Is a Distribution Agreement Simply a Sales Agreement?

By Jerry Meek (January 19, 2016)

Is the relationship between manufacturer and distributor simply that of seller and buyer? Should this relationship be governed by the same legal rules governing ordinary sales transactions?

In the recent case of Precision Indus. Equip. v. IPC Eagle, 14-3222 (E.D. Pa. January 14, 2016), the plaintiff entered into an oral distribution agreement to distribute the defendant’s line of cleaning equipment and machines. According to the distributor, the manufacturer promised not to sell directly to any its customers. The manufacturer denied this, contending instead that the distributor was told that “large national account customers” need to “be handled through” the manufacturer.

According to the distributor, in the same meeting at which this oral agreement was reached the distributor informed the manufacturer of the identity of a national building service contractor for which it did work. Nine months later the manufacturer contracted to sell direct to this account. The distributor sued, alleging breach of contract. The Court dismissed the claim, ruling that – evening assuming that the manufacturer had promised not to sell direct to the distributor’s customers – this promise was unenforceable.

Generally, oral agreements are just as enforceable as written agreements – although their terms may be harder to prove. Article 2 of the Uniform Commercial Code (which has been adopted, in some version, by every State except Louisiana) provides, in part, that contracts for the sale of goods over $500 must be in writing, unless one of several exceptions applies. If, as the Court concluded, this is a contract for the sale of “goods,” then Article 2’s limitation would bar the distributor’s claim. If, in contrast, the contract is for something other than the sale of goods, then general principles of contract law would apply, under which the oral agreement would be enforceable.

In some ways a distribution agreement is a contract for the sale of goods. It is a contract for the future sale of goods by the manufacturer to the distributor and – to this extent – does fall within the scope of Article 2. But, as channel partners well understand, the relationship goes well beyond that of mere buyer and seller. In addition to a contract to sell goods, it is a contract granting certain intangible rights – usually including the right to use the manufacturer’s mark as an authorized distributor and the right to an assigned territory in which it enjoys exclusivity. It also frequently involves service obligations, including the obligations to service goods while under manufacturer’s warranty, to maintain certain staffing and facilities, and to generally promote the sale of the manufacturer’s products. It sometimes even includes a commitment by the distributor not to distribute competing products.

International distribution law takes account of the complex nature of the supplier-distributor relationship. The U.N. Convention on Contracts for the International Sale of Goods (CISG) governs the cross-border sale of goods among the 84 countries (including the United States) that have ratified it. While the CISG applies to sales of goods in which quantity and price are known, it generally does not apply to framework agreements – such as distribution agreements – designed to govern future sales.

Article 2 is essentially the domestic U.S. version of the CISG. Unfortunately, most U.S. courts resolve the issue of whether Article 2 or general U.S. contracts law applies by determining whether the predominant purpose of the agreement is for the sale of goods or for some other purpose. Since the ultimate purpose of a distribution agreement is typically the sale of goods, it is not surprising that most Courts that have considered the question have concluded that Article 2 governs such relationships. The implications are significant, since Article 2 imposes a host of rules at variance to general principles of contract law.

The CISG approach more fully accounts for the complex nature of the distribution relationship than the approach taken by the Court in Precision Indus. Equip. v. IPC Eagle and in most other U.S. decisions. Unfortunately, this attempt to pigeon-hole the relationship as predominantly one for the sale of goods or something else trivializes the nature of the relationship. It fails to appreciate that, while the relationship is in part that of buyer and seller, it is also much more.