Dealership Agreements - contracts-direct.com

29 Nov

29Nov

Let us know if you are thinking of creating a dealership or entering into an agreement with an existing dealership.

A dealership is most often associated with cars. In the commercial world, dealerships come in all shapes and sizes. They are constituted either as distributors of as agents.

Agency and distribution are examples of channels to market: means by which a manufacturer, producer or an intermediary, such as a wholesaler, gets its products to end-user customers.

Other channels to market include direct sales (where sales staff are employed directly by the manufacturer) or where the manufacturer sells at a distance (eg via the internet), entering into a joint venture with a local business, and franchising (which has many features in common with distribution).

Distributor: Distribution has certain features in common with agency, but the legal structure is different. A distributor buys from a manufacturer and sells as independent principal, applying a mark-up to the manufacturer's sale price and re-selling to customers. For this reason, a distributor is referred to as a re-seller in some jurisdictions. Title to the products concerned passes to the distributor, and the distributor not the manufacturer, has the contractual relationship with customers.

Distributorship may be preferable when the principal/manufacturer wants or needs:

to pass on product sales risk, although the sale price to the latter will usually be less than the price to customer net of commission under an agency arrangement;
to spread the risk of expanding into new products or territories;
to utilise the distributor's name and/or experience (of products/support or market/territory) as a positive factor in selling;
to take advantage of the cost benefits, improved sales services and greater flexibility that any outsourcing of a business process provides
to avoid a taxable presence or permanent establishment in the distributor’s jurisdiction;
to avoid the administration of multiple customer relationships for particular products/markets, and to have only one, with the distributor.

Agency: By contrast, an agent negotiates and (sometimes) concludes contracts with customers on the principal's behalf and is remunerated by fixed or variable commission (usually a percentage) on sales concluded through the agent's efforts. Title in the products does not pass to the agent, and customers contract with the principal, not the agent. A distributor therefore assumes legal and commercial risk whereas an agent (normally) does not.

Agency may be preferable when the principal/manufacturer wants or needs:

to retain control of the channel to market (eg for marketing reasons);
to retain control of a customer relationship (eg major customers) or where the nature of the product and/or support requirements mandate this;
to avoid competition law issues in respect of the channel to market, although they may still exist in respect of the principal's own market share if the principal/manufacturer is dominant in that market (e.g. it operates a strict retail price maintenance policy);
to reduce cost—typically an agent's commission is less than the distributor's discount, to reflect the degree of risk assumed by distributors

The main characteristics of agency and distribution relationships are as follows.

Characteristic	Agency	Distribution
Sells on whose behalf?	Principal's	Distributor’s
Sells in whose name?	Usually the principal’s, although sometimes the agent will sell in their own name. The existence and identity of the principal may or may not be disclosed.	Distributor’s
Exclusivity	Agency agreements may contain exclusivity clauses, but consideration should be given to competition law—see below.	Distributorship agreements may contain exclusivity clauses, but consideration should be given to competition law—see below.
Sole agent/distributor	Agency agreements may contain sole agent clauses, but consideration should be given to competition law—see below.	Distributorship agreements may contain sole distributor clauses, but consideration should be given to competition law—see below.
Payment for services	Commission, fixed fee or other form of recompense.	Profit on sale of goods or services purchased from manufacturer: distributor normally receives discounted prices, which can be expressed to be by way of commission or rebate.
Contractual relationship with customers	Principal	Distributor
Business relationship with customers	Principal's, although agent may have a strong influence as intermediary.	Distributor’s. The manufacturer usually has little or no contact, although may contact customers directly if the sales process or product support requires this.
Responsibility for pricing and terms of business	Principal. Where the agency agreement is not categorised as an agency agreement for the purposes of applying the Chapter I prohibition, an obligation preventing or restricting the agent from sharing its remuneration with the customer is classified as a hardcore restriction under Article 8(2)(a) of the Competition Act 1998 (Vertical Agreements Block Exemption) Order 2022, SI 2022/516 (UK VABEO). See competition law issues below.	Distributor. Manufacturer may not normally control pricing or, to a lesser extent, other terms.
Risk of unsold products	Principal	Distributor
Liable for defective products	Principal	Prima facie the distributor, but in practice the distributor will usually require an indemnity from the manufacturer for some risks and certainly for design/endemic defects. Legislation may impose liability on the manufacturer, eg the Consumer Protection Act 1987.
Liability for acts of the agent/distributor	Principal, unless the agent acts outside authority and principal has not ratified.	Distributor, unless the manufacturer has agreed otherwise.
Taxable presence in the territory concerned	Possibly, this depends on the law of the territory and relevant double taxation treaties.	Unlikely, but depends on law of territory and relevant double taxation treaties. May also depend on whether distributor is an individual.
Competition law issues (UK) for appointment in UK territories	None for genuine agency situations, in which the agent bears no significant financial or commercial risk in relation to the performance of agency activities, as principal and agent are considered as one entity. (Competition Act 1998 (CA 1998)). Where the agent is categorised as a non-genuine agent for competition law purposes so that the Chapter I prohibition applies, it will be treated as a distributor for competition law purposes. See opposite.	Possibly, this depends on market share; consider abuse of dominant position (CA 1998). Consideration should be given to the provisions in the agreement and whether these represent hardcore or excluded restrictions under UK VABEO.
Competition law issues (EU) for appointment in EEA territories	None for genuine agency situations, in which the agent bears no significant financial or commercial risk in relation to the performance of agency activities, as principal and agent are considered as one entity. Where the agent is categorised as a non-genuine agent for competition law purposes so that Art 101 TFEU applies, it will be treated as a distributor for competition law purposes. See opposite.	Possibly, this depends on market share and provisions in the agreement itself, consider also abuse of dominant Consideration should be given to the provisions in the agreement and whether these represent hardcore or excluded restrictions under EU Vertical Restraints Block Exemption Regulation (EU) No 2022/720 (EU VBER).
Liability for payment on termination of the arrangement for agents appointed in respect of UK territories	Commercial agents will be entitled to compensation or indemnity, unless serious breach by agent was the reason for termination (Commercial Agents (Council Directive) Regulations 1993, SI 1993/3053, reg 17). In the case of non-commercial agents there will be no such liability unless the agreement so provides. For more information, see Practice Note: Termination of commercial agency.	No liability unless the agreement so provides.
Liability for payment on termination of the arrangement for commercial agents appointed in respect of EEA territories	Position generally similar to UK, but local legal advice should be taken in respect of the local law implementing EU Council Directive 86/653/EEC (OJ L 382/170), the EU Commercial Agents Directive.	Some EU countries give certain distributors equivalent rights to agents. Local legal advice should be taken.
Form of agreement	In the UK the agreement, generally, need not be in writing, although some terms of a commercial agency must be in writing. Even where a written agreement is not required, it is strongly recommended to have one to avoid the risk of confusion as to territory, products, status of appointment, term, termination, customers who may and may not be approached etc. A written agreement may be required overseas and local legal advice should be taken. Note that restraint of trade clauses must be in writing. Either party to a commercial agency may request a signed document from the other setting out the terms of the agency agreement, including variations (Commercial Agents (Council Directive) Regulations 1993, SI 1993/3053, reg 13).	Even where a written agreement is not required, it is strongly recommended to have one. Otherwise, there is a risk of confusion as to territory, products, status of appointment, term, termination, customers who may and may not be approached etc. A written agreement may be required overseas; local legal advice should be taken.

