This article was originally written for and featured in Footwear Today.
In a difficult economic environment the importance of successful distributors cannot be overstated. But all too often experience shows that whilst the brand may be a wow and the product and price point just right, the distributor fails to deliver.
So what can a brand owner do to change things?
First and foremost is to determine what is the agreement upon which the distributor has been appointed. If (as is often the case) the distributor is outside the UK and has been appointed on an unwritten basis, the brand owner will be in danger of compounding a problem of its own making. This is because it is likely that the parties did not orally agree that:
- English law was to be the governing law of the agreement; and
- The English courts were to have the exclusive right to determine disputes.
The result? The brand owner will be likely to be faced with the law of the distributor’s country governing the unwritten distribution agreement with any disputes being determined by that country’s courts.
For most teams, playing away from home is always difficult. For the brand owner, this situation is no different. But to add insult to a difficult position, the brand owner in this case could be faced with having to pay no fault compensation on the termination of the distributorship agreement.
In other words, the brand owner will need to act carefully so as not to trigger a claim against it by the distributor under local law.
In anticipation that this disastrous situation does not apply, it will be important to determine whether the distributor has been appointed on an exclusive, sole, or non-exclusive basis. Although the key is the “appointment” of the distributor, the issue is in fact one of the extent of the restriction on the brand owner.
If the distributor is appointed on an exclusive basis, then the brand owner will be unable to appoint other distributors or itself to sell the products. Usually, the restriction is measured in terms of the geographical territory of the distributor, the customers to whom the distributor may sell, or the range of products themselves. Sometimes the appointment will cover all three in terms of the distributor being appointed on an exclusive basis to sell the products specified in a schedule to the agreement to a specific group of customers.
In contrast to exclusivity, sometimes the distributor will be appointed on a so-called “sole” basis. In this type of situation, whilst the brand owner can sell alongside the distributor, the brand owner cannot appoint another distributor also to sell. Subject to this, it is again necessary to determine whether the appointment relates to territory, products, or customers or any two or all three.
Lastly, the distributor may be appointed on a non-exclusive basis. In this situation, the brand owner is not prevented from selling alongside the distributor, nor is the brand owner prevented from appointing other distributors.
Subject to this, the extent of the restriction on the brand owner can also be affected by the other provisions of the agreement. Often the agreement will carve out certain rights for the brand owner even where the distributor is appointed on an exclusive basis. For example, the specification of certain key customers or house accounts being reserved to the brand owner.
Knowing what has and has not been granted to the distributor will be key to the brand owner managing the distributor to the benefit of the brand.
A well drafted agreement will build upon the basis of the appointment of the distributor by including in the agreement a variety of different obligations, duties, and restrictions to be performed or observed by the distributor.
In determining what obligations, duties and restrictions to include, the brand owner should consider what is important for the brand at the time of the making of the agreement, but also and what may become important in the future. The provisions setting out these obligations, duties, and restrictions should be expressed clearly.
If the contractual object is to reduce the opportunity for argument as to what is and what is not covered by the provisions, the practical objective should be for the brand owner to monitor the distributor’s compliance with the obligations, duties and restrictions. Firm but fair monitoring should reap rewards in ensuring that the distributor is concerned to try and achieve for the brand – so benefiting the brand owner.
It can also be expected that there will be a minimum purchase obligation on the distributor. This should not be an inflexible amount. It can be expected that the brand will grow and, as such, there should be no reason why the minimum performance requirements should not increase.
What is important is that the fulfilment of the minimum purchase requirements by the distributor is reviewed and that the agreement sets out what is to happen if the minimum purchase requirements are not achieved. A failure to review is likely to result in under performance by the distributor which will be to the detriment of the brand and, in turn, the brand owner.
It is possible to see how things can go wrong by looking at a recent court decision which concerned the Dekline footwear brand. Despite both US brand owner and British distributor coming up with draft agreements, the parties had failed to put in place a formal distributorship agreement by the time their relationship ended.
The distributor claimed damages for the bran owner’s failure to give reasonable notice of termination. The brand owner retaliated by alleging various breaches of the obligations on the distributor. The court rejected these allegations. The lack of evidence meant that the brand owner’s claims lacked credibility.
As a result the court decided that reasonable notice would have been 9 months and damages were calculated on this basis. However, the irony for the brand owner was that had it put in place a formal agreement it could probably have avoided such a cost!