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Suppliers supply and distributors distribute - a regular blog
Company administrations just keep on coming. Indeed it is difficult to think of an industry sector which has not seen a spike in the number of administrations over the course of the last 12 months. But the administration of a distributor highlights particular issues for a supplier which still needs to ensure that the now ex-distributor’s former market is best served.
So how to do it?
Unsurprisingly the starting point is the distributorship agreement itself. The post-termination provisions of a robustly prepared distributorship agreement should provide for the supplier to take back the stock of products held by the distributor if the supplier wishes to do so. If the supplier has reserved title of the products, the supplier will be in a reasonable position to take back the products from the administrators’ grasp. This will be underpinned if the post-termination provisions allow the supplier access to the distributor’s premises or warehouse.
The ability to take back stock is important. Many industries will rely on distributors holding a certain amount of stock in order to ensure that urgent needs are met. Without the ability to acquire the stock held by the distributor which is in administration, the supplier may have difficulty in meeting demand.
In the case of the situation where the supplier has not retained title, urgent negotiations with the administrators may be needed to agree a price for the stock.
But having stock is one thing. Knowing the identity and contact details of the distributor’s customers is another. What is sometimes overlooked is that the fundamental difference for a supplier between using an agent or a distributor is that in the case of the distributor the supplier’s contracts are with it.
It follows that there is no contractual relationship between the supplier and the distributor’s customers. Indeed it is often the case that the supplier does not know the identity of the distributor’s customers. It follows that the distributorship agreement should provide for the distributor to keep the supplier informed on a regular basis of the names and contact details of the distributor’s customers. However, often such a provision will be heavily disputed before the distributorship agreement is entered into. This is because the distributor will fear that a provision of such information will enable the supplier to rid itself of the distributor and go direct to customers.
Sometimes this can be a legitimate concern. However, it is manageable. For example, by a provision which requires that details of customers are placed in to a form of escrow and will only be made available to the supplier in the event of the distributor’s going in to administration.
The other way in which the issue of the customers’ identities can be dealt with is by the supplier giving thought to hiring key employees of the distributor in administration. Depending upon whether or not the administrators are keen to obtain a sale of the distributors business as an ongoing concern, it should not prove too difficult for the supplier to approach key employees and, after hiring them, learn of the identity of the customers.
However, care is needed. The information held by such employees may be confidential and the distributor’s employees are likely to have an ongoing duty of confidentiality to the distributor.
Sometimes it is only when an administration occurs that it becomes apparent that the distributor has engaged in form of self-help so far as intellectual property is concerned. On a number of occasions we have seen situations where the domain names used by the distributor are held by the distributor despite such names using the supplier’s trade marks.
There are two ways of dealing with the situation. The first is to rely on provisions in the distributorship agreement which provide for ownership of the domain names to be held for the benefit of the supplier. The other way is to challenge the ownership by the distributor (administrators) through, for example, the Nominet dispute resolution service. Alternatively it may be possible to strike an inexpensive deal with the administrators on the basis that it is unlikely that third parties will be interested in acquiring the domain names without the registered trade marks which are held by the supplier.
As in the case of a distributor’s financial difficulty, the supplier should be prepared to act - and act fast (see here) - the same is true in working out how the now ex-distributor’s former market is best served.