Currently the ways of access foreign markets are very varied.
It does not require a very high investment of money or to own large infrastructures to sell beyond our borders thanks to different types of contracts, agreements and new models that democratize internationalization.
A very useful legal mechanism for those SMEs that want to internationalize is the international distribution contract.
What is the international distribution contract
El international distribution contract It is an agreement by which a company (the supplier) grants to another (the distributor) the right to market its products in a foreign market. In practice, this usually involves the distributor purchasing the products and reselling them in its assigned country or territory.
object lesson
Imagine that a Spanish drill manufacturing company wants to sell in Morocco.
Instead of opening its own stores, it opted to sign an international distribution contract with a Moroccan company that already has a sales network.
In this way:
- Enter a new market more quickly.
- Reduces initial implementation costs.
- Take advantage of the distributor's local knowledge.
This model is especially useful for companies with limited resources seeking expand internationally without taking major risks nor high initial investments.
Who is usually the supplier?
In most cases, the supplier is also the manufacturer of the products, although it may also be an authorized intermediary.
Is this contract regulated?
The international distribution contract does not have a unified international regulation. Its content depends on:
- From what was agreed between the parties (autonomy of the will).
- From the legislation of the applicable country.
- In some cases, the competition law if there is a conflict.
Despite this lack of regulatory uniformity, it is one of the most commonly used instruments in international trade for its flexibility and effectiveness.
Types of international distribution contracts: exclusive and selective
In international trade, distribution contracts can take different forms.
The two most used models are:
- El exclusive distribution contract
- El selective distribution contract
Below, we analyze each one in detail, including key legal aspects for drafting them.
Exclusive distribution agreement: what does it entail?
El exclusive distribution contract establishes that the supplier undertakes to sell its products only to a specific distributor within a specific geographical area.
In return, the distributor:
- You are required not to purchase similar products from other suppliers..
- In some cases, the supplier It also agrees not to sell its own products directly. in that same territory.
When is this contract legal under EU law?
EU legislation does not prohibit exclusive distribution contracts, provided they meet certain requirements:
- The distributor network must be based on objective qualitative criteria.
- These criteria must refer to the technical or commercial suitability of the distributor, such as experience, training, structure or logistical capacity.
- Arbitrary or discriminatory criteria cannot be established.
What is a selective distribution contract?
El selective distribution contract allows the supplier to sell its products to various distributors, but with one condition: Only those who meet certain objective criteria established by the provider will be able to access this network..
What does EU regulation say?
This type of contract is regulated in the Regulation (CE) 2790/1999, article 1.d), which defines:
“A selective distribution system shall mean a distribution system whereby the supplier undertakes to sell the contractual goods or services, directly or indirectly, only to distributors selected on the basis of specific criteria, and the distributors undertake not to sell such goods or services to unauthorized agents.”
What does this definition imply?
- The supplier choose authorized dealers According to previously defined criteria, such as experience, technical qualifications, logistical capacity or strategic location.
- Selected distributors They cannot sell to unauthorized third parties.
- Not just any company can become a distributor: it is a controlled and closed network.
This model is less restrictive than the exclusive distribution contract, but still grants the supplier a high level of control on how and who markets their products.
Advantages and disadvantages of exclusive vs. selective contracts
When choosing between exclusivity or selective distribution, it is important to consider the following aspects:
| Appearance | Exclusive distribution | Selective distribution |
|---|---|---|
| Number of distributors | Only one per zone | Several selected |
| Brand control | Very high | High |
| Expansion agility | Slower | Faster |
| Logistical risks | Older people (bottleneck) | Minors |
| Possibility of close feedback | High | High average |
| Flexibility for the supplier | Minor | Greater |
Common clauses
As we have already explained at the beginning of the article, there is no uniform international legislation that regulates this type of contract.
However, There are certain clauses that are usually included in it and we must take them into account because adding them can save us from more than one problem in the future.
The new options are the following:
- Territory, products and exclusivity: the parties agree on what products they are going to distribute, in what geographical space and if there will be exclusivity in distribution.
- Supply conditions: the circumstances under which the supply will be carried out, i.e. the “how”, are agreed. Information on payment and product prices is also often included.
- Minimum number of sales: The minimum number of sales that the distributor must achieve during a certain period of time is agreed upon.
- Confidentiality information: It is common to agree confidentiality clauses on certain information derived from the contractual relationship.
- List of situations in which you can terminate the contract.
- Client Compensation: the parties agree to agree on compensation for clientele if one of them terminates the contract without justified cause.
- Obligation of stock: the distributor's obligation to have a certain quantity of the supplier's product stored is agreed.
- After-sales service obligation: The distributor undertakes to offer after-sales service to customers after the product has been sold. It is a very common clause for car dealers, who sell vehicles and offer their customers after-sales workshop service.
- Jurisdictional submission: It is agreed which will be the jurisdictional body that will hear legal disputes that may arise from the contractual relationship between the parties.
As we have mentioned previously, there is currently no uniform global regulation for the international distribution contract.
However, in certain countries there is national regulation.
Exclusive distribution contracts carried out in countries of the European Union must respect the Commission Regulation (EEC) No 1983/83 of 22 June 1983 on certain categories of exclusive distribution agreements.
This Regulation considers void those international distribution contracts that impose the prices of the future resale of the products..
Likewise, those contracts in which commercial conditions are opaque and markets or territories are shared between competing companies.
Differences between the distribution contract and the agency contract
It is common to confuse the Agency agreement and the international distribution contract. Indeed, they have many similarities but also differences.
In the agency contract, The agent acts on behalf of another person and, unless otherwise agreed, without assuming the risk and fortune of the operations..
However, In the distribution contract, the distributor acts on his own behalf and is actually a buyer with respect to the manufacturer..
In fact, in Spain the Supreme Court has already ruled on their differences in the rulings of July 26, 2000 and February 5, 2004:
"Just as the purpose of the agency contract is to promote acts or commercial operations on behalf of the independent agent or intermediary, in the concession this purpose is limited to the resale or distribution of the grantor's own products, and generally, with an exclusivity agreement - positive and negative -: only the concessionaire sells and no one else sells in its area."
Conclusions
The distribution contract is a very useful figure for internationalize our product because of the ease it offers us to distribute it in new markets.
However, we must carefully study whether or not it is worthwhile to establish selective or exclusive distribution because that will condition the contract until its termination.
At RRYP, we are expert international trade lawyers and we want to learn about your company and your needs to find the best contract that suits you. Contact us.
RRYP Global, lawyers specializing in international commercial law.
