DISTRIBUTION CONTRACT “Relationship with the distributor, at least ten clauses”

Marcello Mantelli
Lawyer in Milan and Turin

To implement the company marketing plan and prevent the main commercial risks, the careful drafting and negotiation of the international distribution contract is essential. The relationship that is established between the parties in the context of distribution involves a considerable level of trust and investment on the part of both contractual partners.

The contract represents, therefore, a working tool that has the aim of obtaining an appropriate work of sales promotion and uniformity of the brand image of the manufacturer. It must also take into account and limit all major risks that could give rise to economic conflicts with the customer (e.g. for violations of exclusivity).

It seems superfluous to recall that it is not so much the title of the contract that identifies it as distribution, as its content. The contract can be set in an extended or synthetic form. It can be more or less favourable to one or the other party or balanced, depending on the contractual force of the party proposing it, which does not always depend on the higher turnover than that of the other.

In international contractual practice, for some decades now, an operating standard has established itself, that provides for a basic scheme in the context of a framework contract, to which the conditions governing individual sales between the parties are attached. Do not forget that the contract is also a mirror of the level of professionalism of the company and a means of communication to avoid misunderstandings.

Basic clauses

The framework contract normally contains the following clauses, which do not exhaust its variable configuration on a case-by-case basis, in the light of the economic interests pursued by the parties:

1) assignment to the distributor to promote the sales of contractual products or services, listed in an annex or identified by reference to a catalogue in force, in the agreed territory, to all customers of the territory or some categories of them;

2) indication of the legal status of the distributor as an entity acting in the name and on its own behalf with respect to the supplier;

3) organization of sales of contract products by the distributor, for example through a structure consisting of sub-distributors or intermediaries, who act under the exclusive responsibility of the concessionaire, but to the possible approval of the supplier. In addition to this, there is also advertising communication in the broader sense, which may include participation in trade fairs, events, media insertion with possible participation of the grantor;

4) commitment to comply with the general marketing guidelines of the grantor and to respect its corporate image, so as to ensure the uniformity of the network’s image in the market;

5) covenant of non-competition and exclusivity: these are typical clauses, one or the other or both, to be provided depending on the specific case. For example, under Italian law, these are not “automatically” provided for elements of the contract. They are intended to strengthen commercial loyalty between the parties and protect mutual investment. In fact, the non-competition covenant prohibits the distributor from operating for competitors of the grantor, while the exclusivity covenant prohibits the grantor from appointing other dealers in the territory.

Different covenants or exceptions to the general scope of both clauses are, of course, excepted, but the post-contractual covenant not to compete remains prohibited, unless it is limited to the premises where the buyer has operated during the contract, is essential to protect the know how transferred from the supplier to the buyer and is limited to one year starting from the expiration of the contract;

6) compliance clauses with European antitrust legislation, including a prohibition on the distributor, under certain conditions, to actively sell to customers located outside the territory. Also highlighted is the prohibition on the supplier to impose compulsory selling prices on the buyer. However, this is without prejudice to the possibility of setting maximum prices or recommending one, provided that they do not amount to a fixed or minimum price as a result of pressure or incentives from the supplier;

7) minimum business forecast: this is the distributor’s commitment to purchase a minimum quantity of products or services, or to send a certain amount of purchase orders (or to realize a minimum purchase turnover) in a given period (e.g. semester or year);

8) use and manner of use of the grantor’s trademarks, trade names and distinctive signs with prohibition of trademark registration, together with confidentiality obligations on secret information received during the course of the contract (business formulas, pricing policy, etc.);

9) conditions of products supply: here special consideration should be given to the volume of sales that can be met by the grantor in correlation with the risk of non-payment. Also to be evaluated is the credit rating of the customer, the consequent establishment of a commercial credit and the request for any bank guarantees or tout court payments through letters of credit against large volumes;

10) duration of the contract: indetermined term, determined term or determined term with periodic renewals in the absence of termination. This is a clause to be negotiated taking into consideration the mutual needs of the parties, which are, on the one hand, that of the concessionaire to amortize the investment and reap the benefits of his work, and, on the other hand, that of the grantor not to remain tied for a long time to a subject that may not meet their expectations.

Other clauses and conditions

In addition to these ten basic clauses, it is of fundamental importance to provide clauses relating to the applicable law and the method of dispute resolution, the latter useful as an extrema ratio to protect oneself against the risk of non-payment through a judge or arbitrator, on the basis of a careful choice.

The general conditions of sale must then be attached to the international distribution contract to regulate in detail the individual sales completed in execution of the distribution contract, which must be duly signed by the dealer.

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Marcello

Dear Aurelia, the information you have provided are not sufficient for an answer which is subject to a professional engagement. In any case, we should study the provisions of the contract and identify governing law of the contract.If it does not provide anything on governing law then conflict law shall apply (in the most part of the countries likely the governing law will be the law of the country where the agent is domiciled). best regards Marcello Mantelli

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Aurelia

I signed a contract with a fashion agency but there were no termination clauses in the contract and decided to withdraw it before one week after signature so sent them an email but after 14 days they sent me an email and asserted that because i didnt withdraw in legal deadlines i have to perform the contract and pay whole money.Noboday told me about any deadlines and nothing was in the contract!! Why did they claim such a thing?

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