Distribution Agreements in Ireland

As an alternative to the more formal agency agreement, distribution agreements are primarily regulated by commercial case law in Ireland. Whilst no legislative basis exists governing distribution agreements, the general principles of contract law regulate the relationship between a supplier and a distributor. For example, the law will presume the agreement has been agreed freely and will therefore hesitate to imply terms into the agreement and instead will look to the provisions of the agreement in order to determine any issues.

In this regard, certain duties are considered fundamental in regulating the relationship:

• the distributor has a duty to act in good faith, perform the conditions of the agreement and pay the supplier for the goods.
• the supplier has a duty to act in the best interests of the distributor, supply the goods in accordance with the agreement and assist the distributor in the promotion of sales.

In addition, as distribution agreements are “Vertical Agreements”, they are subject to competition rules and fall under the remit of the Competition Act 2002 and the provisions of Article 101 on the Treaty of the Functioning of the European Union. The current 'Declaration' system on vertical agreements, which mirrors the EU rules, remains in force in Ireland until 1 December 2020.

It is advisable that distributors formalise distribution agreements in writing in order to better protect both parties' interests. However, in Ireland, a distributor can be appointed orally or in writing.

In addition to the particulars of the parties and the details of the agreement, key clauses to be included in a distribution agreement include:

• territory: in order to give the supplier recourse should the distributor not provide the appropriate level of sales coverage.
• exclusivity: this clause sets out whether the distributor has exclusive rights to distribute the goods in the agreed territory. If exclusive rights are provided for, the distributor may seek a provision that the supplier will use reasonable endeavours to support its exclusivity in the territory.
• status: it is important that the agreement states that it is a distribution agreement and that the distributor does not act in the capacity of agent to the supplier.
• competition: whether the distributor is permitted to deal with products that compete with the goods under the agreement.
• duration: the agreement should provide whether it is to be for a probationary or fixed term. The agreement should also address the notice period for termination.
• goods: it is advisable to provide a schedule of the goods covered by the agreement and whether the supplier has the right to vary the goods.
• orders: the agreement should provide how the distributor orders the goods from the supplier. A force majeure clause may also be included to protect the supplier where it cannot fulfil the order due to circumstances beyond its control.
• sales and marketing: the agreement should typically provide that the distributor is obliged to promote the goods and grow sales in the territory.
• payment: how payment is calculated, the means of payment and when it falls due.
• no assignment or charge: in order to prevent the distributor's rights being assigned or charged under the agreement. However, in certain circumstances, it may be appropriate for the agreement to allow a distributor to appoint sub-distributors / agents.
• change of control: a supplier may wish to include a right to terminate the agreement should a change of control of the distributor arise.
• intellectual property: in order to regulate how licences to use trademarks, patents or designs, which may have been granted to the distributor under the agreement, are dealt with.
• confidentiality: if the supplier's trade secrets will become known in the operation of the agreement, the supplier should include a clause to the effect that the distributor will not disclose same for the duration of the agreement and such specified time after the termination of the agreement.
• disputes: the parties can elect that disputes will be determined by arbitration, an agreed person or an office holder. If arbitration is chosen, the agreement will usually provide details of the arbitrator, the terms of arbitration and whether the arbitration will be binding and final on the parties. Where the arbitration is binding upon the parties, any redress is on a point of law to the courts.
• choice of law and jurisdiction: the parties may elect which law governs the agreement. This is particularly important where one of the parties to the agreement is outside Ireland. Generally, the Irish courts will give effect to the law chosen under the agreement.
• currency: the parties should specify the currency the goods are to be paid in. This will be particularly important where the agreement deals with international parties.
• retention of title and risk: the supplier may wish to reduce risk by retaining title of the goods until payment has been received from the distributor.

Exclusive agreements are where the distributor has exclusive distribution rights within a particular territory and the supplier agrees it will not supply other distributors within that territory. This is permitted in the Ireland under the Irish and EU competition rules governing vertical agreements.

However, exclusive distribution agreements may not prevent the distributor from answering passive sales requests and must comply with the EU Vertical Restraints Guidelines 2010 which provide that distributors must be "free to use the Internet to advertise or sell products" and that "an outright ban on Internet or catalogue selling is only possible if there is an objective justification. In any case, the supplier cannot reserve to itself sales and/or advertising over the Internet". This is in order to avoid compartmentalisation of the European single market.

In order to ensure parties do not fall foul of the rules on vertical agreements, certain restrictions in distribution agreements should be avoided, including:

• resale price maintenance: where suppliers utilise anti-competitive fixed / minimum prices e.g. price monitoring systems, granting rebates/ bonuses to retailers.
• restricting internet sales and internet advertising.
• restricting a distributor, operating at a retail level, from making active or passive sales to customers.
  

Minimum turnover clauses can be valid in Irish law, provided the targets of a minimum turnover are not unreasonable and so high as to affect a purposeful termination of the agreement.

Based upon Irish contract law, in order for the minimum turnover target not being reached to amount to a ground for termination of the agreement, it would have to be sufficiently serious to result in a fundamental breach of the agreement. The more appropriate recourse for failing to comply with a minimum turnover clause is damages. In addition, such a clause could not be used as a way for the supplier to terminate the agreement unduly by setting an unrealistic or unachievable minimum turnover target.

