
- I. What is a Distributorship Agreement?
- II. Types of Distributorship Agreements
- III. Formation and Validity of a Distributorship Agreement
- IV. Rights and Obligations of the Parties in a Distributorship Agreement
- V. Termination of Distributorship Agreement
- VI. Consequences of Terminating a Distributorship Agreement
I. What is a Distributorship Agreement?
A distribution/distributorship agreement is a cooperation contract established between a supplier and a distributor. Under this agreement, the distributor purchases certain products from the supplier to sell them within a specific region and then resells them to their consumer network. In addition to selling the products and services in their own name and on their own account, the distributor also engages in activities aimed at increasing the supplier’s sales.
The distributor sells the product or service in their own name and on their own account and operates as an independent merchant. While carrying out activities to boost product or service sales, the distributor bears all investment costs. The distributor also assumes the cost risk. Additionally, the distributor has the freedom to select customers, promote products, and set prices. Once the distributor purchases the goods from the supplier, they become both the possessor and the owner of the goods and are free to determine their profit margin.
A distribution agreement is not regulated under statutory law. The Turkish Court of Cassation defines an exclusive distribution agreement, referred to as a sole distributorship agreement, as follows: “A sole distributorship agreement is a contract that regulates the relationship between a producer and a sole distributor, in which the producer undertakes to send goods to the sole distributor for exclusive sale in a specific region, and the sole distributor operates in their own name and on their own account to increase the sales of the goods sent to them. This contract establishes a continuous debt relationship between the parties.”
II. Types of Distributorship Agreements
1. Exclusive Distributorship Agreement
In an exclusive distributorship agreement, the supplier grants the distributor, who is an independent merchant, the exclusive right to sell the agreed-upon products or services within a designated territory. The supplier agrees not to engage in active sales within the contractually defined area and commits to sending all products covered by the agreement solely to the exclusive distributor.
The supplier’s duty of loyalty is very high. Unless there is a justified reason, the supplier must always act in the best interest of the exclusive distributor. If the supplier receives a sales request from the exclusive territory, they must inform the exclusive distributor and allow the distributor to make the sale.
Other terms used to describe exclusive distributorship includes:
- Sole distributorship
- Sole dealership
- Sole agent
- Main dealership
- Exclusive dealership
Exclusivity is generally limited to a specific region or certain products. The supplier may restrict market sharing based on geographic areas, customers, or usage. The parties must clearly define the exclusive territory, the products and services covered by the agreement, and the prices in the contract. If exclusivity is not explicitly stated in the contract, the agreement is considered a non-exclusive distribution agreement.
Along with the exclusivity clause, the exclusive distributor is also solely authorized to market and promote the products. This authority is referred to as an “exclusive authority.”
2. Non-Exclusive Distributorship Agreement
A distributorship agreement without an exclusivity clause is a non-exclusive distribution agreement. In this type of agreement, the distributor does not have a monopoly on the sale of the products covered by the contract. The same products can be sold by other individuals or entities, requiring the distributor to compete with other suppliers.
3. Selective Distributorship Agreement
In a selective distributorship agreement, the supplier establishes a selective distribution system and requires the selective distributors to meet certain criteria in order to be included in this specific system.
The supplier focuses on quality control of the selective distributors. This type of agreement is commonly preferred for luxury brands and businesses that require prestigious marketing. The agreement aims to ensure that the appearance of stores, the training, knowledge, and sales techniques of the sales staff adhere to the system set by the supplier. In selective distribution, a high level of service and presentation is expected during the product sale. To ensure post-sale support, the supplier limits the number of distributors included in the selective distribution system within a particular region.
The supplier creates a unique and closed distribution network, and the products are not sold outside this network. Based on the established criteria, the supplier commits to selling the contractually defined products directly or indirectly to the selective distributors. In return, the selective distributors commit not to sell the products to unauthorized distributors. Distributors are only allowed to sell the products to approved distributors, and those within the selective distribution system will compete with one another.
