Reinier advises national and international companies
reinier.russell@russell.nl +31 20 301 55 55The franchise agreement and the distribution agreement are very similar, but there are also important differences. What are the consequences if you conclude a franchise agreement when it is actually a distribution agreement or vice versa? How can you avoid this misunderstanding?
Earlier, we discussed the difference between distribution and agency agreements. In this blog, we discuss some of the differences between the franchise and the distribution agreement. For parties, it will not always be clear exactly which agreement they have concluded; after all, both a distributor and a franchisee can sell products to third parties. Also, both agreements concern continuing performance agreements aimed at remaining in place for a long period of time. In addition, both involve agreements between parties located at a different place in a distribution chain.
Nevertheless, it is important for you, as a business owner, to be alert on whether an agreement qualifies as one of these agreements, as different laws and regulations apply. Distributors and franchisees therefore have different rights and obligations. In this blog, we explain three differences you should consider when drafting such an agreement.
The distribution agreement is not specifically regulated by law. Therefore, it is also referred to as an unnamed continuing performance agreement. Parties can therefore largely shape this agreement as they see fit. However, if the cooperation between the contracting parties is in different countries, it is wise for the parties to include a choice of law and forum in the distribution agreement.
If parties opt for a selective distribution agreement, more laws and regulations apply to the agreement in question. A selective distribution agreement limits the number of distributors and resellers in order to protect a luxury brand, for example. A company is likely to choose this to safeguard the exclusive image and reputation of its brand. Because free market forces are restricted by such an agreement, competition law must be taken into account when drafting it. In doing so, the supplier may not make any prohibited distinctions.
The franchise agreement does have a legal basis. In addition, the Civil Code contains various provisions applicable to the franchise agreement, which automatically imposes certain obligations on the contracting parties. These may include:
It is irrelevant what the parties call the agreement itself. This means that if parties call an agreement a distribution agreement, while it is actually a franchise agreement, the rules for franchise agreements still apply. This can have far-reaching consequences.
A major difference between the distribution agreement and the franchise agreement concerns the manner in which the franchisee and distributor act. A franchisee will often have to use the franchisor’s name, trademarks, products, know-how and logo. This may include, for example, supermarket formats or fashion chains. This is also characteristic of this type of agreement: often customers do not know at all whether they are, for example, at a supermarket owned by the company itself or a supermarket owned by a franchisee. The difference is not noticeable. However, the franchisee does act for its own account and risk and therefore not for that of the franchisor.
A distributor, on the other hand, will sell products in its own name – and thus not in the name of the supplier. In doing so, it will also be clear to a buyer that he is not buying from the company itself, but from a distributor. As a result, a supplier generally provides less support to the distributor than a franchisor does to a franchisee. Like the franchisee, the distributor acts for its own account and risk.
In the case of the distribution agreement, the usual rules for terminating continuing performance contracts apply. This means that a distribution agreement is generally terminable, but a reasonable notice period must be observed. In principle, a notice period of at least three months will apply. In addition, a party may have to have a substantial ground before the agreement can be terminated. There is also the possibility that the distribution agreement can only be terminated if the terminating party pays a financial compensation or damages to the other party.
For a franchise agreement, this works differently. If the franchise agreement includes an end date with the possibility of interim termination, it is of course possible to terminate the franchise agreement before the end date of the agreement. If the franchise agreement contains an end date without an early termination clause, this means that the agreement must be continued until the end date. Should the franchise agreement not include an end date, it will probably be possible to terminate the franchise agreement, with or without compensation. Often, however, a notice period will then apply or the terminating party must have a substantial ground before termination can be given.
In both cases, however, if the other party does not comply with the contract, there will often be a possibility to terminate the agreement anyway. In that case, we will be happy to look at the options with you.
Because of the differences that exist between distribution and franchise agreements, it is important to keep a sharp eye on exactly which agreement you have entered into with your counterparty. Clarity in advance prevents a lot of hassle afterwards. Therefore, pay attention to drawing up a sound written distribution or franchise agreement that matches your intentions. We will be happy to help you with this!
Do you have any questions about this blog or would you like us to review or draft a distribution or franchise agreement for you? Or do you have a dispute with your contracting party? Please contact us:
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