Appointing distributors is one of the fastest ways to reach new customers without building a sales team in every region.
The basics are usually covered: territory, pricing, targets. The problems tend to come later, when the network grows, a distributor gets into trouble or the relationship ends.
Here are four risks that are easy to miss when you are scaling, and what your contracts should do about them.
1. Know who you are appointing
A distributor sells under your brand to your customers. If it is in financial difficulty, conflicted or careless about compliance, that becomes your problem.
Before signing, check:
- Financial health. Review filed accounts and credit reports. A distributor that cannot pay you is also one that may not invest in selling your product.
- Ownership. Find out who owns and controls the business, so you are not unknowingly appointing a competitor or a party linked to one.
- Other products. If the distributor sells competing products, decide whether that is acceptable before you sign, not after.
- Anti-bribery approach. Under the Bribery Act 2010, your company can commit an offence if someone acting on its behalf pays a bribe, unless you had adequate procedures to prevent it. Depending on how they operate, distributors can fall into that group, particularly in markets where public sector or large procurement deals are common.
Your contract should back this up with compliance obligations, audit rights and a right to terminate for breach.
One related point: a distributor buys your product and resells it. A commercial agent sells on your behalf. That difference matters, because commercial agents selling goods can be entitled to compensation when the relationship ends. Make sure your contract reflects what the relationship really is.
2. Control how your product is sold, within competition law limits
For technical or premium products, you will want to control who sells them and how. The law allows a lot of this, but not everything.
Distribution agreements in the UK are assessed under competition law. The Vertical Agreements Block Exemption Order 2022 (VABEO) gives a safe harbour to most supplier and distributor arrangements, provided each party's market share is 30% or less and the agreement contains no "hardcore" restrictions.
What you can generally do:
- Selective distribution. Only appoint distributors who meet set quality criteria, such as trained sales staff, technical support capability, website standards or a physical showroom, and stop them selling to unauthorised resellers.
- Online standards. Set quality requirements for how your product is presented and sold online.
- Dual pricing. Charge a distributor a different wholesale price for products sold online and offline, where the difference reflects the different costs of each channel.
What you cannot do:
- Fix resale prices. You can recommend a resale price or set a maximum, but you cannot set a fixed or minimum price.
- Ban or cripple online sales. Preventing distributors from using the internet to sell effectively, directly or through pricing designed to make online sales unviable, is a hardcore restriction.
- Share more information than you need. If you also sell directly and compete with your own distributors, limit information sharing to what is genuinely needed to run the distribution relationship. Swapping future pricing or wider commercial strategy can create competition law risk.
The VABEO expires on 31 May 2028, so agreements running beyond that date should be reviewed nearer the time.
3. Plan for a distributor in financial trouble
Most distribution agreements let the supplier terminate if the distributor becomes insolvent. Since the Corporate Insolvency and Governance Act 2020, that clause is often unusable.
Under section 233B of the Insolvency Act 1986, once a distributor enters a formal insolvency or restructuring procedure, you generally cannot stop supplying or change the terms just because of that procedure. A right to terminate that arose before the procedure started, for example for late payment, generally cannot be used once it begins either. There are limited exceptions, such as where the insolvency practitioner consents or a court agrees that continuing to supply would cause you hardship.
What that means in practice:
- Act on early warning signs. Include termination rights for things that happen before formal insolvency, such as repeated late payment or a breach of credit limits, and use them promptly. They will not help once a formal procedure has started.
- Protect your cash. Retention of title clauses, credit limits, deposits and security give you more protection than a termination right that may be blocked.
Product liability needs attention too. Under the Consumer Protection Act 1987, producers and anyone who imports a product into the UK can be liable for injury or damage caused by a defective product, regardless of fault. A distributor can also be liable if it cannot identify who supplied the product.
Your agreement should set out who is responsible for product claims, include indemnities that match that position, and require the distributor to hold appropriate insurance, with evidence provided each year.
4. Plan the exit before you sign
Most distribution disputes happen at the end of the relationship. The fix is to decide now what happens then.
- Remaining stock. Decide whether you will buy it back, at what price and in what condition, or whether the distributor can sell it off within a fixed period. Without a buy-back or sell-off clause, a former distributor can usually keep selling genuine stock it has already bought, even after its right to use your brand has ended.
- Open customer orders. Set out who completes orders already placed, and who supports those customers afterwards.
- Brand and software. End the distributor's right to use your trade marks and marketing materials, and set out what happens to any software licences it has granted to customers, so end users are not left without support.
- Customer data. Agree what customer information is handed back, and how that complies with data protection law.
- Non-compete restrictions. A restriction stopping the distributor selling competing products after the contract ends is only covered by the VABEO in narrow circumstances. It must be limited to competing goods, to the premises the distributor operated from, be necessary to protect your know-how, and last no more than one year. Anything wider needs separate justification or is likely to be unenforceable.
Summary
- Check a distributor's finances, ownership and compliance before you appoint them.
- Control how your product is sold, but stay clear of fixed resale prices and online sales bans.
- Do not rely on an insolvency termination clause. Act on early warning signs and protect your cash.
- Agree up front what happens to stock, customers, your brand and data when the relationship ends.
If your distribution network has grown faster than your contracts, book a free 20-minute call with the Ethiqs team.