NSW Exclusive Dealing - Food Distributor?

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Kate1973

Member
12 August 2014
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1
1
I work for a food manufacturer and we use distributors in each state to sell our products to a variety of customers - for example; independent supermarkets, health food stores, online stores, fresh food markets, specialty food stores/delis.

We don't tend to have formal agreements drawn up with our distributors, we have been doing business with them since well before I started with my company.

They are distributors rather than sales agents. We sell our products to them, then they mark up the products to sell to their customers.

I have a problem in a state where I have two distributors, one we've had a long standing business with and they sell to stores mainly in metropolitan Melbourne. We appointed a second distributor last year because we heard they were very strong in regional Victoria - Ballarat, Shepparton, etc where there are larger IGA stores that we weren't reaching previously. The second distributor knows that this is why we appointed them and this is the area we want them to focus on to develop our business.

Now the second distributor doesn't seem to be focussing on the regional areas, they are 'stealing' customers in metro Melbourne from the first distributor. So our first distributor is very upset and now not focussing on our products and demanding that I set strict territories for both distributors. I can understand this but am hesitant to do so as I feel like it might be exclusive dealing. Once I sell to the distributors, I feel like I'm not allowed to then restrict where they do business, either geographically or by channel.

However I believe its extremely common in this industry for distributors having contracts telling them where they can and can't sell the manufacturers products. For example - there's one distributor to sell into grocery and one to sell into health food stores. From my reading, this just doesn't seem legal. I think once a distributor has purchased the product from the manufacturer, they are allowed to sell it wherever they like at whatever price they like.

Rather than getting incremental sales growth, my second distributor is just cannibalising the sales from the first distributor and there's no overall growth in the state.

I've told the first distributor that I can't tell the second distributor that they are not allowed to call on particular stores. They simply don't believe me and the relationship is being damaged with this customer. Which I obviously don't want, particularly when I'm not getting incremental sales as a result of having two distributors.

Any answers would be great or advice on how to handle this situation.

Thanks,

Kate
 
S

Sophea

Guest
Hi Kate,

I would strongly suggest setting up a formal agreements with your distributors, especially as your business grows. You would likely only need to have a lawyer draft up one pro-forma agreement for you that you can use for all of your distributors, that covers all the things you want to set out in it. If you ever get into a legal dispute over something - it is SOOO much easier to simply refer to your signed distribution agreements to show the court what the terms of your business relationship are.

It is legal to dictate to distributors how you want your product to be sold. Therefore you can require that they stick to specific territories where they can distribute your product or specific requirements regarding advertising / pricing etc. I would be getting all of your distributors to sign a distribution agreement and kick your 2nd VIC distributor back out to the 'burbs.

For example, a distribution agreement will generally cover terms and conditions dealing with the following:
  1. Parties - Who are the parties involved in this relationship?
  2. Product - What goods are being supplied/distributed? Can these goods be changed/altered in any way?
  3. Quantity - How much product is being distributed?
  4. Territory - Where is the product being distributed?
  5. Period - How long can the product be distributed for? Is there a probationary period?
  6. Price - What price is the product being sold for?
  7. Targets - How much product needs to be distributed to achieve sales targets? If these targets are not met, what are the rights of both parties? Is there a minimum order?
  8. Payment - What (and how much) payment will be made for the distribution? When (and how frequently) will this payment need to be made?
  9. Exclusivity - Is the distributorship exclusive? What happens if this is breached? (Retailers often try to secure exclusive deals to distribute popular products)
  10. Termination - How can the distribution agreement be terminated?
  11. Marketing - How are the products to be marketed? (Apple has very strict terms and conditions when it comes to their products)
  12. Reporting - What are the reporting requirements of both parties?
  13. Licensing - Are there any trade mark licensing issues? Who owns the brand?
  14. Confidentiality - Are any aspects of the relationship to be kept confidential?
 
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Kate1973

Member
12 August 2014
2
1
1
Thanks Sophea. You're right, we do need to get our agreements formalised and in writing.
This is what I'm reading....the parts I've underlined and bolded are the ones that concern me.

Exclusive Dealing/Third Line Forcing
Exclusive dealing and third line forcing are prohibited under the Competition and Consumer Act.
Exclusive dealing occurs where a company supplies goods or services on conditions that restrict the buyer's freedom to choose with whom, in what or where they deal. Examples include where:
  • a supplier agrees to supply goods (or give a discount) to a retailer on condition that the retailer only sell the supplier's brand or that the retailer does not acquire goods from a competitor of the supplier;
  • a supplier agrees to supply goods (or give a discount) on condition that only certain parts or brands be used when repairing the supplier's products; and
  • a supplier agrees to supply goods (or give a discount) on condition that the goods only be distributed or sold in a particular area or to particular people.
A company's refusal to supply because the customer will not agree to such conditions may also be exclusive dealing.
Exclusive dealing will only be illegal if it is likely to substantially reduce competition in the market.
Penalties for exclusive dealing, and third line forcing, by companies include fines up to the greater of:
  • $10 million;
  • three times the gain from the breach of the Competition and Consumer Act; and
  • if the gain cannot be assessed, 10% of the annual turnover of the company in breach.
Penalties for exclusive dealing, and third line forcing, by individuals include fines up to $500,000.
 
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DennisD

Well-Known Member
11 July 2014
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Hi Kate

It sounds that you are acting on Sophea's suggestion to document your agreement in a written contract. Good idea, could not agree more!

Seems that you got your information from here, the Treasury website

The exclusive dealing provisions in the relevant section 47 of the Competition and Consumer Act 2010 (Cth) should be read having regard to the exceptions set out in section 47(10). Distribution agreements sometimes make explicit the purpose of the contract (for example, maximising brand and sales growth) in their recitals, being mindful of section 47(10)(a). The second limb in 47(10)(b) will be of more of an issue if your company is a major market player

In any event, best to document your contract and have lawyers provide you with compliance advice, as the above only scratches the surface and should be taken as general information only
 
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Rod

Lawyer
LawTap Verified
27 May 2014
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I'm not an expert in this area but I'd always believed distributors had different rules/laws compared to selling to retailers. I have no 3rd party source to back my belief :(