By implementing a selective distribution system, price competition is minimized, and non-price-related factors, such as pre-sale services and store appearance, become the focus of the agreement parties.
III. Formation and Validity of a Distributorship Agreement
A distributorship agreement is formed when the supplier and distributor agree on their declarations of intent. It is a contract that imposes obligations on both parties. Both parties must have legal capacity to act.
There are no formal requirements for the formation of a distributorship agreement. Although a written form is not a validity requirement, it is necessary for evidence. Given the high amounts often involved in disputes, written proof is required. Therefore, the agreement should be made in writing. The contract should specify which products the distributor will procure and resell to others, the distribution network, and whether the distributor has exclusive rights.
The contract can be made for a definite or indefinite term. A distribution agreement is a framework agreement that implies continuity. The agreement should include:
- Prices of products or services,
- Delivery terms,
- Payment terms,
- Exclusive rights,
- Advertising expenses and how they are shared,
- Penalties,
- Minimum purchase quantities,
- Whether the agreement is for a definite or indefinite term,
- If for a definite term, conditions for renewal,
- After-sales service provisions,
- Termination conditions.
A distributorship agreement cannot be made in a manner that violates morality, personal rights, mandatory legal provisions, public order, or if it involves an impossible subject matter.
IV. Rights and Obligations of the Parties in a Distributorship Agreement
1. Rights and Obligations of the Supplier
The supplier and distributor, in accordance with the principle of freedom of contract, can determine their rights and obligations. However, there are also essential rights and obligations arising from the contract itself.
The supplier’s obligations include:
- The obligation to properly fulfill the provision of products and services,
- The obligation to either sell or refrain from selling within the distributor’s territory, in line with the nature of the contract,
- The obligation to support the distributor,
- The duty of loyalty.
Due to the supplier’s duty of loyalty, the supplier must guarantee the quality of the products and refrain from sending defective goods to the distributor. The supplier must also conduct negotiations on equal terms and support the distributor with knowledge, trade secrets, samples, and materials.
If the supplier fails to deliver the products and services on time or at all due to their own fault, causing significant harm to the distributor, the distributor has the right to immediately terminate the contract due to the breach of the delivery obligation.
In cases where the consumer exercises their rights stemming from defective products, the supplier is also liable. The supplier can guarantee the quality of the products sold to the distributor through the contract, which would impose a broader responsibility than defect liability. In such cases, the supplier is responsible for ensuring the product’s presentation, packaging, the inclusion of a warranty certificate, the brand’s visibility, after-sales support, and providing product service.
The distributor sells the products obtained from the supplier in their own name and on their own account, bearing all risks independently. The supplier has limited rights to give instructions to the distributor, and these should be clearly outlined in the contract. However, even if not specified in the contract, the supplier, based on a trust relationship, must provide the distributor with all necessary information and documents regarding the products. Additionally, the supplier has the obligation to treat the distributor equally at every stage of the relationship.
2. Rights and Obligations of the Distributor
The distributor is responsible for covering the costs of distribution and advertising expenses. The distributor must promote the products covered by the contract in the best possible way, make all necessary preparations to increase sales, and organize the distribution method effectively.
According to the Turkish Court of Cassation, since the sole distributor conducts business in their own name and on their own account, bearing all associated risks, they cannot claim reimbursement for expenses, particularly advertising costs .
The distributor is responsible for the logistics of the products obtained from the supplier, including storing the incoming goods in their warehouse. Additionally, the distributor has the obligation to prepare orders and deliver the products to consumers on time and without defects.
The distributor must ensure that products sold to the consumer are delivered in accordance with the contract. Regularly purchasing the agreed-upon quantity of products from the supplier is a fundamental obligation of the distributor. Although there is generally no minimum purchase obligation, such a condition can be stipulated in the contract between the parties.
The distributor has several responsibilities, including offering quality products, expanding the sales network by establishing stores and warehouses, maintaining stock, and providing after-sales services.
The distribution agreement also includes a confidentiality obligation between the parties, which should be explicitly outlined in the contract. If the confidentiality obligation is breached, the supplier has the right to terminate the contract immediately without notice. In cases of fault, the supplier also gains the right to claim damages.
