As a starting point, a distribution agreement can be defined as a contract between a supplier and a reseller. Distribution agreements range from straightforward to exhaustive depending on whether they include a national/international territory, set out exclusive sales/supply conditions, provide for selective or non-selective distribution criteria, include online sales or only brick and mortar sales, etc.
Two main categories can be distinguished:
- distribution agreements signed with a distributor operating in its name and on its behalf; some of the best-known examples are exclusive distribution agreements (the supplier agrees not to appoint any third party to sell its goods in the territory allocated to the distributor nor to sell its goods directly to customers in the territory) and selective distribution agreements (supplier is entitled to appoint particular distributors to its specific criteria); they may be part of a franchise agreement (but not necessarily);
- distribution agreements signed with a distributor not acting in its name and on its behalf such as the agency agreement; the agent may be in charge of identifying, signing and motivating distributors.
Distribution agreements aim at granting a certain level of flexibility to the distributor, who is paid through the profit it generates from reselling the products it acquires from the supplier. Under this contract, the supplier no longer manages the contractual relations with the final customers and partially loses control over its commercial strategy (for example, it cannot impose resale prices on its distributor as this would infringe competition law rules). In return, the distributor bears a large degree of risk associated with products. Moreover, it cannot receive compensation in the event of termination of the contract and can only claim damages in the event of wrongful termination.
In order to guarantee the specific undertakings under the distribution agreement, the parties must:
- define conditions of sale, by referring to the general terms and conditions of sale of the supplier, and more particularly delivery and payment conditions, passing of title to the goods and limitation of liability;
- define the consequences of termination;
- modulate the degree of control that the supplier has over all the intellectual property rights in the products.
Unlike the distribution agreement, the commercial agent agreement allows the supplier to retain control over its commercial policy, particularly in terms of pricing and marketing methods. The commercial agent, compensated by the payment of a commission, is not, unlike the distributor, the owner of the products sold and does not bear the risks associated with goods (solvency, liability, etc.).
The law of Hong Kong does not have a legal framework, except in relation to mercantile agents, to protect the interests of commercial agents. Agency agreements are governed by common law principles of equity and contract which set out the rights, duties and responsibilities of the commercial agent and the principal. Due to the absence of legal framework, the parties must define their relationship themselves and must agree contractually on the terms of the contract and notably:
- define the method of calculation and conditions of payment of the agent’s commissions;
- define if they agree to a period of notice in relation to termination;
- define if the commercial agent is entitled to compensation in the event of termination of the contract.
Despite their differences, distribution and commercial agent agreements can contain similar provisions and in particular the following clauses:
- obligations of parties (principal, commercial agent, supplier, distributor);
- advertising and promotion;
- governing law;
- commencement, duration and termination;
- non-compete obligations (or not);
- exclusivity (or not).
HOW CAN WE HELP?
Over years of practice in Hong Kong, we have assisted clients’ regional headquarters in the review of their standard contracts (distribution agreements and commercial agent agreements).
Our ability to take an interest in our clients’ business line and understand their issues, coupled with our methodological tools, allows us to efficiently gather all the information that clients provide us to offer a tailor-made contractual solution and more particularly:
- inform our clients of the current legal framework;
- discuss with our clients of key aspects of the contract before drafting it and determine the key clauses to be included in the contract;
- draft distribution agreements and commercial agent agreements that protect the interests of our client by complying with the formalism specific to each contract.
Fixed fees may be agreed for the drafting of the templates referred to above. The review and amendment of existing standard documents will usually be invoiced based on hourly rates, unless the scope of the review is clearly defined. Negotiations or support for negotiations is invoiced based on hourly rates.