How to create and structure a distribution network: legal guide
Introduction: The strategic importance of a well-structured distribution network
The deployment of a distribution network is a fundamental step for any company wishing to extend its commercial reach, conquer new markets and ensure the availability of its products or services. Far from being a simple matter of logistics, the structuring of this network is a strategic decision that directly impacts the brand image, profitability and sustainability of the company.
A poorly designed or legally fragile distribution architecture can expose the company to significant risks: loss of control over marketing, devaluation of the brand, conflicts with partners, and above all, severe sanctions under competition law.
This guide, based on our firm’s expertise, aims to provide you with the legal keys to build and manage a high-performance, secure distribution network aligned with your strategic ambitions.
Overview of the main distribution methods
The choice of contractual framework is the cornerstone of your network. There is no one-size-fits-all solution: the optimal model depends on the nature of your products, your brand strategy, the desired level of control and the profile of the partners sought.
Here are the four main forms of distribution contracts:
|
Type of Contract |
Principle |
Benefits |
Disadvantages and Vigilance Points |
|
Distribution |
The supplier (head of network) approves distributors who meet basic criteria (often technical or competence), without limiting their number. |
– Flexibility and simplicity of implementation. – Wide market coverage possible. – Low legal constraints. |
– Weak control over branding and sales conditions. – Risk of direct competition between authorized distributors. |
|
Distribution |
The supplier selects its distributors on the basis of predefined, objective and non-discriminatory qualitative and/or quantitative criteria. Distributors may only resell to end consumers or other authorized network members. |
– Brand image protection (ideal for luxury, technical or high value-added products). – Control of the sales environment. – Allows to justify certain restrictions (e.g. prohibition of sale on third party marketplaces). |
– Selection criteria should be justified by the nature of the product and applied consistently to avoid accusations of discrimination. – Risk of reclassification as an anti-competitive agreement if the criteria are poorly defined. |
|
Distribution |
The supplier grants to a distributor the exclusivity of the sale of its products in a defined territory or for a defined group of customers. In return, the distributor often undertakes not to sell competing products. |
– Strong involvement of the distributor, who is encouraged to invest in its territory. – Targeted and effective market penetration. – Simplification of network management for the supplier. |
– Risk of dependence on a single partner in an area. – Strong framework by competition law (prohibition of absolute restrictions on passive sales). |
|
Management-Mandate |
The principal (head of the network) entrusts the management of his business to a manager-agent, who acts in his name and on his behalf, for a commission. The agent manager does not own the stock. |
– Full control over trade policy, pricing and branding. – Flexibility for the principal (no goodwill to be transferred). – The manager-agent is an independent contractor, which limits direct salary costs. – Suitable for sectors requiring high homogeneity (e.g. fast food, ready-to-wear). |
– Risk of reclassification as an employment contract if the relationship of subordination is too strong. – The principal bears the commercial risk (stock, unsold). – Requires rigorous training and monitoring of the managing agent. – Obligation to submit a Pre-contractual Information Document (PID) if the principal provides a trade name, a brand or a sign and requires an exclusivity or quasi-exclusivity commitment. |
|
Deductible |
The franchisor grants the franchisee the right to use its brand, brand and know-how, in exchange for a royalty. Franchisor provides ongoing commercial and technical support. |
– Maximum control over network homogeneity and customer experience. – Rapid development with less capital investment for the franchisor. – Pooling of marketing efforts. |
– Heavy legal obligations for the franchisor (submission of a Pre-contractual Information Document – PID). – Contractual complexity and significant litigation risk (end of contract, transfer of know-how). |
This list is not exhaustive, if you want more information on other distribution methods, do not hesitate to contact Gouache Avocats.
The key steps in creating the network
The establishment of a distribution network must follow a methodical process to ensure its success and legal certainty.
-
Business strategy
- definition: First and foremost, you need to clarify your goals.
- What market are you targeting? What is your product/service image? What level of customer service do you want to guarantee? Would you like to grant territorial exclusives? The answer to these questions will guide the choice of the distribution model.
- Choice of contract model: Based on your strategy, select the most appropriate contract type from those described above. A consumer product will benefit from a wide (approved) distribution, while a luxury product will require a selective case.
- Elaboration of selection criteria (for selective distribution): If you opt for a selective network, define objective, transparent and non-discriminatory criteria. These criteria may relate to:
- The quality of the point of sale (location, layout).
