Professional Interpretation

Economic development gave birth to the refinement of social division of labor, manufacturers no longer have to act as a seller at the same time and the sales function has been weakened as a result, sales only be profitable[Al1]  unless the channels have broadened to reduce the cost of sales, this has spawned the dealers, agents and some similar means. A kind of agreement is emerging more often from the present economic activities.

The distribution agreement is not a recognized contract provided in the Contract Law of PRC, but comes into being like other anonymous contracts in the actual economic life. A large number of distribution agreements have been made between manufacturers and distributors, or signed by general distributors and agents. The two parties in the distribution agreement according to their role in the contract can be classified into suppliers and distributors, generally it is viewed a kind of authorization relationship, in which the authorizer (supplier) grants (distributor) the right to sell identified product in certain area at certain price. The content includes the distribution method, term, annual sales target, advertising investment, price discount, annual share of profit and the amount for the dealers purchase for product on credit. As a result, the nature of the distribution agreement is not as definitive as the agreement appellation shows, such as the licensor and the licensee. The relationship between the parties in the distribution agreement is mixture of commission & sales, while it is different from the traditional commission & sales contract, it always one nature dominates, prevails over the other properties in the distribution relationship. We can nominate it commission-oriented and sales-oriented distribution agreement.

The different legal rules apply to rights and obligations of both parties under different distribution models. The writer tries to look for the specialty of rights and obligations of both parties: under different distribution model.

The first type is a typical commissioned model; the dealer is designated by the supplier (producer) of the product, who has no pricing power over the price of the product, generally it is only allowed to sell within a limited area, this Selling mode is very common. Usually the supplier applies measures like discount sales, rebates and the degree of amount that dealer could purchase on credits to stimulate dealer to sell. The relationship between the two is the principal-agent relationship, the supplier (manufacturer) entrusts the dealer to sell the product in the dealer's own name, because usually the dealer will produce a distribution agreement or power of attorney indicating that the product quality or goodwill. Therefore it is also in line with the apparent agent in the contract law, at the same time the dealer signs the contract in their own name with the terminal customers, and thus meets the characteristics of indirect agency.

The second type refers to the sale-model of distribution, the dealer usually pays for the product in advance and resells the product after he obtains the title to the product. The region and price to resell are not controlled by the supplier. The dealers in this model essentially earn the profit either from the price gap between two sales or additional value-added services. two parties of this kind of distribution agreement completely belong to the sale-purchase relationship, the main purpose of the authorized distribution certificate is to ensure the source or quality of the goods.

For example, a judgment of Intermediate People's Court of Wuxi, Jiangsu Province held that because the plaintiff Zhibiying company claimed that the distribution relationship between Donaldson and itself actually achieves through two separate sales independent to each other, the Zhibiying company & Donaldson, the Zhibiying company & terminal clients, so the relationship between Zhibiying and Donaldson is more a sales contract than a commission contract in essence. Because in each project, Zhibiying companies were to buy equipment from Donaldson company in their own name, again Zhibiying under its own name sold equipment to terminal customers, of which the choice of end-customers, pricing and other key factors that affect the contract are not dictated by Donaldson's instructions. As a result, the sales contracts between Zhibiying & Donaldson, Zhibiying & the customer are independent from each other and it separately binds each party to their own contract. Although Zhibiying provided three POA to prove its agency relationship with Donaldson, the court found the formality and content of the POA merely indicates the source and quality of the product. Even promise made by Donaldson to the users for technical support or quality assurance is also a reduction in worries that the end-users may have in quality, technical and other considerations when deciding to purchase equipment. Its ultimate aim is to facilitate the success of the transactions in order to achieve their respective business interests, however, it wouldn’t change the fact there were two transactions in the case and two separate sales contracts. Therefore, the court did not support the claim of Zhibiying Company that Donaldson should bear the breaching liability for its customer due to its failure to fulfill the contractual obligations after Donaldson withdrew its authorization and the investment cost paid for winning the customer.

The third type of distribution model possesses characteristics of both the sale and the commission model, which can be called hybrid distribution. Dealers pay for the goods and obtain full title to the product, but its sales price and sales region are still subject to the supplier, violation of the price and the region is considered breaching of contract. Such contracts are different from the traditional sale or commission contracts; it combines both as above mentioned.

For the point of view arising from the following typical case of this model, Shanghai Pentair appointed Lan Hai company as its designated products distributor, their distribution agreement includes "Lanhai company is authorized to distribute the products only in the region of Guangzhou, if Lanhai engages in distributing activities beyond this region without the written approval from Pentair, Pentair have the right to immediately terminate the agreement in writing and make further steps to claim Lanhai's liability for breach of contract. During the term of the agreement, should Shanghai Pentair instruct the Lanhai company to implement pre-fixed price, Lanhai company should strictly abide by, otherwise Pentair has the right to immediately terminate the agreement in writing and held Lanhai Company on responsibility; no return of products once Shanghai Pentair sold to Lanhai Company,; Lanhai Company shall pay 10% of the total price as premium within 5 days after the order is confirmed by Shanghai Pentair and shall at least 5 days before the delivery date make full of the payment. "

It can be seen from the above agreement, Lanhai is subject to strict control regarding to sales price and sales region, it is obviously different from the traditional self-pricing, no region limit sales contract, but the judge held that the relationship between the two is not a commission relationship, because the most important factors to determine nature of relationship between the two depend on the ownership of the product and payment methods. The judge considered Lanhai Company paid in full before delivery, which possesses full ownership of the goods already[Al3] , whereby the judge affirms that the relationship between the two is still the sales relationship, legal rules concerning the sales contract apply to the case. Therefore, Pentair Company does not default on the revocation authorization of Lanhai Company, and claim of goods return lodged by Lanhai Company based on the commission relationship was not be supported, because Lanhai Company has become the owner of the goods, it does not have the reasonable ground to request goods return.

