1. SELECTIVE DISTRIBUTION: WHAT IS IT?

The contracts most commonly used by exporters wishing to organize the distribution of their products in a foreign country are commercial agency1and distributorship contracts2(normally entered into with a sole importer, responsible for one or more countries). Agents and distributors will normally act at the wholesale level by promoting contracts of sale (in the case of agents) or by reselling the products (in the case of distributors) to wholesalers or retailers within their territory.

In some cases, however, the exporter may wish to establish a direct link with the retailers who sell its products to the final consumer, in order to be able to control the way in which its products are marketed to the end user.

The reason for this is normally the need to ensure a certain level (and uniformity) of the sales service given to the consumer3. For instance, for technically sophisticated products sold on the consumer market, the producer may wish to have them marketed only by retailers who are able to give competent technical advice to the prospective purchaser. So, for products with an exclusive and high level image, it is in the interests of the producer (and of the existing network) that such products are only obtainable in shops having certain exclusive characteristics (as to their location, appearance, etc.).

Of course, the above conditions can be ensured only if the products are sold solely by retailers who fulfil the selection criteria. This necessarily implies that all the members of the network (as well as the producer himself, of course) must be prevented from supplying resellers who are not part of the network. Consequently, selective distribution entails a closed network, the result of imposing on all its members a prohibition from selling to non-authorized resellers4.

It is therefore appropriate to have recourse to selective distribution only if it appears possible to actually enforce (possibly on a world-wide basis) the obligation not to sell outside the network. If resellers not belonging to the network (and consequently free not to respect the quality standards imposed by the manufacturer) can obtain (and consequently market) the products, the selective distribution system cannot work properly.

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Selective distribution contracts are one of the possible means for reaching the above result, i.e. to have the products marketed through a network of qualified resellers. Franchising contracts can also be used for the purpose of obtaining control over the retail distribution, although they imply further requirements, such as the existence of commercial know-how5.

The members of a selective distribution network will almost always be left free to sell competing products. In other words, retailers in a selective distribution network normally offer their customers a variety of competing products, the only limit being that the Supplier will prevent the Distributor from selling products that could adversely affect the image of its own6.

Finally, it should be considered that within a selective distribution system the Supplier is expected to warrant uniform conditions to all members of the network. Of course, this does not exclude that different conditions may (and will) be granted in the presence of different situations (e.g. a higher discount for the distributor who purchases higher quantities), but as a general rule each retailer will be treated in the same way as the other members of the network.

2. THE TYPE OF SELECTION CONSIDERED IN THE MODEL

The Supplier will decide from case to case the criteria for selecting the “authorized dealers”. It may in particular admit into the network:

  1. all distributors that comply with certain objective minimum qualitative requirements, as to the characteristics of the shop and/or the qualifications of the personnel (the so-called qualitative selection), or
  2. distributors that comply with the above requirements and which in addition are willing to accept certain promotional obligations like, for instance, carrying a full range of products, purchasing minimum amounts, etc. (qualitative selection with promotional obligations), or
  3. only a specified number of distributors, thus limiting the global number of distributors selling its products (quantitative selection). This latter solution may be justified where the distributor would not be able to carry out the obligations imposed by the Supplier without having the warranty of a certain protection from competition from other distributors of the same products.

When drafting this model contract, we have mainly considered the second option, i.e. we have assumed that the Supplier would admit into the distribution network all distributors complying with the selection criteria and willing to accept the promotional[Page9:]obligations foreseen in the contract. This means that parties wishing a “stronger” type of selection (such as the quantitative selection) should check whether the model fully conforms to their situation and make the necessary modifications.

3. SELECTIVE DISTRIBUTION AND INTERNATIONAL TRADE

A network of retailers bound to the producer (such as a selective distribution or franchising network) is traditionally established at a national level. Companies wishing to operate a selective distribution network in several countries will often establish a subsidiary in each country, which will directly manage the network and the contracts with its members.

However, it has become more frequent in recent years to organize selective distribution across borders, i.e. between two parties from different countries7.

This model is meant for the second situation, i.e. that where the Supplier is established in a country other than that of the Distributor.

However, it can be used as well (provided the clauses implying the international character of the agreement are appropriately modified) for domestic contracts, particularly when parties wish to work out a standard contract applicable to several countries (and consequently less influenced by the peculiarities of each national law).

4. A FAIR AND BALANCED MODEL

The ICC task force that drafted this model form has sought to strike a fair balance between the interests of the Supplier and those of the Distributor. In other words, this model form does not favour the position of one of the parties, but aims at protecting and balancing the legitimate interests of both.

For this reason, parties looking for stronger protection of their interests should use models prepared by the categories they belong to (i.e. producers or, respectively, distributors retailers).