The supplier and distributor may also agree on a non-compete obligation. This prohibits the distributor from selling products that compete with the products and/or services covered by the agreement.
V. Termination of Distributorship Agreement
A distributorship agreement terminates upon the bankruptcy, death, or loss of legal capacity of either party. The provisions related to agency in the Turkish Commercial Code are applied by analogy to distribution agreements. Throughout the term of the agreement, the parties may mutually agree to terminate the contract at any time.
If the agreement is for a fixed term, it generally ends automatically when the term expires without the need for notice. However, the extension of the term can be foreseen in the contract. Even if no extension is stipulated, if the parties continue their contractual relationship after the term expires, the agreement becomes an indefinite-term contract.
Parties can terminate the agreement through ordinary termination by providing notice within the timeframes specified in the contract. If no termination period is specified, according to the Turkish Court of Cassation, the termination period should be determined by the judge, considering the specifics of the case. In the case of indefinite-term distribution agreements, either party can unilaterally terminate the contract without providing a reason, as long as they comply with the principle of good faith. If the contract does not specify how ordinary termination should be carried out or the notice period, the duration will be determined by the court.
Extraordinary termination allows either party to terminate the agreement immediately, without notice, and with future effect if a significant reason exists, regardless of whether the contract is for a fixed or indefinite term. Either party may terminate the agreement immediately if an important reason arises.
Examples of significant reasons include:
- One party nearing bankruptcy and unable to fulfill obligations,
- Breach of the confidentiality obligation,
- Prolonged illness,
- Breach of the non-compete obligations,
- Failure to make payments despite warnings,
- Persistent neglect of contractual obligations,
- Damage to the supplier’s brand due to the distributor’s actions.
If a party abuses their right to terminate, the termination will be deemed invalid, and the agreement will remain in effect. Additionally, the party at fault for wrongful termination is liable for compensating the damages that arise from the termination.
VI. Consequences of Terminating a Distributorship Agreement
Upon the termination of the distribution agreement, the distributor must return any remaining stock and spare parts to the supplier. Additionally, the compensation provisions set forth in Article 122 of the Turkish Commercial Code (TCC) apply to the distributor as well.
According to Article 122 of the TCC: “After the termination of the contractual relationship, a) If the principal obtains significant benefits from new customers found by the agent after the termination of the contractual relationship, b) If the agent loses the right to claim commissions for work done with customers acquired during the contract, or for business that would have been done within a short period after the termination, and c) If it is considered fair, based on the circumstances of the case, the agent may request appropriate compensation from the principal.”
In the context of distribution agreements, the distributor will likely have built a customer portfolio. If this portfolio is transferred to the supplier upon termination, the exclusive distributor may be entitled to compensation. According to the Turkish Court of Cassation, this compensation, known as indemnity compensation, is a remedy for the loss the agent or exclusive seller incurs when their customer base is transferred to the principal, who continues to profit from these customers after the contract ends.
If the supplier continues to benefit from the customer base that the distributor established, and generates income from it after the termination of the agreement, the distributor may request compensation to offset this profit.
Conditions for the distributor to claim compensation:
- The contract must involve continuous obligations.
- The distributor must be an exclusive distributor.
- The compensation claim must be made within one year of termination.
- The distributor must not be at fault for the termination.
- The distributor must have provided significant income through the customer base.
- The distributor must have suffered a loss due to the contract’s termination.
The rules governing the non-compete clause in agency agreements can also be applied to distribution agreements. Non-compete clause must be limited in terms of location, subject matter, and duration, and must be included in the contract in writing for it to be valid. The maximum period for such a clause is two years.
If a party terminates the distribution agreement via extraordinary termination based on a justifiable cause, that party can claim the profit they would have earned from the other party if the agreement had not been terminated.
Ece Deniz Vardar
Attorney at Law | Lawyer in Turkey
Call us : +90 212 909 86 34
Send mail : info@ballawfirm.com