DISTRIBUTION CONTRACT

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The distribution contract is an agreement in which an independent distributor makes its commercial structure and network available to a manufacturer or entrepreneur to distribute its products in a specific territory and for a specific or indefinite period of time.

The distributor acts in his own name and on his own account, assuming the risk derived from the resale of the products he acquires from the entrepreneur. The distribution contract is not expressly regulated in Spanish law, so it is essential that it be documented in writing.

Among the terms and conditions that should be included in the distribution contract should be

The identification of the parties, definition of the products, territory, obligations of the parties, exclusivity, price of the product, minimum purchase volume, form of payment, protection of the industrial and/or intellectual property of the entrepreneur, duration of the contract, forms of termination and consequences of termination, non-competition, applicable law and regulations.

The advantages of the distribution contract include the possibility of reaching potential consumers/users that would be very difficult to reach without the involvement of the distributor, with minimal investment and controlled risk.

Practical recommendations include: including minimum purchase requirements, protecting the brand by registering it in the distributor's country, ensuring the collection of sales through the use of Incoterms and secure means of payment, taking out civil liability insurance for possible product defects and formalising in writing any commercial relationship between distributor and entrepreneur.

Below are some advantages and disadvantages of the distribution contract for the exporter:

ADVANTAGES:

1. Extension of the distribution network: the distribution contract allows the exporter to reach new markets and potential customers without the need to invest in its own commercial structure.
2. Cost reduction: By having a local distributor, the exporter can reduce costs in advertising, logistics, warehousing, among others.
3. Greater control: the distribution contract allows the exporter to set certain conditions and to supervise the activity of the distributor in the agreed territory.
4. Possibility of exclusivity: the exporter can grant the distributor exclusivity to market its products in the agreed territory, which can increase distributor loyalty and identification with the exporter's brand.

DISADVANTAGES:

1. Loss of control: By relying on an external distributor, the exporter may lose some control over how its products are marketed.
2. Dealer dependency: export success may depend to a large extent on the capacity and motivation of the local distributor, which may create some uncertainty for the exporter.
3. Communication difficulties: geographical distance and cultural and linguistic differences can lead to difficulties in communication and understanding between the exporter and the distributor.
4. Legal risks: the distribution contract must be well drafted and cover certain legal aspects in order to avoid problems and conflicts in the future.

How can the artificial intelligence (see+ TIP) How can you make a good distribution contract? 

As a model language, I can provide useful information and advice on how to draft a good distribution contract.

HERE ARE SOME POINTS TO CONSIDER WHEN DRAFTING THIS TYPE OF CONTRACT:

1. Identify the parties involved: It is important to clearly identify both parties to the contract, i.e. the distributor and the entrepreneur.
2. Define the products to be distributed: The contract must specify the products to be marketed and distributed by the distributor.
3. Determine the distribution territory: The contract must specify the territory where the distributor will market and distribute the products.
4. Set out the obligations of the parties: The contract should set out the obligations of both parties, i.e. the distributor and the entrepreneur.
5. Establish exclusivity: The contract may provide that the distributor will have exclusive rights to sell the entrepreneur's products in a particular territory. It may also provide that the entrepreneur will not sell the products to other distributors in that territory.
6. Pricing of products: The contract should set out the price of the products and how it will be determined.
7. Establish the minimum purchase volume: The contract may stipulate a minimum purchase volume that the distributor must meet, as well as a penalty in case of non-compliance.
8. Establish the method of payment: The contract should set out the method of payment, the payment terms and the guarantees required.
9. Protect the intellectual property and trademarks of the entrepreneur: The contract must state that the distributor may not use the entrepreneur's trademarks or intellectual property without his prior consent.
10. Establish the duration of the contract and the forms of termination: The contract should specify the duration of the contract and the ways in which it can be terminated by both parties.

In a nutshell, In order to make a good distribution contract, it is important to clearly define the terms and conditions of the relationship between the entrepreneur and the distributor, as well as to establish protection and security measures for both parties. It is also important that the contract is well documented and drafted in clear and concise language to avoid misunderstandings or confusion in the future.

By virtue of the distribution contract, a professional or independent businessman (the distributor) places his commercial structure and network at the disposal of another businessman or manufacturer (the entrepreneur) to distribute, for a determined or indefinite period of time, in a specific territory and under certain control and supervision of the entrepreneur, the products supplied by the latter, guaranteeing him, under certain conditions, the exclusivity to resell them. 

The main characteristic of the distributor is the independence and autonomy it enjoys and the fact that:

• It always acts in its own name and on its own account. 
• His activity consists of buying a series of products from the entrepreneur and then reselling them to his own customers, so that he (and not the entrepreneur) assumes the risk arising from this resale.
• The profit made by the distributor consists of the margin between the purchase price of the product from the entrepreneur and the resale price to its final customers. 

