The concept of distribution

Contract of distribution is essentially a controlled resale of goods or services. Under a contract of distribution, one party – distributor – shall take an obligation to purchase in his name and at his expense from the other party – producer (supplier) – goods (services) and sell them to the final consumer or to other distributors, as well as to perform other work related with the reselling of goods (services) while the producer (supplier) shall undertake the obligation to sell goods (services) to the distributor, as well as to perform other work related with the distribution of goods (services). Only enterprises may be parties to a contract of distribution. This type of contract can be concluded for a fixed or an indeterminate term, depending on the preferences of the parties. However, it shall be noted that according to the Art. 6.798 of the Civil Code of the Republic of Lithuania (hereinafter – the Civil Code), a contract of distribution must be concluded in written form, failure to comply with this requirement shall render the contract null and void.

Types of contract of distribution

According to the provisions of the Art. 6.800 of the Civil Code, contracts of distribution may be exclusive and selective:

-        Under an exclusive contract, the producer (supplier) shall take an obligation to sell the goods indicated in the contract as intended for resale only to one distributor in a concrete territory exclusively attributed to the distributor, or to a concrete group of consumers exclusively attributed to the distributor. 

-        Under a contract of selective distribution, the producer (supplier) shall take an obligation to sell the goods intended for resale only to certain distributors who conform to the technical, qualification or any other criteria determined by the producer (supplier).

Depending on which type of contract is chosen, different obligations apply to the parties.

Limitations

Parties to a contract of distribution may provide certain limitations which restrict competition. However, only conditions which are not prohibited by the Competition law may be provided in the contract of distribution. For example, the parties shall have no right to the price of resale of the goods. According to the Art. 6.801 of the Civil Code, the following conditions are acceptable in the contract of distribution:

-        A condition preventing the distributor from producing or distributing goods that compete with the goods indicated in the contract;

-        A condition obligating the distributor to buy the goods indicated in the contract only from the producer (supplier);

-        A condition preventing the distributor from searching for customers and establishing branches and representative offices in any other territory than indicated in the contract.    

Obligations of distributor

Distribution is often defined as controlled resale because the contract may provide certain obligations to the distributor regarding the sale of the products (services).

Unless otherwise provided for by the contract and the Competition law, the distributor shall be obliged to:

1)     sell the goods only in the territory or to persons indicated in the contract;

2)     ensure effective distribution of goods;

3)     organise the advertising and advertising campaigns for the goods of the producer (supplier);

4)     ensure adequate qualification of his employees and their training;

5)     ensure adequate preservation and warehousing of goods, continuous replenishing of the stocks, establish and maintain a network of trade warehouses;

6)     sell the goods under the trademark of the producer (supplier) or in the special packing or marking of the producer (supplier);

7)     avoid establishing branches and representative offices in any other territory than determined in the contract;

8)     buy the goods in certain batches or a certain minimum amount within the period established in the contract;

9)     sell the goods within a certain period established in the contract;

10)  provide technical service to the goods after their sale or provide the buyers of those goods with any other guarantee or servicing;

11)  supply the producer (supplier) with information about the market conditions, its changes and carry out market research;

12)  avoid producing goods which compete with the goods established in the contract;

13)  avoid revealing commercial secrets or any other confidential information of the producer (supplier);

14)  return to the producer (supplier) all the documents, materials, trade samples, etc. received from him upon the termination of the contract.

Obligations of the producer (supplier)

Unless otherwise provided for by the contract, the producer (supplier) shall be obliged to:

1) sell the goods of proper quality and guarantee their quality, sell the goods within the time periods and amounts established in the contract;

2) sell the goods agreed upon only to the distributor and avoid selling goods directly to the consumer;

3) train the employees of the distributor;

4) supply the distributor with advertising material;

5) pay the distributor remuneration established in the contract for additional services supplied by the distributor.

Liability

Because of distribution contract the final consumer of a product (service) does not deal with producer (supplier) directly. In such case, a question of who is liable – the producer or the distributor – arise. 

For the damage inflicted to third persons the distributor and producer (supplier) shall be liable upon general grounds. For the damage caused to the consumer by goods or services of inferior quality, liability of the distributor and producer (supplier) shall arise in accordance with the rules established in Articles from 6.292 to 6.300 of the Civil Code. It shall be noted that clauses of the contract of distribution by which the producer (supplier) is relieved from liability for damage caused to consumers by goods produced (services supplied) shall be null and void.

In conclusion, if the requirements regarding distributorship contracts are met, producer or supplier can successfully ensure that distributor will comply with its obligations and avoid infringement of Lithuanian legislation.

Jovita Valatkaite, solicitor of the Gencs Valters Law Firm in Vilnius

Practising in fields of Entertainment Law in Latvia, Lithuania and Estonia

T: +370 52 61 10 00

F: +370 52 61 11 00

jovita.valatkaite@gencs.eu