Proactive Provisions in Selective Distribution Contracts

Midia Tayyeb

Student thesis: Master thesis


A manufacturer within a selective distribution system is given the right to list demands to distributors regarding the store design, the assortment and product knowledge. In all, this contributes to the protection of the brand value that has been created, and contributes to the consumers experience – in harmony and accordance with the exclusive reputation. The law sets legal limitations to the distribution system, and the strategic aspects and rationale for deciding to use these systems are reasoned through three elements; prevention of free-riding by other distributors, maintenance of the brand value, and creation of distributor incentives. These reasons underline the conditions for finding that a selective distribution system is compatible with EU competition law. Historically, in the conventional legal paradigm this distribution contract is primarily defensive and reactive, which is unsuitable for creating and optimizing distributor-relations and generating value trough the relationship, since it highly focuses on failure. Contracting parties enter contracts because they believe that there is mutual benefit to be achieved, and negotiators focus on the consequences of failure will undermine the probability of success. More importantly, it results in key areas of the contract content being overlooked or paid inadequate attention – specifically, clarity over scope and goals and over the on-going governance and management procedures for the relationship. The contractual conditions that are being negotiated should be more relation- and future-oriented and contracting parties should always have these goals in mind to learn from previous business to improve future business. By applying proactive provisions the parties will generate relational rents through provisions on asset specificity, knowledge sharing routines, complementary resources and through effective governance. Specifically, the latter is of importance since the greater the parties in a selective distribution system are to employ effective governance mechanisms, the greater the potential will be for relational rent. These mechanisms generate relational rents by either lowering transaction costs, or providing incentives for value-creating initiatives. A solid dispute solution plan that focuses highly on self-enforcement will include elements of prevention and management in the proactive contract. Such a dispute solution plan is important since settling disputes in courtrooms are simply too costly. The integration of law and economics is headed in a highly interesting direction, where the contract will hopefully be a tool and result of this integration. This shift away from failure presents itself through the proactive approach, where an integration of the legal and economic discipline appears to create an interdisciplinary management tool with a wide range of possibilities. With a proactive approach a paradigm shift emerges, from which the focus is on success rather than potential failure. Legal resources will help firms in achieving sustainable competitive advantages, by encouraging legally strategic thinking, and to extract competitive advantages in a legal environment.

EducationsMSc in Commercial Law, (Graduate Programme) Final Thesis
Publication date2013
Number of pages101