5. INDIVIDUAL CONTRACT FOR A SPECIFIC POINT OF SALE

A selective distribution agreement inevitably has a close link to the authorized point of sale. It is with respect to the characteristics of a specific outlet (location, appearance, specialization of the personnel) that the parties agree to enter into the contract. PART ONE – INTRODUCTION

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Of course, this does not exclude that the Distributor may manage several shops, with each conforming to the selection criteria established by the Supplier. However, in order to avoid unnecessary complications, the task force has decided to work out a model for one single point of sale. If parties are interested to cover more shops they may conclude several contracts (each for a separate shop), a solution that moreover corresponds to the prevailing practice, or – if they really need one single contract – they can make the necessary adaptations to the model.

6. THE APPLICABLE LAW

This model form has been based on the assumption that it will not be governed by a specific national law, but only by the provisions of the contract itself and the principles of law generally recognized in international trade as applicable to distribution contracts (also called “lex mercatoria”). The purpose of this solution is that the rules of this model form can be applied in a uniform way to suppliers and distributors of different countries, without giving one party the advantage – and the other party the disadvantage – of applying one party’s national law.

The task force is of the opinion that the possible disadvantage resulting from the application of rather flexible and general rules is counterbalanced by the greater certainty of a uniform set of contractual rules and by the reference to a set of rules on contracts – like the Unidroit Principles of International Commercial Contracts8– which offer a reasonably foreseeable legal framework for most issues which may arise.

With regard to the Unidroit Principles, it should be borne in mind that according to Article 23.1 A they apply only to the extent they do not conflict with general principles and trade usages, since Article 23.1 A puts the various sources incorporated by reference in the following hierarchical order: contract clauses, general principles, trade usages, Unidroit Principles9.

This also implies that, even when the Unidroit Principles provide that certain of its rules are mandatory, such rules will not prevail over the contractual clauses, general principles or trade usages in case of inconsistency between them.

In any case, if the parties wish to have their contract governed by a specific national law, they may use the alternative set forth in Article 23.1 B. In that case they should check carefully whether any provisions of the model form violate mandatory provisions of the national law they have chosen10. The choice of submitting the contract to a national law is preferable if parties submit the contract to the jurisdiction of ordinary courts instead of arbitration, since it is highly unlikely that national courts would accept to consider general principles, “lex mercatoria” and the like as the governing law of the contract.

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7. THE NEED TO RESPECT CERTAIN DOMESTIC RULES OF THE DISTRIBUTOR’S COUNTRY

Although the contract governing the reciprocal rights and obligations of the parties may be governed by general principles of law or by the domestic law of a country other than the Distributor’s one, there are specific provisions in the Distributor’s country which must be respected in any case.

This is particularly the case with respect to domestic rules governing the establishment and management of a sales outlet. Consequently, the Supplier should accurately verify if the exercise of the sale at the retail level requires permits, authorizations, etc. and, if so, if the Distributor complies with such rules.

8. THE NEED TO COMPLY WITH ANTITRUST RULES

Distribution contracts normally contain clauses which may restrict competition, such as in particular the obligation not to sell the products to non-members of the selective distribution network, resale price maintenance, etc., and which may consequently conflict with antitrust rules. It is therefore recommended to check if all clauses are in accordance with such rules. Since it is impossible to consider the provisions contained in the various national antitrust laws, we will mainly consider the rules of the European Union.

8.1 EU Rules: Article 81 and Regulation No. 2790/1999

The European Commission enacted on 22 December 1999 Regulation No. 2790/1999 which came into force on 1 June 2000. This Regulation exempts certain vertical agreements from the prohibition of Article 81 of the EC Treaty.

As regards distributors established within the EU11, the clause prohibiting the Distributor to sell to non-members of the network (which is the typical restriction contained in selective distribution contracts) is admitted, provided the Distributor remains free to sell the products to any other distributor of the selective distribution network and to any consumer, wherever the consumer is domiciled. However, the Distributor can be obliged to sell the products only from its premises.

Regarding the criteria for the selection of the distributors, the Supplier is entitled, if it so wishes, to decide the number of distributors it appoints and consequently to refuse to admit to the network prospective distributors which have the necessary objective qualifications (so-called quantitative selection). However, this type of selection, which was considered very negatively by the EU Commission before the enactment of Regulation No. 2790/99, has not been considered in the present model (see above, § 2), which is based on the assumption that the Supplier would in principle admit all retailers complying with its selection criteria.

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One of the basic principles of EU antitrust rules regarding selective distribution is that each member of the network must remain free to sell to other members (so-called “horizontal sales”). The Supplier may of course verify that such sales are actually within the network (in order to prevent sales to non-selected outlets), but it may not use this means to prevent lawful horizontal sales.

