Routes to Market Series: Contracting

There are many different routes to getting a product to market. From simple supply chains where a sole proprietor has limited suppliers and a single retail outlet, to complex supply chains involving multiple retail outlets, outsourced manufacturing, outsourced marketing and distribution, along with a web of suppliers and a network of logistic providers.

The right supply chain set-up and the different contracting considerations will depend on a business’ objectives and growth trajectory. As a business grows, it is important to fully understand the supply chain building blocks that are being put in place and how they can be properly managed.

Since the UK left the EU, the free movement of goods has been a hot topic. EU brands, distributors and exportors have a new raft of issues to contend with from UK competition law to customs regulation. Robust and well understood contracts lie at the heart of a successful relationship, and importantly, the parties having clarity on the commercial and legal parameters of that relationship.

So, what are some of the basics you need to think about?

1. Key supply chain participants and contracts

The supply chain process usually starts with procuring raw materials and arranging the manufacture of a product. In terms of contracts, businesses may need to consider manufacturing or co-manufacturing agreements, outsourcing and subcontracting agreements, and other supply agreements.

Logistics (and reverse logistics) partners may also come into play where products need moving through the supply chain, often across multiple jurisdictions. Warehousing providers that can also provide associated services (such as inventory management, quality control, storage in bond) may also be important.

Further down the supply chain, businesses may need to consider sales-related partners, such as agents and distributors/resellers (considered in more detail in 2 below) and franchising arrangements (which is a particularly common model used in the food and beverage sector to bring products to market).

2. Outsourcing marketing and distribution

Particularly when expanding into new jurisdictions, many businesses choose to outsource the marketing and distribution of products to an agent or distributor/reseller. Sometimes, this is because the laws in a certain jurisdiction require that sales are made through a local agent or distributor. However, it might also be a quick way to enter into new markets, saving cost on setting up selling operations and making the most of an agent/distributor’s local connections and knowledge.

When it comes to the outsourcing of marketing and distribution, businesses should fully understand the nuances of the different options as there can be significant legal implications.

What’s the legal difference between an agent and a distributor?

An agent acts on behalf of its principal and can either introduce a customer to the principal or it can arrange for a contract to be entered into between the principal and customer. Agents aren’t usually a party to the contract between the principal and customer and goods will normally pass directly from the principal to the customer. An agent tends to be paid commission on sales it helps its principal achieve. Usually, there will only be one contract that the agent is party to and that is the contract between the agent and principal setting out how the arrangement will work.

In contrast, a distributor is an independent trader that usually buys products from the principal and resells them on to its own customers. This means, usually, there will be two contracts the distributor is a party to - one between the distributor and principal (for the purchase of the products), and one between the distributor and its own customer (for their resale).

Which arrangement is better?

Which arrangement is better will depend on the circumstances and objectives. A distributor is essentially just a reseller of products so, if keeping close control over the marketing and sale of products is the objective, an agency relationship may be preferred but this kind of arrangement tends to require more leg work and can have a significant financial impact when the relationship ends.

In many counties (particularly in the EU and UK), agents might be due a potentially significant lump sum payment when an agency agreement comes to an end. Businesses considering utilising a commercial agent will therefore need to think carefully about the relevant legal, financial and tax implications. Businesses should also ensure any contract underpinning the agency relationship complies with agency laws and mitigates risk as much as is possible.

Competition law should be at the forefront of any decision, particularly in respect of distribution arrangements where territorial exclusivity is in scope.

3. Managing the supply chain

It is essential to create and maintain the right contractual framework to protect the supply chain and business interests. From a contractual perspective, just a few of the key issues to consider are set out below.

Regulatory compliance

There are increasingly complex local and international regulatory considerations to take into account across a global supply chain. Contracts across the supply chain may need to address bribery and corruption issues, modern slavery and human trafficking, environmental concerns, cyber security, product safety and liability, import/export requirements as well as industry specific regulation.

Brexit has had a significant impact on import and export custom controls.  

Risk management

Supply chain contracts should address how to deal with unanticipated issues to protect the resiliency of the supply chain. This may include consideration of, amongst other things, insurance, incident response, geo-political risk, supplier delivery capability, labour shortages or price increases, product and component recalls, supplier disputes. At a basic level, contractual provisions that prevent, mitigate or shift risk will be vital.

Brand protection

Brand protection can present a difficult challenge particularly across a global supply chain. Each link in the supply chain should include appropriate intellectual property contractual protection to protect the value in a brand but also the overall strength of the supply chain.

Exit

The contractual provisions around exiting an arrangement in the supply chain should be carefully planned. Flexibility may be needed but resilience of the chain will also be paramount. A break or fault in just one link can cause much wider repercussions in the broader supply chain.

Getting your supply chain set-up right, particularly in the context of a rapidly growing business, can present significant challenges. Choosing the appropriate structures and contractual protections will be essential for a successful, resilient and scalable route to market.