Distribution Agreement Legal Issues

by · April 8, 2021

Most distribution agreements involving experienced dealers and manufacturers allow termination for reasons and conveniences (or not at all). Less experienced partners sometimes try to allow the dismissal of a limited number of specific cases. Termination for reasons is sometimes simple and undisputed, such as when a partner declares bankruptcy. However, partners sometimes disagree on the presence of the cause. Partners often disagree on the responsibility of the cause. You must ensure that your sales contract advances in your legal obligations as a manufacturer in accordance with the ACL. Distributors, agents, resellers and OEM partners all have the same commercial function of selling goods to the end user. Thus, while there are significant differences between the statuses of each of these players, this article below collectively treats all of them as “distributors”. Limit liability limitation: in most jurisdictions, the manufacturer is responsible for the damage caused by the use of the products. Some agreements try to transfer that responsibility to the distributor, but if they are tested by the courts, they probably will not hold. Therefore, the right way to resolve the liability risk is to formulate an effective compensation mechanism that limits the extent of your liability. Such a mechanism should limit your liability in terms of both amount and time and be supported by appropriate insurance coverage. Distribution agreements are fairly flexible documents and the following clauses are not exhaustive.

However, when entering into distribution agreements, parties often have to take competition rules into account, as they often wish to include such provisions and safeguards in agreements. This can be problematic from a competitive point of view and some issues can be a real violation of the relevant legislation. We have looked at this in more detail below. Distributor franchises may be exclusive, where there will be no other franchised distributor in the territory; or not exclusively if the new distributor could be one of the distributors of several franchisees in the territory. Distributors sometimes use exclusive territory to argue that, without an exclusive area, the distributor is not encouraged to provide adequate resources to the producer to develop sales. As soon as a vendor accepts an exclusive domain, it loses the ability to franchise an additional distributor for a certain period of time. The allocation of an exclusive distribution in an area is an unnecessary leap of confidence on the part of the supplier. An alternative to the allocation of exclusive territory is to design the distribution agreement so that the distributor is not exclusive, but is only a distributor.

An oral agreement would indicate that if a supplier`s objectives were met, no additional distributors would be allowed into the non-exclusive territory.

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