Local distributors and commercial agents

Distribution relationships

What alternative distribution relationships are available to a supplier?

Multiple relationships are available to a foreign supplier for the distribution of products in India, and the relationship can be chosen based on the commercial objectives and the nature of the products of the foreign supplier.

Distributors

Foreign suppliers generally appoint a distributor for the whole of India, or for a defined territory, by way of entering into a detailed distribution agreement. Sometimes the foreign supplier establishes its own entity to act as the importer and master distributor in India, and the latter further appoints distributors for different territories in India. The suitability of the distributor model depends upon the level of control the foreign supplier wishes to have on the distribution and sales activities in India. Competition law-related issues are important considerations for deciding the distribution relationship, such as the fixing of resale prices, exclusivity and territorial restrictions, among others.

Agency

The supplier can appoint agents, in which case the supplier is the principal and would retain control over the product sales and price. The agent only represents the supplier in India. Further, the supplier would be legally responsible for all the acts carried out by the agent in the course of business. The agent is generally not implicated in any financial risk, and all the risks associated with the product rest with the supplier. The agent is paid commission based on the sales made. Agents can have varying authority in accordance with the contract entered into between the supplier and the agent. There are a few products where the appointment of an authorised agent in India is legally required, such as pharmaceutical drugs and some medical devices.

Franchise

A foreign supplier may adopt a franchise arrangement to distribute its products in India. This arrangement is generally adopted where sharing of technical know-how and business methods is required. In India, many foreign suppliers have adopted the franchise model to sell their products.

Other forms of business models

Multinational brands generally enter the Indian market through distributors or franchisees by formulating an agreement. This concept is usually adopted by new entrants to access the Indian market without establishing their own entities.

Foreign suppliers can also enter into a trademark licensing agreement or a licensing of private labels whereby they would license their trademark on receipt of the negotiated payments from the licensee. In this arrangement, generally, the products are manufactured in India, and a royalty fee is paid on the products. The objective is to allow the Indian company to render services or manufacture goods under the foreign supplier’s trademark in accordance with the trademark licence agreement.

Companies sometimes opt for a strategic alliance by entering into joint ventures with Indian partners. Strategic alliances are typically adopted by foreign suppliers when local expertise or support of an Indian partner is required for the foreign suppliers to cater to the Indian market in an effective manner, or where there are other synergies of business.

Legislation and regulators

What laws and government agencies regulate the relationship between a supplier and its distributor, agent or other representative? Are there industry self-regulatory constraints or other restrictions that may govern the distribution relationship?

The relationship between a supplier and a distributor is primarily governed by the contract entered into between the parties. The Indian Contract Act 1872 (the Contract Act) governs the fundamental principles of the contract. There is no government agency that regulates the entire relationship between the foreign supplier and the Indian distributor. However, certain government agencies have regulatory roles based on the specific legal issues where the government agency has a legislative mandate to enforce any specific law. For example, issues related to competition law under a contract are enforced by the Competition Commission of India, which ensures that any contractual arrangement between the parties does not lead to any appreciable adverse effect on competition in the relevant Indian market or create any barriers to new entrants, or forecloses competition, among other things.

Similarly, the provisions of the Foreign Exchange Management Act 1999 are applicable whenever there is involvement of foreign currency and payment-related issues for the import of goods into India. The regulatory authorities in this regard are the Reserve Bank of India and authorised dealer banks acting in the capacity of delegated authorities. Further, issues pertaining to warranties, the transfer of risks and the ownership of goods are governed by the provisions of the Sale of Goods Act 1930. The quality of goods and trade practices are governed by the Consumer Protection Act 1986, which provides for various safeguards against unfair trade practices, defects in goods and deficiencies in services. Further, the Consumer Protection Act 2019 has been passed by Parliament, which envisages providing additional safeguards to consumers, especially relating to product recall, e-commerce business, grounds to file complaints, product liability and brand endorsement. The Act has yet to come into force.

To ensure the proper use of the intellectual property of the foreign supplier, the provisions of the Trade Marks Act 1999 and the Patents Act 1970 should be considered.

Contract termination

Are there any restrictions on a supplier’s right to terminate a distribution relationship without cause if permitted by contract? Is any specific cause required to terminate a distribution relationship? Do the answers differ for a decision not to renew the distribution relationship when the contract term expires?

There is no legal prohibition on a supplier terminating a contract unilaterally without any reasons if the contract provides for it. The right of termination of a contract and the conditions therefor are governed by the terms of the contract between the parties. The distributor agreement usually stipulates the terms and conditions under which the parties to the contract may terminate the contract. Typically, the contract provides for the termination right of a party during the subsistence of the contract for any breach of material obligations, misrepresentation, omission or commission of certain acts, infringement of intellectual property and so on. Care should be taken to incorporate reasonable terms for termination of the contract by a party; otherwise, the affected party generally tends to challenge the termination of the contract on the ground of unreasonableness. However, generally, the courts in India respect and uphold the contractual terms if the contract is not totally unbiased.

Contract termination without cause is permitted in India provided that the terminating party gives reasonable notice or compensation to the other party. The supplier is under no legal obligation to renew the contract at the end of its term. Indian courts have held that even in the absence of a termination clause in the contract enabling either party to terminate the agreement, the contract can be terminated even without assigning any reason and by serving a reasonable notice or paying compensation in lieu of notice.

Is any mandatory compensation or indemnity required to be paid in the event of a termination without cause or otherwise?

The termination of a contract by either party with or without cause does not statutorily require a party to pay any compensation or indemnity to the other party. Compensation or indemnity is paid by the party terminating the contract only in the event that the contract was terminated unlawfully or in contravention of the terms and conditions stipulated in the contract. In the event that the contract is terminated unlawfully or in contravention of its terms and conditions, then compensation or indemnity is paid in accordance with the terms of the contract. In the absence of any express agreement on it, the compensation amount is determined by the courts.

Transfer of rights or ownership

Will your jurisdiction enforce a distribution contract provision prohibiting or restricting the transfer of the distribution rights to the supplier’s products, all or part of the ownership of the distributor or agent, or the distributor or agent’s business to a third party?

The parties to the contract can formulate any terms and conditions within the ambit of the Contract Act, and the courts may enforce a provision prohibiting or restricting the transfer of the distribution rights to the supplier’s products. The Supreme Court, in the case of M/S Gujarat Bottling Co Ltd and Others v The Coca Cola Company and Others, observed that franchise agreements usually incorporate a condition that the franchisee shall not deal with competing goods. A condition restricting the right of the franchisee to deal with competing goods is to facilitate the distribution of the goods of the franchiser, and it cannot be regarded as restraint of trade. A restriction on transfer of all or part of the ownership of a distributor or an agent to a third party after the termination of the contract may not be enforceable as the prudence to enforce such provisions in India is that no party can restrain the other party from trading, and only a reasonable restriction can be imposed.

Law stated date

Correct as of

Give the date on which the information above is accurate.

13 December 2019