- Staff competence (training, certifications).
- The services offered (after-sales service, personalised advice).
- Prospecting and partner selection: Conduct a reasonable audit (due diligence) on candidates. Analyze their financial health, their reputation in the market, their existing brand portfolio and their ability to achieve the goals you will set.
- Negotiation and contractual formalisation: The negotiation phase must result in a written, clear and complete contract, which will become the law of the parties. Never settle for verbal agreements.
The structuring of the distribution contract: the essential clauses
The distribution contract is the document that governs the entire business relationship. It must be drafted with surgical precision to anticipate sources of conflict and protect the interests of each party.
Here are some examples of essential clauses:
- Purpose of the contract and products concerned: To define precisely the range of products or services covered by the agreement.
- Territory and exclusivity: Delimit the granted geographical area. The exclusivity clause must be carefully drafted to comply with competition law (in particular, by distinguishing active sales from passive sales).
- Obligations of the head of the network:
- Provide the products and services in accordance with the specifications and within a reasonable time/ make available a brand /know-how, if applicable.
- Guarantee the distributor against hidden defects and eviction within the limits provided for by law and the contract.
- Provide planned technical, commercial and marketing support.
- Respect any territorial exclusivity granted.
- Obligations of the Distributor:
- Actively promote the products and respect the supplier’s brand image.
- Achieve sales targets (quotas) if planned. These objectives must be realistic and may be revised periodically.
- Purchase exclusively from the supplier for the contract products (exclusive supply clause).
- Inform the supplier of market developments and customer feedback.
- Do not actively sell outside its exclusive territory.
- conditions:
- Define pricing conditions, billing and payment terms.
- Caution: It is strictly forbidden to impose a minimum resale price on the distributor. You can, however, communicate recommended retail prices.
- Intellectual property: Accurately frame the conditions of use of your trademarks, logos and other distinctive signs by the distributor.
- Duration of the contract and renewal conditions: The contract may be for a fixed term (CDD) or indefinite (CDI). A fixed-term contract offers more predictability, while a fixed-term contract offers more flexibility for termination, subject to reasonable notice.
- conditions: this is a major source of litigation. In particular, the clause must provide for:
-
Termination
- terms (for fault or no fault).
- The duration of the notice, which must be “reasonable”. In the event of a permanent contract, it is calculated according to the duration of the commercial relationship to avoid a conviction for sudden termination.
- The fate of the remaining stocks at the end of the contract (taken over by the supplier or not, and under what conditions).
- The withdrawal and cessation of use of the distinctive signs made available.
- The absence (in principle) of customer compensation for the distributor, unless the conditions of a mandate of common interest are met, which must be avoided by adequate contractual drafting.
- Confidentiality / non-compete / non-affiliate clause.
Financial
Termination
Points of vigilance in competition law
Certain practices are strictly prohibited and can result in severe penalties, including:
- Prohibiting the imposition of resale prices: You cannot impose on your distributors the price at which they must sell your products. Any clause or pressure to this effect is unlawful.
- Market partitioning: If you grant territorial exclusivity, you generally cannot prohibit your distributor from responding to unsolicited requests from customers located outside its territory (passive sales). An absolute prohibition is almost always considered anti-competitive.
- Restrictions on online sales: The case law is clear: a total and absolute ban on your distributors selling your products online is illegal. However, in the context of a selective distribution network, you can nevertheless, under certain conditions, regulate this use by imposing compliance with qualitative criteria.
- Justification of selective networks: To be valid, a selective distribution network must be justified by the nature of the product. Selection criteria must be objective, qualitative, applied in a non-discriminatory manner and not go beyond what is necessary.
Towards a high-performance and secure network
The creation of a distribution network is a major project that determines the commercial success of a company. The key to success lies in a two-pronged approach: a clear strategic vision and rigorous legal execution.
Good practices can be summarized as follows:
- Align your distribution model with your product and brand strategy.
- Choose the contractual framework that suits your control and coverage objectives.
- Write a comprehensive, precise and balanced contract that anticipates the life and end phases of the relationship.
- Always ensure that your network complies with the ever-changing rules of competition law.
A strong distribution network is a strategic asset that is built and managed with method and expertise.
This article provides general information and does not constitute legal advice. For any questions specific to your situation, we invite you to consult a lawyer. Gouache is at your disposal to assist you in structuring and securing your distribution networks.
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