, weigh the costs and the benefits before you ask an attorney to draw up a thick contract for you. Especially if Dutch law is the applicable law for your contract. The Dutch Civil Code (Burgelijk Wetboek, in Dutch) already includes a lot of rights and obligations that generally find a good balance between the interests of the supplier and the distributor.”

Large companies

Large parties usually have their own contracts and suggest using them first. “That is only logical”, explains Van der Heul. “Because a big supplier usually has several distributors. If a supplier has to use different contracts, it can become hard to keep track of them all. But the same also applies to large distributors. A large distribution chain will therefore usually use its own contracts.”

Verbal agreement

Sometimes a distribution agreement arises without the parties writing anything down. "Suppose you, as a distributor, buy products from the same supplier with the same conditions for a long time. Then sometimes a distribution agreement arises automatically. Even if you don't put anything on paper. But without a paper contract, it is more difficult to explain what you expect from each other. In case of problems, it is harder to prove in court what agreements you have with each other. Often, things go well and you come to an agreement. You have a contract ready for when things go wrong."