International distribution: main features (part 2)

Following our previous article, today we continue the analysis about international distribution contracts considering, in particular, the basic clauses provided in the contract.

The international distribution contract usually provides the following clauses which constitute the core of the contract itself in the international commercial practice:

– commitment of the distributor to promote sale of contractual products or services (all or part of them) borne by the distributor and in an established territory;

legal status of the distributor who acts in its own name and on its own (it is not an employee, nor an affiliate, nor a jont-venture etc.) and so it is fully independent;

organization of distributor’s sales of contractual products following ad ad hoc sale structure;

– commitment to follow grantor’s general directives on marketing and commitment to follow its brand image, so as not to affect its image on the market;

– prohibition, under certain conditions, of active sales outside the contractual territory by the distributor.

In practice, according to EU Regulation 330/2010, in order to guarantee the free movement of goods, the distributors must always be free to sell even outside their exclusive territory, provided that these are “passive sales”, i.e. they are not solicited/promoted by the distributor outside its territory: for example through the opening of delivery warehouses outside the exclusive territory. The passive sales cannot be prohibited by the grantor, while the active sales can, following precise conditions;

– commitment to buy an annual minimum of products (the so called “minimum purchase”):

This clause is of extreme importance, because it allows the grantor, in case of failure by the distributor to comply with the minimum business obligation, to terminate early the contract or to reduce the territory or to cancel the exclusivity. The clause has to be drafted carefully, by agreeing expressely and clearly the minimum business;

– non competition/exclusiveness: these are typical clauses, almost always provided, which have the main scope to reinforce the cooperation and the trust between the parties, by prohibiting each other sales in competition in the exclusive contractual territory (i.e. the grantor sales only through the distributor its own products in the exclusive territory, and the distributor cannot sale products from competitors of the grantor in that territory). The non-competition agreement must not last, following Reg. EU 330/2010, more than 5 years, therefore it is important to re-stipulate the entire contract and the related non-competition agreement within five years as of signature date of the contract;

– sales condition: purchase orders and the grantor’s capacity/supply conditions (if necessary, by establishing ceilings), prices and variations, payment methods and guarantees, including the retention of title, with reference to the grantor’s conditions of sale for regulating individual sales (for example, delivery according to Incoterms 2020 or successive updated revision, technical standards and labelling laws in force in the country of destination, warranty conditions, civil liability, force majeure, etc.) to be attached to the distribution contract duly signed by the distributor;

– distributor’s resale prices: on this point it should be noted that, pursuant to art. 4 of EU Regulation 330/2010, in commercial relations with distributors based in the European Union it is forbidden to impose compliance with resale prices;

– methods for using trademarks and distinctive signs of the grantor and prohibition of trademark registration and confidentiality obligations on mutually exchanged confidential information;

– contract duration: the distributor, having to invest for the promotion and organization of sales, will ask for a certain period of time to amortize the investment and reap the benefits of his work. It follows that, in most cases, he will require a fixed-term for the contract of two/three or five years, with automatic renewal, unless termination by a party.

It is therefore highly recommended to link this request to a minimum of annual purchase that is appropriate for the principal, so that it does not remain tied for a long period to a subject who buys unsatisfactory quantities.

Alternatively, it is always possible to agree on an indefinite duration of the contract, with freedom of the parties to withdraw by observing the withdrawal period specified in the contract;

– early termination/express termination clause: the clause in question allows a party to exit the contract with immediate effect before the normal contractual expiry date, in the presence of a serious breach of the contract, the so-called material breach, with indication in the clause of the related legal situations: for example in case of failure to reach the minimum business;

– applicable law and dispute resolution method: although neglected by the economic operator, these clauses are essential for the business in a preventive and deterrent key, to protect yourself from the request of paying unexpected sums, to protect yourself from the risk of non-payment – always in a preventive phase – and to quickly obtain a judicial or arbitral decision, depending on the choice made in the contract.

It is therefore extremely important to insert these clauses, after the evaluation of all legal, commercial and economic aspects (costs of the litigation method choosen).

The clauses that we have now listed and briefly outlined, constitute the basic clauses of the distribution/sales concession contract, but they do not exhaust the configuration – which is variable on a case by case basis – as it depends on the specific set of economic interests pursued by the parties and related to each commercial operation.

It is therefore necessary that, for each distribution relationship to be established, a careful commercial and legal analysis is carried out in order to operate safely and in such a way as to achieve the commercial objectives.

Marcello Mantelli
Avvocato in Milan and Turin

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