Switzerland Update: The distribution agreement – the core of the cooperation between supplier and dealer

In today’s globalized world, it is common for companies to sell their products abroad. If a company wants to do this, it has to decide how it wants to organize sales. They often work with independent dealers who sell the products in their own name and on their own account in a certain territory.

The manufacturer or supplier thus transfers the sales risk to the independent dealer. At the same time, the supplier can integrate the independent dealer into the sales structure by means of a suitable contract to the extent that is desirable for the supplier.

Main elements of the distribution agreement

The core of the cooperation between the supplier and the independent dealer is the distribution agreement, by which the manufacturer or supplier grants a dealer the right to advertise, distribute and sell the goods of the manufacturer or supplier in a certain territory.

Essentially, distribution agreements consist of two elements:

1. A long-term contractual relationship that regulates the rights and obligations of the supplier and the dealer. These include, in particular:
   • Supplier’s Commitment to Sell and Retailer’s Obligation to Buy
   • Sales promotion measures of the dealer
   • Retailer’s sales targets and minimum purchases
   • Minimum expenditure of the retailer on advertising and any cost contribution of the supplier
   • Retailer’s reporting obligations on sales figures, stock information and advertising expenditure
   • Quality standards for transport, warehousing and traceability of products
   • Training by the supplier
   • Recalls of goods
   • Use of Supplier’s Trademark Rights
   • Limitation of Supplier’s Liability
   • Termination provisions and the consequences of termination
      
2. The terms and conditions of the individual sales contracts for the products to be concluded under the distribution agreement. These include, in particular:
   • the specifications of the products
   • Purchase prices and payment terms
   • Merchant’s purchase predictions
   • Ordering process
   • Minimum Order Quantities
   • Terms of delivery
   • Inspection of products by the dealer
   • Warranties and representations
   • Handling of complaints

Types of Distribution Agreements

1. Exclusive distribution

In practice, the exclusive distribution agreement is of great importance. This occurs when the supplier grants a retailer the exclusive right to sell the products in a certain area. The supplier undertakes to ensure that no other retailer actively sells the products in the defined area. This exclusive distribution right of the retailer is offset by his duty to promote sales. The retailer must advertise and sell the goods. Since he is granted exclusivity, he is also willing to make (high) investments in the sale of the products in the specific market.

As a rule, exclusive distribution agreements provide for minimum purchase obligations on the part of the dealer. The contract may provide that the supplier may temporarily or permanently withdraw exclusivity or terminate the distribution agreement if these requirements are not complied with by the dealer for a certain period of time.

2. Selective distribution system

With the selective distribution system, the manufacturer wants to ensure that products do not leave a distribution network for a specific territory, which consists of the dealer and his authorized dealers as well as possible other authorized dealers. The distributor is integrated into the supplier’s distribution system in such a way that the supplier undertakes to sell, directly or indirectly, the products only to distributors selected on the basis of certain objective characteristics, and those distributors in turn undertake not to sell the products in question to distributors who are not authorised to distribute them in the territory defined by the supplier for the operation of that system.

The selective distribution system is mainly used in the luxury goods segment and for high-quality consumer goods, as manufacturers want to avoid their products being sold on internet platforms or sales outlets of discounters.

3. General Traders

It is not uncommon for suppliers to decide to work with several dealers within a certain territory without granting them an exclusive right and without integrating them too strongly into the supplier’s distribution system. In these constellations, the suppliers regularly do not set any specifications for retailers on minimum advertising expenditure,
order quantities or reporting.

Distribution agreements in practice

1. Poor distribution contracts and inconsistent distribution strategy

In our practice, we regularly see distribution agreements that do not meet the requirements of a comprehensive set of contracts. They are rudimentary and have significant gaps. These shortcomings come to the surface when disagreements arise between the parties or when one of the parties wants to end the cooperation.

In some cases, companies do not pursue a uniform sales strategy. For example, in addition to merchants with exclusivity rights for certain territories, they also have general merchants who are not subject to territorial restrictions. This inconsistency harbours potential for conflict.

2. Clarity creates security

A clearly formulated contract leaves no room for interpretation. It clearly defines who has to do what, when and how to do it, and what happens if things don’t go as planned. This clarity minimizes the risk of misunderstandings and conflicts, which can be expensive and time-consuming.

3. Trust and professionalism

A good contract shows your business partners that you work professionally and take their interests seriously. It creates trust and can thus help to build and maintain long-term business relationships.

In summary, a clear and comprehensive contract is essential in international sales. It provides security for the parties and promotes trust. Invest the time and effort to work out a good distribution agreement for the development of new markets.

We offer solutions for drafting and reviewing distribution agreements, and our experts will be happy to answer your questions.

By Vischer, Switzerland, a Transatlantic Law International Affiliated Firm.

For further information or for any assistance please contact switzerland@transatlanticlaw.com

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