Therefore, when drafting such clauses for inclusion in a distribution agreement, care must be taken to agree a reasonable and realistic minimum turnover requirement which reflects the spirit of the agreement between the parties and their respective capabilities in adhering to the agreement.

A distribution agreement will generally terminate in law by any of the following events: (i) death; (ii) insanity; (iii) illegality; (iv) frustration; or (v) bankruptcy/insolvency.

Termination can occur by the expiration of a fixed period provided for the in the agreement or by an act of the parties. A party may terminate the agreement by giving such notice as is provided for under the distribution agreement. If the distribution agreement does not provide for a specified notice period, the notice must be reasonable. What is reasonable notice will be determined on a case by case basis and assessed by (i) what a reasonable person would consider reasonable notice at the time the contract was entered into; (ii) the nature of the business and the product(s); and (iii) how much time it would take the distributor to find an alternative distributorship.

The distribution agreement may provide for an event which triggers summary termination, or the supplier may reserve the right to summary termination on specified grounds. Examples of common grounds include:

(i) any assignment or charge of the distribution agreement.

(ii) a change of control occurring.

(iii) the bankruptcy of the distributor.

(iv) a judgment issued against the goods or the assets of the distributor.

Upon termination of a distribution agreement, the agreement will usually provide for the method of return of the goods, any promotional materials or books of account. The agreement may also deal with the rescinding of any trade mark agreement in force.

In contrast to commercial agency agreements Irish law does not provide a distributor with a right to claim any indemnity or other form of compensation on termination of the distributorship agreement, although this could be expressly provided for in the agreement.

As discussed previously, there is no legislative basis in Ireland governing distribution agreements and the general principles of contract law regulate the relationship between a supplier and a distributor. Care must also be taken to ensure distribution agreements are compliant with domestic and European competition law.

In particular, the Block Exemption and the Declaration on Vertical Agreements (the "Exemption" and "Declaration") both detail actions that frustrate competition but are permissible. A distribution agreement falls under the remit of the Exemption and Declaration where (i) the supplier holds less than 30% of the relevant market on which it sells; or (ii) the distributor holds less than 30% of the relevant market on which it purchases.

The Exemption and Declaration contain a list of strict restrictions which, if included in a distribution agreement, operate to remove the availability of the exemption. Other restrictions, referred to as excluded restrictions, could be unenforceable. Where a restriction is unenforceable, EU law will consider the remainder of the agreement to be enforceable. However, it is open to an Irish court to find an entire agreement void if it considers the restriction is fundamental to the agreement. Therefore, where a distribution agreement is subject to the Exemption and Declaration, it is advisable that the parties include a clause allowing the parties to revise or exclude any unlawful clause to avoid uncertainty on the enforceability of the agreement.

The parties to a distribution agreement may choose the law they wish to govern the agreement and the parties should ensure a clause to that effect is included in the agreement, particularly where a party is outside Ireland. The chosen law will generally be given effect by the Irish courts and only overridden if it conflicts with mandatory rules or public policy.

In the absence of a choice of law clause, the agreement will generally be governed by the law most closely connected to it. The assessment of which law will govern in such circumstances will be:

• contracts entered into on or after 17 December 2009 will be governed by Regulation (EC) 593/2008 of 17 June 2008 (Rome I).
• contracts entered into prior to 17 December 2009 will be subject to the Contractual Obligations (Applicable Law) Act 1991, pursuant to which the Rome convention on the law applicable to contractual obligations (the Rome Convention) was enacted in Ireland.

Contracts falling outside the scope of Rome I or the Rome Convention will be subject to standard Irish common law principles which also generally support the parties’ right to choose the governing law of their contract and will only displace their choice in exceptional circumstances.

The advisable course of action is for the parties to include a reasonable choice of law clause that reflects the operation of the agreement in order to avoid any disputes in this regard.

Jurisdiction

The Irish courts will respect a choice of jurisdiction clause in a distributorship agreement to a foreign jurisdiction but will construe it strictly. The courts do so in accordance with provisions of Regulation (EC) 44/2001 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (Brussels I) and the provisions of the re-cast Brussels I Regulation. The new Brussels Regulation has been transposed into Irish law and applies to judgments in proceedings commenced on or after 10 January 2015.

The Irish courts can accept jurisdiction to determine a dispute where the choice of jurisdiction is not exclusive or where both parties agree to the Irish courts accepting jurisdiction. Where the defendant is not domiciled in a contracting state to Brussels I, the common law rules apply, and Irish courts may claim jurisdiction if Ireland is the most appropriate forum for the claim.

Arbitration

Ireland has adopted the UNCITRAL Model Law on International Commercial Arbitrations which expressly recognises the competence of an arbitral tribunal to rule on its own jurisdiction. Under the Model Law, an arbitration clause will be regarded as independent of the other terms of the agreement and is not dependant on the validity of the agreement.

A foreign arbitration award relating to a distribution agreement can be recognised by the Irish courts if the awarding country was a signatory to the New York Convention, the Geneva Convention or the Washington Convention.