It should finally be noted that the block exemption under Regulation No. 2790/1999 does not apply if the Supplier has a market share over 30%. In this case parties should seek expert advice.

8.2 National legislation

It is likely that the clause whereby the Distributor is to respect the resale prices fixed by the Supplier is prohibited under most national antitrust laws.

As to the other clauses it is impossible to give general indications, since the solutions may vary from country to country.

9. RECOURSE TO INTERNATIONAL ARBITRATION

Since the model form is a set of uniform contractual rules, avoiding (as far as possible) the direct application of conflicting domestic legislation, it is appropriate that possible disputes be solved by a uniform resolution system organized on an international level.

From this point of view the best solution appears to be international commercial arbitration (see particularly Article 24.2. A), which offers a more international (neutral) approach by overcoming the option between the domestic courts of one or the other party.

It should also be considered that arbitration is recommended if the option under Article 23.1. A (general principles of law) is chosen, since such solution is unlikely to be accepted by domestic courts.

10. PRECAUTIONS FOR USE OF THE MODEL FORM

Any model contract should, to the extent possible, be adapted to the circumstances of a specific case.

Of course, in theory the best solution consists of drafting an individual contract based on existing model forms in order to take account of all the specific requirements of the parties.

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However, the parties are often not in a position to prepare a specific contract and prefer to have recourse to a ready-to-use balanced model form: in this case they will ask for a model which can be used as it stands, without any need to make modifications or additions.

The present model is an attempt to achieve a balance between these two possibilities.

The ICC has tried to work out a single solution on every issue. However, where this has not been possible (see e.g. Articles 18, 23.1 and 24.2), alternatives have been suggested.

Such alternative solutions have been presented side by side under the letters A and B, in order to point out that only one of them can apply.

Therefore, before signing the contract, the parties must decide which of the alternative solutions they choose, and then cancel the alternative they do not want to apply.

In any event, the model form provides (Article 25.1) that, if the parties do not make a choice by cancelling one alternative, one of them will automatically apply.

There are also a number of points where the parties must insert their requirements: definition of the territory and the products, minimum quantities to be purchased by the Distributor, etc. All such points have been incorporated in the annexes to this document, so that the parties can complete and (where necessary), by mutual agreement, modify such annexes during the life of the contract, without making changes to the basic text of the agreement.

Before signing the contract the parties should complete the Annexes and, if appropriate, delete the parts they do not need.

In order to avoid misunderstandings the parties should, when signing the contract, put their initials on each page, in order to check and make completely clear which amendments they have agreed upon or which alternative solutions they have chosen.

The Annexes have been construed throughout so that even when the parties do not fill in some parts, a solution can be found within the contract.

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ENDNOTES

1
See the ICC Model Commercial Agency Contract, Second edition, ICC Publication no. 644

2
See the ICC Model Distributorship Contract, Second edition, ICC Publication no. 646.

3
This is why selective distribution systems will be used mainly where the products require careful retail distribution and the producer thinks that it is worth it to organise such a network.

4
This aspect, which in principle restricts competition, may give rise, as will be seen later (§ 8 of this Introduction), to problems of compliance with antitrust rules.

5
Moreover, franchising implies in most cases that the franchisee/retailer sells only one brand of products, while in selective distribution the normal situation is that the retailer sells a variety of competing products.

6
This is a basic difference with respect to franchising, where it is normal that the franchisee sells only one brand of products.

7
This is particularly the case within the European Union, to the extent that obstacles to cross-border trade are gradually disappearing.

8
The text of the Unidroit Principles can be found in Appendix 2.

9
This solution takes into account that a limited number of provisions of the Unidroit Principles may not actually reflect the expectations of international trade. This may be the case with respect to certain rules which protect the disadvantaged party to an extent that goes beyond the standards that are usual in business-to-business relations: see, for instance, Article 3.10 on gross disparity (particularly as concerns the end of the sentence in para 1(a), where reference is made to “the improvidence, ignorance, inexperience or lack of bargaining skill” of a party in order to justify contract avoidance) and the rules on hardship contained in Articles 6.2.1-6.2.3 (particularly with regard to the rule authorizing courts to modify the contract terms). With respect to such rules, general principles of law and trade usages will in principle prevail over the Unidroit Principles. Of course, parties may also expressly exclude the application of specific provisions of the Unidroit Principles that they consider inappropriate.

10
It should in any case be considered that, even if no choice of a national law has been made, internationally mandatory rules (i.e. rules which would be applicable independently from the applicable law: so-called “lois de police”) of a national law having a close connection with the contract may be applicable in certain circumstances under Article 23.2.

11
The same applies, at the time of publication of this model contract, to Iceland, Norway and Liechtenstein, as members of the European Economic Area (EEA)