18/08/2008

Our firm recently acted for a client who lost millions of dollars of business because it did not have a formal distributorship agreement in place. 

Our client (let’s call them “Fish”) was the sole distributor for the Blue Pool range of pool equipment in NSW.  However, there was no formal written distribution agreement in place between Fish and Blue Pool.

The distribution arrangement was evidence by a three paragraph letter from Blue Pool to Fish confirming that Fish was Blue Pool’s sole distribution agent for its range of pool equipment in NSW.  In this letter, Blue Pool also reserved the right to appoint an additional distributor after giving Fish 3 months’ notice in writing.

For many years Blue Pool and Fish conducted business based on this letter and Fish built up quite a reputation as the sole distributor for the Blue Pool range of pool equipment in NSW.  Fish estimated that this sole distributorship was worth $4 million to its business.

One day, Blue Pool told Fish that it intended to appoint an additional distributor and gave Fish 3 months’ notice in writing.  After receiving this notice, Fish did some investigating and discovered that Blue Pool had no intention of appointing an additional distributor, but rather Blue Pool intended to take over the distribution itself . 

If Blue Pool took over the distribution of the Blue Pool range of pool equipment, Fish would no longer have its “sole distributor” status but of even more concern, Fish would be competing directly with Blue Pool as the manufacturer and distributor!

Despite Fish’s protestations, Blue Pool terminated the distribution arrangement and began to distribute its range of pool equipment.  Fish was still entitled to distribute the Blue Pool range of pool equipment , but Fish had lost its “sole distributor” status.  When the market found out they could purchase the Blue Pool range of pool equipment directly from the manufacturer Blue Pool and at a cheaper cost than via its agent Fish, Fish lost almost all of its business.

This highlights the need to ensure that you have good distributorship agreements in place which add capital value to your business.  Luckily for Fish it had a large share of the pool equipment market and was able to focus on other areas of its business.  But just imagine if Fish had developed its business around promoting itself as the sole distributor for the Blue Pool range of pool equipment in NSW!  If that were the case, Fish would not be in business today.

For advice in relation to distributorship agreements, contact Townsends.