Distribution Agreements in India

Distribution agreements are not governed by any special legislation but primarily rely on written contracts and the general principles of contract law.

Other applicable laws governing the following may additionally apply:

• sale of goods – warranties, transfer of risk, and ownership of goods;
• consumer protection – the quality of/defects in goods, safeguard against unfair trade practices, deficiency in services;
• competition/anti-trust – impact on competition or creation of barriers to entry for new players;
• tax laws – goods and services taxes, customs duty for imports, double taxation avoidance schemes;
• intellectual property – where handling of trademark or packaging is contemplated;
• foreign exchange laws – for import of goods into India, remittance of payments outside India; and
• product-specific laws, if any.

Additionally, if a foreign supplier/manufacturer were to establish its own entity in India to import and distribute its products, such investment would be governed by the foreign investment policy of the Government of India.

Distribution Agreements should preferably be in writing and requisite stamp duty is to be paid on such agreements.

Key clauses of a distribution agreement will be:

• the duration of the appointment;
• the distributor’s authorised territory or customers;
• the scope of exclusivity (if any);
• terms and conditions of product/services (prices, ordering procedures, payment, shipping terms, inspection etc.);
• minimum performance obligations (if any);
• use of supplier’s intellectual property;
• termination and subsequent rights and obligations;
• governing law and dispute resolution.
  

Exclusive distributorship is when a distributor is the sole distributor of a supplier’s products/services in a specified territory or to identified customers. Such exclusivity should not adversely impact market competition. Parties may also agree that a distributor shall not directly or indirectly supply competing products or supply to customers in regions outside the agreed territory.

Likewise, the manufacturer/supplier may agree not to sell its products directly to customers in the designated territory and make all sales only through the distributor.

Parties may commercially agree to minimum performance standards (including minimum turnover clauses, purchasing requirements, market acquisition targets etc.) in distribution agreements in India. These clauses are generally valid and enforceable in India. In practice, these minimum requisites are cushioned with an agreed standard deviation (~10-15%) in response to fluctuating demand, or parties may agree to periodically re-setting targets. Unless a distributor is given a certain level of exclusivity, they may not readily agree to a minimum performance obligation.

Parties may agree to the grounds for termination and the consequences of termination. This will be generally enforced unless deemed unreasonable or contrary to public policy.

Parties often agree to ‘termination with cause’ such as for material breach of contract, insolvency/bankruptcy, or commission of fraud/illegality; and ‘termination without cause’, subject to prior written notice.

Goodwill indemnity is a monetary compensation paid to the distributor upon termination of the agreement for the distributor’s efforts in building the supplier’s market presence and customer base. It is not commonly seen or negotiated in India except for exclusive pan-Indian distributorship arrangements. Instead, indemnity payments by a terminating party are often contemplated for a party’s termination during a lock-in period.

Since distribution law is largely commercial and not regulated by specific legislation, peculiarities if any, are largely derived from commercial inventiveness of the parties involved. Notably, distributors need to pay heed to the applicability and payment of state and central Goods and Service Tax (GST), including integrated GST as is applicable when crossing State borders.

No regulatory regime applies to distribution agreements as a general class in India.

Parties are free to enter into a distribution relationship on terms of their choice without any specific formalities or oversight by a government body, subject to general principles of contract law and other applicable laws (as mentioned in question 1 above).

If one party is a foreign entity, the parties may mutually determine the governing law applicable to the contract. However, in situations where a foreign company establishes its own entity in India and the parties to the distribution agreement are both Indian entities, the governing law must be Indian law.

Jurisdiction

Indian law provides for jurisdictional civil courts to try disputes arising out of distribution agreements based on where the ‘cause of action’ arises (i.e., where the dispute/wrong took place), location of the property in dispute, or where the defendant resides. Hence, more often than not, more than one court has jurisdiction over any dispute arising out of a contract. In such a situation, when a dispute arises parties rush to the court of their choice (which has jurisdiction) irrespective of the other party’s wishes. The first party to file its claim will effectively get to choose which court hears the matter. To avoid this race to the courthouse, it is preferable to have the parties choose their jurisdiction in advance.

Parties are at liberty to mutually agree to confer exclusive jurisdiction to a specific court or forum (of those with jurisdiction otherwise) to preside over any disputes arising from the agreement.

It is often advisable to confer exclusive jurisdiction to applicable courts in metropolitan cities of India where interim relief may be expeditiously granted.

Arbitration

Considering the huge backlog of cases and slow disposal rates by Indian courts, arbitration is often preferred.

India’s arbitration law governs domestic arbitration, international commercial arbitration, and the enforcement of foreign arbitral awards. Under Indian arbitration law, parties to a dispute have the freedom to appoint an arbitral tribunal of their choice (whether it is ad hoc or institutional arbitration) to resolve their conflicts. They may also choose a foreign-seated arbitration or domestic arbitration. Foreign arbitral awards are enforceable in India so long as the country chosen is a signatory to either the New York Convention or the Geneva Convention, and is further notified by the Indian government as a country that has made reciprocating provisions for India. Awards from other countries are not de facto enforceable in India, and may only have persuasive value as evidence before a freshly instituted proceeding in India.