Some things never change as Supertramp once claimed. But the super resonance of these words is often seen when a distributor is appointed by a supplier but without a formal distributorship agreement being in place.
For some time, things may go well. The supplier supplies and the distributor distributes. But then a decision is made by the supplier to formalise the relationship, at which point, the distributor may play cute – but not in a Disney like sense.
The risk-reward issue for the distributor will be whether it is better off with or without a formal distributorship agreement. In turn, this will be linked to issues such as:
- the value to its bottom line of distributing the supplier’s product;
- its assessment of its importance to the supplier including how important the distributor’s market is to the supplier;
- how quickly the distributor considers it could replace the supplier’s product with a substitute product.
It is often the case that the an assessment of these issues by the distributor leads it unsurprisingly to reduce its dependence on the supplier whilst it can. Put another way, the supplier’s wish to formalise the relationship can lead to suspicion.
Does this mean that a supplier should not seek to do so? The answer to this question is “no”. Instead, it is more of an issue of thinking things through.
Often, however, the situation moves on as the supplier sees a downturn in its business in the distributor’s territory which is a consequence of the distributor reducing its dependence on the supplier. In turn, this leads the supplier to ask questions of the lawyer in terms of:
- how can we exit the relationship with the distributor?
- how much notice do we have to give?
- how much will it cost to exit if we do not give notice?
- will it still cost us if we give notice?
The consequences of these questions should be seen in the context of the steps which some countries are taking to protect their distributors.
An increasing number of European countries are looking to protect their distributors. Meanwhile, earlier this month, the South Korean competition authority announced a plan to eliminate “unfair distributor transactions”. The plans include a change in South Korean law to allow distributors to apply directly to the South Korean courts to stop unfair transactions and extend scope of punitive damages on foreign suppliers.
Next month’s blog will consider various exit routes for suppliers. But until then, some things never change…