The distribution relationship therefore involves a sales transaction between the entrepreneur (as seller) and the distributor (as buyer), who will be obliged to pay the price of the products purchased.

WITH THE SPECIALITIES SET OUT BELOW: 

• Purchase planning and minimum stock obligations on the part of the distributor. 
• Protection of the employer's trademark; and, inter alia. 
• And, among others, the possibility of agreeing that in certain cases (normally linked to minimum purchase obligations) the distributor has an exclusive resale right in a given territory. 

The distribution contract is not expressly regulated in Spanish law and, therefore, the relationship between the distributor and the entrepreneur is based (i) on the terms and conditions that have been expressly agreed in the corresponding contract and (ii) on the interpretation that the courts and tribunals have been making of this type of commercial relationship. It is therefore essential in this case that the distribution contract is documented in writing.

In relation to the aforementioned jurisprudential interpretation, it is important to bear in mind that, despite the fact that distributors assume the commercial risk derived from the resale of the products previously purchased from the entrepreneur and that, in principle, the termination of the distribution contract would not entail the loss of these customers for the distributor, in certain cases, where there is an early termination of the distribution contract, the courts and tribunals are recognising the distributors a compensation equivalent to the compensation for customers provided for in the Law on Agency Contracts. 

The distribution contract is configured, together with the agency contract, as an essential element in commercial exports insofar as it offers, with a minimum investment and controlled risk (provided that the means of payment agreed with the distributor offer collection guarantees), the possibility of reaching potential consumers/users who, without the distributor's participation in the transmission chain, would be very difficult to reach.

ADVICE AND RECOMMENDATIONS

THE DISTRIBUTION CONTRACT SHOULD AT LEAST REGULATE THE FOLLOWING TERMS AND CONDITIONS:

• Identification of the parties: distributor and entrepreneur. 
• Definition of the products to be resold by the distributor. 
• Determination of the territory where the aforementioned resale is to take place. 
• Obligations of the parties:

• • From the distributor

• • • Pay for the products purchased from the entrepreneur on the terms and in accordance with the agreed means of payment; establishment of guarantees.
    • Where applicable, comply with the agreed minimum purchase obligations. 
    • Where appropriate, inform the employer about product defects or infringement of its trade marks in the territory of its competence. 
    • Contribute to the costs of advertising the employer's brand. 
    • Duty of confidentiality.

• • From the employer

• • • Deliver the products under the agreed conditions and deadlines. 
    • Provide the distributor with product samples, warranties, technical assistance, etc. 
    • Licensing the use of trademarks. 
    • Instruct the distributor on how to market and advertise your product.

  • Exclusivity

    • In both directions (neither the entrepreneur may sell his products to other distributors in the agreed territory nor the distributor may resell other entrepreneurs' products in the agreed territory). 
    • One-way exclusivity (for the distributor or for the entrepreneur). 
    • Non-exclusive distribution.

• Price of the product: impossibility for the entrepreneur to impose the price at which the product is sold to the final consumer by the distributor. 
• Minimum annual purchase volume: 

• • • Penalty in case of non-compliance by the distributor with the minimum purchase obligation: 
    • Possibility of direct sales by the entrepreneur in the territory. 
    • Fine. 
    • Reduction in the purchase price of the products by the distributor once the agreed minimum purchase volume has been exceeded. 

  • Method of payment

    • Means of payment. 
    • Management of non-payments. 
    • Possible guarantees.

• • Protection of the industrial and/or intellectual property of the entrepreneur:

• • • Express proof of ownership in favour of the entrepreneur of any industrial and/or intellectual property rights.
    • Trademark registration in the distributor's country.

• • Duration of the contract:

• • • - Determined. 
    • - Indefinite.

• • Forms of termination of the contract and consequences of such termination:

• • • Return of products. 
    • Payment of outstanding amounts. 
    • Pre-Notices.
    • Waiver by the distributor of any claim for damages.

• • Non-competition. 
  • Applicable law. Regulations 
  • Atypical contract, i.e. not expressly regulated in the Spanish legal system, except in matters of antitrust.
  • Rome Convention: the law of the country in which the party who is to perform the principal performance has his habitual residence applies. Practical recommendation From a commercial point of view it is advisable to include a minimum purchase price.
  •  Protect the brand by registering it in the distributor's country.
  •  Securing the collection of sales through the use of Incoterms and secure means of payment (i.e. documentary credit). 
  • Take out liability insurance for possible product defects. From a legal point of view, it is essential to formalise in writing any commercial relationship between distributor and entrepreneur.

Since most of the negotiation process with a distributor does not allow for the necessary time to draw up a distribution contract, it is advisable to have a standard (framework) contract in advance, which has been reviewed by an experienced lawyer and can be modified by the company on a case-by-case basis.