Links of success: intermediaries in trade (part 1)
As a manufacturer, you want to get your products to the end customer as efficiently as possible. To this end, it may be interesting to work with intermediaries. The choice of distribution regime depends on both economic and legal considerations. In this article, we give an overview of the different actors in the distribution process and some legal points of interest.
Direct sale vs. intermediaries
You can distribute your products in the market yourself, e.g. through physical stores or e-commerce. In theory, this offers the highest potential in terms of margin, but this requires significant investments (e.g. personnel, marketing) and, in addition, all risks (e.g. the buyer’s insolvency risk) lie with you. This could jeopardize the profitability of the commercialization, so it may be opportune to work with intermediaries. Professional distributors also offer a guaranteed sales level and economies of scale. On the other hand, there are also costs and risks involved (e.g. pre-contractual information obligations, termination fees), which one should know how to assess in order to make the best choice.
What’s in a (middleman’s) name?
The producer can choose from brokerage, commercial representation, commercial agency, commission, sales concession or franchise. This qualification is often crucial as it determines the legal protection of the intermediary.
Commercial agents and commercial representatives mediate (and possibly conclude contracts) in the name and on behalf of the principal, on a permanent basis and against a fee. The commercial representative is bound by an employment contract to the authority of his employer, while a commercial agent works independently. In turn, a broker has no permanent, lasting relationship with the principal, and a commission agent negotiates in his own name but on behalf of the principal.
Even further down the distribution spectrum are the sales concession (purchasing products in order to resell them oneself, e.g. official Volkswagen garages) and the franchise (operating a brand and/or commercial formula, e.g. McDonald’s restaurants). The concessionaire and franchisee act in their own name and for their own account. They thus assume part of the risk of sales, price change and payment. This relationship requires structured and lasting cooperation, which takes shape in a framework agreement organizing the commercial transactions. The manufacturer can reach a wide sales market without excessive investment. Since the manufacturer and the distributor both act as sellers (and thus potential competitors), rules of competition law must always be taken into account here (e.g. the prohibition of imposing minimum prices or restricting passive sales (including internet sales) outside the allocated territory).
Pre-contractual information obligations
The law provides for strict pre-contractual information obligations for commercial cooperation agreements. Although originally intended for franchising, this legislation also applies to sales concession and commercial agency. At least one month before the conclusion of the agreement, the principal must submit a draft of the cooperation agreement as well as a pre-contractual information document to the intermediary. This is followed by a mandatory waiting period during which no commitment may be made and no remuneration may be requested. In case of non-compliance, a draconian sanction applies: the intermediary can invoke nullity within two years of the conclusion of the agreement. As these far-reaching pre-contractual information obligations have a delaying and discouraging effect in practice, many legal professionals consider legislative intervention on this point appropriate.
What’s next?
In addition to pre-contractual information obligations, the legal protection of the intermediary upon termination of the commercial cooperation (notice period and (clientele) compensation) also constitutes an important transaction cost that one should take into account when developing a distribution network. In a later edition, we will reflect on the concrete legal consequences thereof.
Bruno Thoen and Wibo Van Poeck De Langhe Attorneys