Typical Provisions in a Dealership Agreement:

It's important to note that specific dealership agreements can vary and it's always recommended to consult with legal professionals for specific legal advice. Some common key points that may be included in a UK dealership agreement:

Grant of dealership: outlines the scope of the dealership, including the products or services that the dealer is authorised to sell or distribute, as well as any geographic limitations or exclusivity rights.
Obligations of the dealer: outlines the responsibilities and duties of the dealer, such as sales targets, marketing activities, customer service, and maintenance of product/service knowledge.
Obligations of the manufacturer/supplier: outlines the responsibilities and duties of the manufacturer/supplier, such as providing products/services, marketing support, training, warranties, and after-sales support.
Pricing and payment terms: specifies the pricing structure, payment terms, and any discounts or commissions that may apply to the dealer.
Order and delivery process: outlines the procedures for placing orders, delivery schedules, and any relevant shipping or transportation terms.
Intellectual property rights: addresses the ownership, use, and protection of intellectual property rights, such as trademarks, patents, copyrights, and trade secrets.
Termination and renewal: sets out the conditions and procedures for terminating or renewing the dealership agreement, including notice periods, termination for cause, and rights and obligations upon termination.
Confidentiality and non-compete: may include provisions related to confidentiality of business information, non-compete clauses that restrict the dealer from selling competing products/services, and non-solicitation of customers or employees.
Dispute resolution: may outline the procedures for resolving disputes, such as mediation, arbitration, or litigation, and the applicable laws and jurisdiction.
Insurance and liability: addresses any insurance requirements, liability for product/service defects, and indemnification provisions.
Governing law and entire agreement: specifies the governing law that applies to the agreement, as well as any entire agreement clause that confirms that the dealership agreement represents the entire understanding between the parties.
Miscellaneous clauses: may include clauses, such as force majeure, assignment, amendment, waiver, and notice provisions.

It's important to note that dealership agreements are legally binding contracts, and it's crucial to carefully review and understand all the terms and conditions before signing one. It's always recommended to seek legal advice from qualified professionals to ensure that the dealership agreement meets your specific needs and complies with applicable laws and regulations in the UK.

Legal Notice:

Publisher: Atkins-Shield Ltd: Company No. 11638521
Registered Office: 71-75, Shelton Street, Covent Garden, London, WC2H 9JQ

Note: This publication does not necessarily deal with every important topic nor cover every aspect of the topics with which it deals. It is not designed to provide legal or other advice. The information contained in this document is intended to be for informational purposes and general interest only.

E&OE

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