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REMEDIES FOR SOLE DISTRIBUTORS

Interesting • 14th Nov, 14

 

1. INTRODUCTION

1.1 Traders in South Africa who negotiate sole distributorship agreements with foreign suppliers for the supply and resell of products in this country are often left with few or no remedies should the grantor of such sole rights unintentionally sells the same products to an entity outside South Africa, who, in turn, sells such products to a distributor in South Africa.

1.2. This happened in the case Taylor & Horne (Pty) Ltd v Dentall (Pty) Ltd 1991(1) SA 412 (A) where –

1.2.1. the appellant had since 1974 distributed a dental substance manufactured by a German company exclusively in South Africa in terms of an agreement with the German company.  As a result of the appellant’s efforts in promoting the substance it had become the most used substance of its type in South Africa.  During 1987 the respondent started distributing the same substance in the original packaging, save that the respondent merely affixed to the outside of the packaging a sticker proclaiming that it was the supplier thereof;

1.2.2. the appellant sought an undertaking from the respondent that it would desist from supplying the substance and when the respondent failed to give such an undertaking the appellant sought an order in a Local Division restraining the respondent from distributing the substance so long as the appellant enjoyed the exclusive distribution rights in respect of the product in South Africa.  The respondent opposed the application and stated that the supplies of the substance which it had sold had been purchased from distributors in Europe who in turn had procured them from the German manufacturer or its agents;

1.2.3. the Appellate Division (as it then was) held that –

1.2.3.1. the exploitation of a market established by a competitor for a particular product was not in itself a form of unlawful competition and the appellant therefore had to stand or fall by the contention that, because of its exclusive supply agreement, nobody could lawfully market the substance in South Africa in competition with it;

1.2.3.2. the acceptance of this contention would lead to startling consequences and would mean that for as long as the sole agency endured the appellant would enjoy a monopoly akin to that derived from a patent in regard to the commercial distribution of the substance and an agreement which created purely contractual rights between the parties thereto would in effect bind would-be competitors no matter from what source or however honestly they obtained supplies thereof;

1.2.3.3. such an approach would impose an unwarranted restriction on the right of ownership of a person who legitimately acquired supplies of the substance;

1.2.3.4. fairness and honesty were relevant criteria in deciding whether competition was unlawful and that this was judged by the boni mores and the sense of justice of the community and applying these criteria the respondent’s intrusion into the market would not be condemned by the community as unfair or unjust in a legal sense.

1.3. The critical point in the Taylor & Horne case was the fact that the respondent legitimately obtained the product in Europe from a different supplier than the supplier of the sole distributor.

1.4. The German supplier of the products to the sole distributor in South Africa sold to another company in Europe and did not know that that company would sell it to the respondent for distribution in South Africa.

 

2. PROTECTION FOR THE SOLE DISTRIBUTOR

2.1. Some protection against unwelcome competition of the nature described in the Taylor & Horne case for the sole distributor may lie in the contractual arrangements it concludes with the supplier, rather than to resort to litigation against the likes of the respondent, who are deemed to be innocent in this regard.

2.2. In addition to the usual restrictions to be imposed on the foreign supplier, namely, that it may not sell any of the products sold to its sole distributor to any other party who intends to sell it into the market in respect of which sole distribution rights have been granted, restrictive measures should also be imposed in the nature of the following:

2.2.1. The supplier –

2.2.2. should undertake to the sole distributor to take steps to determine whether buyers of its products in the country of origin intend to sell such products into the country where it has granted exclusive distribution rights to another company;

2.2.3. should undertake to the sole distributor to not to sell such products to such buyers who intend to sell the products into the restricted markets; and

2.2.4. consequently, indemnifies the distributor in respect of any damages it may suffer should a buyer of its products sell into the restricted market.  The supplier can however be released from such indemnity in all such matters where it has concluded with such buyer outside South Africa a contract for the benefit of the sole distributor in terms of which such buyer will refrain from selling such products to any entity in the restricted market or to an entity in Europe who intends to sell to any entity in the restricted market.  Upon acceptance of such benefit by the sole distributor, the supplier could be released from its indemnity.

2.3. The advantage of the arrangements referred to in paragraph 2.2.1 is that it creates a vinculum iuris (legal tie) between the sole distributor and the supplier through the indemnity and between the sole distributor and the unwelcome competitor through acceptance by the sole distributor of the restraint not to sell such products in the restricted market.  The foreign supplier should be obliged to furnish the sole distributor from time to time such signed contracts concluded with its buyers for acceptance of the rights contained therein, or the foreign supplier and the sole distributor could agree in the sole distributorship agreement that any sale to a foreign buyer, which will also include a contract in favour of the sole distributor, will be deemed to have been accepted by the sole distributor in the absence of express acceptance.

2.4. The requirements for such an effective contract to benefit the sole distributor are:

2.4.1. The sole distributor must be named as the beneficiary in the contract between the sole supplier and its foreign buyers;

2.4.2. The sole supplier must restrain the foreign buyers from trading with the nominated product in South Africa, either personally or through intermediaries;

2.4.3. The sole supplier must be bound in the sole distributorship agreement with the sole distributor that it will not at any time revoke such benefit of restraint of trade as granted to the sole distributor prior to acceptance thereof.

2.5. Of course, the would-be distributor also needs protection against competition while it is building demand in its market of choice for such products.  It can overcome that problem by obtaining an option of such sole distribution rights from the supplier for the period it needs to build its market.  When a sustainable order flow is likely, the option can be exercised for that purpose.  In the meantime, the supplier is bound not to grant any distribution rights in that restricted market.

 

William Du Toit



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