Main idea: What does a distributor do? It buys goods from a supplier and sells them (for its own risk and account) to its customers in a certain territory, market segment or customer channel. Its customers may be companies who use the goods in their own products, and they may also be retailers (e.g. shopping malls, supermarkets).
The supplier sells on the terms and conditions of the international distribution of goods contract, and the distributor resells to its customers or to consumers on the basis of – in principle – the general terms and conditions that should be attached to the distribution contract (listed in Schedule 4), applicable by virtue of Article 2.5.
If there is a gap with the terms and conditions invoked by the distributor, this is at the risk of the distributor or, if the supplier is an original equipment manufacturer (OEM) the reputation of the supplier is at risk).
Exclusive distributorship mitigated. If the distributor persists in becoming the exclusive distributor and the supplier nonetheless wishes to undertake independent sales activities, the parties might compromise on a commission to be paid by the supplier to the distributor on all net sales realised by the supplier in that territory (see Article 1.4 in the Model Contract).
Framework-character and ordering. A distribution agreement provides a structural framework for ordering and delivering the goods under contract to the distributor. As in the long-term supply agreement, actual deliveries are subject to a purchase order that must be accepted by the supplier. This mechanism is meant to ensure that the distributor is firm in its wish to purchase a certain quantity and quality of goods and that the supplier has received the order; it also stipulates the moment in time as of which both parties are bound to a single delivery of goods. The (software) accounting and enterprise resource planning (ERP) systems work this way.
Forecasting. Especially in cases involving complex products, a supplier needs to purchase raw materials and components. Also, the manufacturing of a certain product may depend on the availability of (fine-tuned) production lines. For those purposes, to optimise the production process for the supplier (and allow it to acquire such raw materials or components at a discount), the ITC Model Contract contains a so-called ‘forecasting mechanism’. For a lawyer, a forecasting mechanism is a strange animal: every month, quarter or year, the customer is requested to submit a good faith estimate of its product requirement for the forthcoming periods, without being bound to actually purchase the estimated volume.
Inventory management and discontinuation of products. The advantage of a forecasting mechanism is that it enhances a supplier’s ability to improve the product lead time – the time it requires between receipt of a purchase order and the actual delivery of the ordered goods. Although reflected weakly, the ITC Model Contract’s Article 2.9 provides that the supplier will use its commercially reasonable endeavours to meet its obligations (expeditiously). The same Article provides for a discontinuation of goods: technological developments, decreasing order volumes or other efficiency-decreasing factors may force a supplier to stop supplying a product. In such cases, the supplier must give written notice (allowing the customer to submit an ‘end-of-life purchase order’).
Competition law restraints. A supplier or manufacturer should not set the resale prices charged by the distributor. However, it may be possible to give non-binding price recommendations for the resale prices of branded products, if no direct or indirect pressure is exercised and no incentive is offered to enforce these recommendations, and provided that there is no market dominance. Similarly, the supplier may not impose maximum resale prices and should mark all statements regarding resale prices as ‘recommended resale prices’.
Web shops and internet-sales. The increasing importance of electronic commerce is a further aspect of distribution that needs to be dealt with in the contract.
What sales activities? A supplier will often wish to ascertain that sales activities undertaken by a distributor correspond to a certain extent to those undertaken elsewhere for the same brand and goods. It may be important to be specific about the particular sales efforts, the dissemination of advertisement materials, and provision of after-sales services, because these can be important aspects affecting the customer’s and end-users’ perception of the goods. In the ITC Model, Article 7 deals with the central issue of how the goods are to be distributed and what level of effort will be required. Then Article 8 specifies the support and training to be given by the supplier.
Intellectual property rights. Frequently the goods to be distributed will be protected by various forms of intellectual property rights, particularly trademarks, that the distributor will need to use during marketing and distribution. These IP rights are dealt with in Article 9 of the ITC Model.
Miscellaneous clauses. The remaining provisions of the distribution contract are similar to those given in the ITC Model international long-term supply agreement, except for Article 13. As you will see, Article 13 in the distribution Model Contract focuses on the consequences of termination, in terms of the repurchase of stock and related matters.