As part of our Spotlight series, we welcome Marie Davy, who recently joined Morgan Lewis as a partner in our Paris office, to discuss key issues to consider when negotiating global distribution agreements.
Recognized across several categories by The Best Lawyers in France, Marie has a deep practice counseling clients on distribution law and international transport law and assisting French and non-French manufacturers in setting up distribution networks in France and globally. Her transactional and litigation focus enable her to dissect and understand the full lifecycle of distribution relationships, including structuring and negotiating the foundational agreement to comply with client requirements and applicable local regulations, renewing and renegotiating agreements, and analyzing and handling troubled transactions that are in dispute.
What are some of the key issues from a contractual perspective that companies often overlook when negotiating global distribution agreements?
Exclusivity clauses, by which a manufacturer grants a distributor the exclusive right to distribute its products in a specific territory or to a particular group of customers, must be carefully considered. As such clauses inherently restrict free competition, they are specifically regulated by the EU Vertical Block Exemption Regulation. For example, it is by principle prohibited to prevent a distributor from engaging in “passive sales,” i.e., sales solicited by customers located outside the exclusive territory of the distributor. Additionally, we often observe that exclusivity is improperly harmonized across international distribution networks, leading to risks such as overlapping territories or customer groups.
Retention of title clause can be a strong security for manufacturers in distribution agreements as distributors often hold stock of the manufacturer’s products that have not yet been paid for. The national law of the country where the customer is established will often take precedence over the contract once insolvency proceedings begin. However, several protective measures can be taken before such proceedings occur, for example requiring the distributor to store the products separately from others; granting the right to access the premises to inventory and mark the goods; recovering the products upon the first payment default; or claiming the resale proceeds received by the distributor in the event of resale.
Warranty clauses can sometimes create confusion between the warranties provided by the distributor to its end-customers and those provided by the manufacturer to the distributor, potentially resulting in the manufacturer being held liable for end-customer warranties. Unless the manufacturer decides such, the warranties offered by the distributor to its own customers do not bind the manufacturer.
Specifically for sales on the French market, a mandatory “written agreement” must be concluded between manufacturers and distributors every 1, 2, or 3 years, by February 28. This agreement must set out all applicable commercial terms as well as additional specific provisions required in certain sectors, such as agri-food. Failure to sign the written agreement or include the required terms may result in administrative fines.
What are your thoughts on effective dispute resolution provisions—including escalation mechanisms—to include in global distribution agreements?
To enable the manufacturer to efficiently monitor its international network of distributors, a single jurisdiction (and applicable law) should be selected. Some commercial courts in Europe—such as in France and the Netherlands—have established dedicated international chambers as an alternative to arbitration. These chambers feature judges specifically trained to handle international matters, with extensive knowledge of international trade provisions, fluency in English, and procedures allowing exhibits to be submitted in English and witnesses or experts to testify in English.
Escalation mechanisms are particularly useful in distribution agreements, where disputes may arise while the parties are still doing business together and wish to avoid court proceedings. However, such clauses must be carefully drafted (for example, escalation to “directors” is not precise enough) and the mechanism should include clearly defined time limits to prevent it from becoming an obstacle to initiating legal action. Escalation procedures or mediation should not be mandatory in cases requiring urgent interim relief.
The international landscape seems be changing at an unprecedented pace; are companies examining their contracts to consider the impact on distribution channels?
Geopolitical instability reveals the inadequacy of overly long and rigid contracts. Manufacturers exposed notably to raw material cost spikes, trade route disruption, currency volatility, and increase in tariffs need flexibility in the definition of prices and delivery schedules.
With regards to prices, the Holy Grail for sellers is often the inclusion of pass-through clauses or an indexation clause, which transfer the cost burden to the end-customer. However, these mechanisms require that the risk of cost increases is precisely identified at the time of signature. Moreover, we are currently seeing with US tariffs that they can be very difficult (not to say impossible) to negotiate.
Hardship clauses must especially be watched for. Which party benefits from the clause—and could it be used against the party that negotiated it? Are the hardship triggers capturing the real risks? What is the ultimate objective of the clause: attempt at renegotiation, systematic equitable adjustment, right of termination? Does the clause provide for a sufficiently clear timetable for negotiations? Is it relevant to include a neutral third party to decide on the fulfillment of the hardship conditions or on the “equitable adjustment” of the price? The outcomes of any hardship clause must also be clear in order to be enforceable.
Delivery times and lead times are most of the time binding, and delays generally trigger multiple sanctions. Given the increasing number of obstacles to cross-border delivery (e.g., regional conflicts, custom duties, change of trade routes), clients may want to consider levers for gaining some leeway in delivery times, for instance, setting up buffer stocks, renegotiating Incoterms, expanding the definition of force majeure, adding a right to postpone delivery with a certain notice period, gradating in sanctions, or using EU laws that may regulate logistic penalties in their market.
The addition of Marie Davy to Morgan Lewis’s Paris office enhances the capabilities of the firm’s global commercial contracts practice, building on our international footprint and adding French law and EU law mastery. Marie works closely with Morgan Lewis colleagues across the globe to assist clients in the drafting and securing of distribution agreements as well as other commercial agreements and industrial partnerships. Please reach out to Marie with any questions.