Under the aforementioned different distribution model, some of the contractual rights and obligations will be correspondingly changed. For example, the distribution cost of products generally would be partially or totally borne by supplier in the traditional distribution agreements because it is related to the image of the brand and unified promotion could achieve the greatest effect of intensive promotion on the brand. Individuals as distributors are less capable than the supplier. However, in the sale-distribution model, parties will negotiate on the matters of cost allocation and finally provide the content in the contract.

For example, in the dispute between Beijing Jinghai Company and Lehai Company, Article 9 of the distribution agreement signed by both parties stipulated: "Party A (Leo Company) cooperated with Party B (Jinghai Company) to do a good job of the regional exhibition, and Party B Put forward the relevant support application, Party A will base on the specific circumstances to provide funds, labor and material support, "the court accordingly held that the definition of rights and obligations between the two parties should be determined by the special distribution agreement, the relationship between two is the dealer relationship, not the product display and advertising contract relations advocated by the plaintiff. According to the agreement, the plaintiff should first apply fund to the defendant before the defendant make decision to provide the plaintiff with the funds, and the plaintiff failed to provide any evidence to prove that the expenses claimed by him have been obtained the approval from the defendant in advance or recognized afterwards, so the plaintiff has to pay for the expenses by himself.

Distribution agreements usually stipulate the term in the agreement because the term decides directly on how long the distributors hold privileges such as the amount limit of goods on credit, the discount period of the goods, the right to use the intellectual property rights of the products sold, etc. Therefore, usually the distribution agreement will expressly provide "after the expiration of this agreement, if two parties agree to extend, it must be extended in writing" and other similar expressions, that means it does not admit the implied contract renewal. However, if the distribution agreement term has passed in the commission model and the two parties have not renewed the distribution agreement, the continuous performance according to the previous model will be regarded as the actual renewal of the distribution agreement. While in the sales model, court will think differently, for example, in the following case, the court of first instance held that according to the arbitration tribunal's ruling, the Annual Dealership Agreement signed by Lanhai Company and Shanghai Pentair has been expired on December 31, 2012, so the business carried out in 2013 cannot be regarded as the renewal of the "Annual Reseller Agreement." Therefore, the principle of the sales contract shall apply to the disputes instead of commission rules between the parties after the expiration of the distribution period.

In the distributing activities, most of the products distributed are with certain intellectual property rights. Therefore, intellectual property rights including but not limited to patents and trademarks are all sensitive points, a large number of infringement of intellectual property rights constitute unfair competition disputes arising from distribution parties, so it’s very important for the supplier to protect their own rights. Usually the supplier is the entity who is entitled to intellectual property rights or has obtained the legal authorization from the third party; the distributor as an licensee must not only pay attention to the source of the supplier's rights and legitimacy, while in the commissioned distribution model, the dealer is better to insert the “goods-return” clause in the agreement to avoid the disadvantage of "unauthorized dealer" after the agreement expires. In the sales model, the distributor, acting as the body who has acquired the ownership of the product, is protected by exhaustion of the intellectual property rights, who have the right to resale or use without interference.

In the above discussion of the impact to the legal relationship between the two parties under two different distribution models, author also found an interesting case which has a dramatic turning occurs in the role of the distributor plays. This case is about a dispute arising from Jiangsu Sun Moon Star Electrical Co., Ltd. & Xuzhou Xugong Road Construction Machinery Co., Ltd (XRCM). In accordance with the agreement signed by the two parties, the Sun Moon Star Company is XRCM 's distributors, which make sales of the company's products. In the distribution process, the Sun Moon Star company signed first with the customer, and then signed a sales contract with XRCM according to the settlement price stipulated in the distribution agreement and the product is delivered to the customer. XRCM shall rebate Sun Moon Star Company according to the preferential policies stipulated in the distribution agreement and sales performance of the latter. Thus, the legal relationship between XRCM and Sun Moon Star Company is also sales relationship; of course, its rebate application is in line with the characteristics of principal-agent agreement. However, Sun Moon Star Company later failed to make the full payment, and then he introduced his nine clients to XRCM. The court held that in the course of the transaction in this case, the company's status has changed and is no longer a dealer but has become an intermediary to XRCM.

Franchising is a kind of distribution, but it has a special "Regulations on Commercial Franchise Management" to regulate, in which it is defined as: a company (generally referred to Franchisor)that processes managerial resources like registered trademark, company logo, patents and proprietary technology, who allows other operators (referred to the franchisee) to use these resources by the franchisee contract. The franchisee operates in a unified mode of operation and pays franchise fees to the Franchisor. From its definition, it can be seen that its main features are the existence of a unified business model, the sharing of tangible and intangible business resources including intellectual property. According to the 3rd clause of the Regulation, other units and individuals except enterprise are not permitted to act as franchisees, that is to say franchisees must be enterprises. This is different from the general distribution agreement. Secondly, the aforementioned distribution model still exists in franchising chain. In the franchising mode, unfair competition disputes caused by intellectual property infringement are on the rise.