Many manufacturers or distributors place restrictions on the resale of their goods. Typically, these restrictions will be found legal if there is a “reasonable business objective” and there is no “adverse effect on competition.”
Some examples of restrictions that are usually upheld are:
- A requirement that the distributor sell or not sell to specific customers;
- A requirement that the distributor conduct business only in certain areas;
- A requirement that the distributor sells only at certain precise locations.
These conditions will usually be a part of the distributorship agreement and will be implemented by cutting off supplies of the manufacturer’s goods or terminating the distributorship contract. Since many distributorship agreements may contain covenants not to compete, which may restrict the ability of the distributor to work for a competitor, this can be a mighty punishment.
Are There Any Restrictions That Are Not Allowed?
The most typical restriction that is not enforceable is a restriction on resale price maintenance. This restriction demands that the distributor sell the product at a minimum set price level. This requirement stops resellers from competing too fiercely and driving down profits.
The Supreme Court has ruled that since this practice decreases the ability of customers to choose from sellers with independent prices, it is a violation of competition and antitrust laws.
What Are the UCC General Contract Rules?
Formation of Contract
Both attorneys and business people will inform you that you should always “get it in writing.” Article 2 provides detailed conditions for when a sales contract must be in written form. This type of rule is known as a “statute of frauds in legal lingo.” Beyond the regulations for when a contract must be in writing, Article 2 also provides rules for what a contract must contain and what it needs not to be enforceable. Article 2 also provides fundamental rules for when oral, as opposed to written agreements (in the jargon, “parol evidence”), may be relevant.
To form a contract, there must be an offer and acceptance. Article 2 offers some general regulations regarding offers and acceptances. These rules are intended to facilitate, rather than hinder, the making of contracts, and, as a result, the rules are rather comprehensive.
For instance, Article 2 says that it typically is not necessary that there be a conclusive moment of agreement between the parties for a contract to be binding, nor is a contract necessarily nullified if specific terms are missing. In a few cases, Article 2 also offers more detailed rules regarding offer and acceptance, such as a rule regarding so-called “firm offers.” These are offers which, at least for a stated period, are not revocable.
Modification of Contract
Frequently, you will find that you need to alter an existing agreement. Article 2 delivers basic rules for how to do this. One fundamental rule is that contract modification typically does not need additional consideration to be effective.
Contract Obligations
Apart from general statements that a seller is obligated to deliver the goods and that a buyer is bound to make payment per the contract, Article 2 covers additional rules regarding obligations.
These include:
- A rule that certain risks may be allocated between seller and buyer
- A rule that a proper contract need not necessarily have a price term (along with additional rules on the handling of prices)
- A rule concerning whether and how an order for goods may be delivered in several lots
- A set of rules concerning warranties.
Performance
“Performance” on a contract means doing what you’re bound to do. In the case of contracts for the sale of goods, the primary obligation is the seller delivers the goods, and the buyer pays for the goods. Article 2, however, goes further and provides specific rules relating to shipments and deliveries of goods and payment.
For instance, Section 2-503 includes a rule that a seller must give a buyer “notification reasonably necessary to enable [the buyer] to take delivery.” And Section 2-508 states that if a seller originally provides the wrong goods, the seller may “cure” the error by delivering the correct goods within the timeframe set out in the agreement. If the seller does “cure” the mistake, it is implied that the buyer will not be rid of the responsibility to pay for the goods.
Breach
One of the immediate ways a contract for the sale of goods may be breached is if a seller provides the buyer with the wrong items. Article 2 includes a series of rules concerning a buyer’s alternatives in such circumstances, including when and how to refuse all or part of a group of ordered goods.
Likewise, there are regulations regarding a buyer’s acceptance of goods, including a rule that acceptance occurs if a buyer “fails to make an effective rejection.” Finally, concerning breach, Article 2 has regulations for “repudiation” of a contract before, for instance, the delivery of ordered goods.
Remedies
When a party to a contract breaches the contract, the non-breaching party is generally entitled to compensation, restitution, or “remedy” for the breach. Article 2 delivers sections on both seller’s remedies (Section 2-703 lists such general remedies as withholding or stopping delivery of goods, reclaiming goods, canceling orders, or obtaining “specific performance”).
It also covers buyer’s remedies (Section 2-711 lists such general remedies as recovering the price paid for undelivered goods, subtracting damages from any amount still due, revoking orders, or getting “specific performance”). The sections on remedies in Article 2 are rather expansive; those listed here scratch the surface.
Seller’s Performance: The Perfect Tender Rule Under the UCC
As opposed to the UCC, general contract law generally allows for a party to fulfill contractual obligations through substantial performance. This means that it may suffice if a party substantially, though not precisely or perfectly, meets the contract’s requirements. However, for contracts for the sale of goods, the UCC requires “perfect tender” by the seller.
Tender means, in essence, the delivery of goods to the buyer, and perfect tender means delivering goods that specifically meet the terms of the agreement. According to the UCC, if the goods as tendered “fail to conform to the contract,” the buyer has different choices, including rejecting the goods.
The Seller’s Primary Obligation
Under the UCC, a seller’s direct obligation is “tender of delivery.” In other words, delivering the goods to the buyer. In some circumstances, tender of delivery will affect the seller shipping or otherwise transporting goods to the buyer. In other circumstances, it may mean that the seller holds the goods where the buyer can take possession of them. How the goods are to be tendered is often specified in the sales contract.
However, where the contract does not require the seller to ship the goods to the buyer, the two primary requirements for the seller are:
- To “put and hold” the goods “at the buyer’s disposition;” and
- To give the buyer whatever information is reasonably necessary for the buyer to take delivery.
Do I Need a Lawyer?
The laws regarding distributorships can be complex and challenging to understand. When setting up a distributorship agreement, it is important not to create any arrangement that could be considered a direct or indirect price-fixing plan.
A business lawyer can help you create a distributorship agreement and advise you on what restrictions are allowed and whether they can be enforced. A lawyer can also advise you regarding existing agreements and restrictions and represent you in court if necessary.
