For Thai manufacturers, working with a Swiss distributor can be an easy way to enter the Swiss market. A distributor may already have established customer relationships, market knowledge and, in many cases, its own warehousing, logistics and service infrastructure. This allows the manufacturer to enter the market without having to build its own sales organisation in Switzerland from the outset.
Unlike an agent, a distributor generally purchases the products from the manufacturer and resells them to its customers in its own name and for its own account. The distributor does not earn a commission but instead makes its margin from the difference between the purchase price and the resale price. It typically assumes a significant part of the sales, inventory and customer payment risk. In return the manufacturer gives up some control over the market, particularly over its direct relationship with end customers.
A distribution agreement is more than a sales contract
Swiss law does not contain a specific statutory regime governing distribution agreements. A distribution agreement is a type of contract that is not expressly stipulated by statute. This gives the parties considerable contractual freedom, but at the same time makes it particularly important to address the relationship in sufficient detail.
A distribution agreement typically operates on two levels.
At the first level, it governs the long-term relationship between the manufacturer and the distributor. This may include the contractual territory, exclusivity, minimum purchase obligations, marketing duties, reporting requirements, use of trademarks, training, inventory management, product recalls, as well as the term and termination of the agreement.
At the second level, it sets out the terms applicable to the individual sales transactions between the manufacturer and the distributor. These may include the products and their specifications, purchase prices, payment terms, ordering procedures, delivery periods, minimum order quantities, Incoterms, inspection of the products and warranty provisions.
For ongoing supply relationships, this structure avoids having to renegotiate the basic commercial and legal terms with every individual purchase order.
Exclusive, selective or non-exclusive sistribution?
The simplest model is non-exclusive distribution. The Thai manufacturer may appoint several distributors and, where appropriate, continue selling directly to Swiss customers itself.
Under a sole or exclusive distribution arrangement, the distributor receives special rights for a defined territory or customer group. The scope of this exclusivity should be clearly defined. Can the manufacturer continue selling directly to Swiss customers? Are international key accounts excluded? May the manufacturer use additional sales channels or operate its own online shop?
Another option is selective distribution. Under this model, distributors are selected according to certain criteria, such as professional qualifications, sales premises, service capabilities or quality standards. This model can be particularly suitable for technically complex products or high-value branded goods. Swiss competition law, however, imposes requirements on the way such systems are structured. Purely qualitative selective distribution systems may be permissible where the selection criteria are objective, applied uniformly and without discrimination, and do not go beyond what is necessary for the product concerned.
Minimum purchase obligations and sales targets
A manufacturer granting a distributor an exclusive territory will normally want to ensure that the distributor actively develops that market. Minimum purchase obligations and sales targets are among the most important provisions in many distribution agreements.
The agreement should clearly distinguish between non-binding sales forecasts and binding minimum purchase requirements. It should also specify the consequences if a target is not achieved. Possible consequences may include loss of exclusivity, a grace period to improve sales performance or, in the event of significant or repeated underperformance, a right to terminate the agreement.
Precision is particularly important in this regard. If an annual minimum quantity is agreed, the contract should specify whether products count toward the target when they are ordered, delivered or paid for. It should also address situations in which the manufacturer itself is unable to supply sufficient products.
Minimum purchase obligations are generally possible. However, if they are structured in such a way that the distributor is effectively required to purchase more than 80 percent of its total requirements from the manufacturer, they may become relevant under competition law as a non-compete or exclusive purchasing obligation. Additional competition-law restrictions may then apply, particularly where such obligations are agreed for long periods.
Marketing, reporting and trademark rights
One of the main advantages of working with a local distributor is that the distributor actively develops the Swiss market. The agreement should do more than simply grant a right to resell the products. It should also define what level of sales and marketing activity is expected from the distributor.
The distributor may, for example, be required to carry out specific marketing activities, attend trade fairs, conduct customer visits or provide local customer service. The parties may also agree on a minimum annual advertising budget or a contribution by the manufacturer toward certain marketing expenses.
Because the Thai manufacturer may no longer have direct access to end customers, regular reporting on sales figures, inventory levels, forecasts and marketing activities can be important for assessing market development.
The agreement should also define the extent to which the distributor may use the manufacturer’s trademarks, logos, product images and marketing materials, as well as what happens to those rights once the relationship ends.
Delivery, storage and product recalls
Because the distributor purchases the products itself, each individual delivery constitutes a separate sales transaction. Hence, the distribution agreement should define how orders are placed and which general sales terms apply to those transactions.
For deliveries from Thailand, appropriate Incoterms should be agreed together with a precisely defined place of delivery. Among other things, Incoterms determine which party bears certain transportation costs and responsibilities and when the risk of loss or damage passes to the distributor.
For manufacturers, the agreement should also clarify who is responsible for importation, customs clearance and compliance with regulatory requirements in Switzerland. Depending on the product, requirements concerning transportation, storage conditions, batch traceability and documentation may also be important.
These issues become particularly relevant in the event of a product recall. The agreement should establish who is responsible for notifying customers, collecting affected products, providing traceability information and bearing the resulting costs.
Competition law: Exclusivity does not mean complete control
Exclusive distribution agreements are generally permissible in Switzerland. However, contractual freedom is limited by Swiss competition law.
Particular care is required when dealing with resale prices. Since the distributor operates as an independent business and sells on its own account, it must generally remain free to determine the prices at which it resells the products. Minimum or fixed resale prices may constitute particularly problematic vertical restraints. Even a price described merely as a “recommendation” can become problematic if pressure or financial incentives effectively make it binding.
Territorial protection is also subject to limits. Under certain conditions, a manufacturer may allocate exclusive territories and restrict active sales by other distributors into those territories. However, an absolute territorial restriction that also prevents passive sales is not generally permissible. If, for example, a Swiss customer independently approaches a distributor located in another territory, a distribution system cannot simply prohibit such sales across the board.
Preventing the segmentation of the Swiss market and restricting parallel imports are areas of particular concern under Swiss competition law.
What happens when the agreement ends?
A distribution agreement should regulate not only how the relationship begins but also how it ends.
Important provisions include the contractual term, ordinary notice periods and grounds for extraordinary termination. These may include repeated failure to meet minimum purchase obligations, payment defaults, breaches of trademark guidelines or serious compliance violations.
The agreement should also address what happens after termination to outstanding orders, remaining stock, spare parts, warranty cases, customer service obligations and marketing materials. Particularly in exclusive distribution relationships, the question of whether the manufacturer must or may repurchase remaining inventory can have significant financial consequences.
Another Swiss-specific issue should also be considered. A distributor generally has no statutory right to a goodwill indemnity comparable to that of a commercial agent. However, the Swiss Federal Supreme Court has held that such compensation may exceptionally apply by analogy with agency law.
This can be relevant where an exclusive distributor is closely integrated into the manufacturer’s sales organisation and occupies an agent-like position with only limited economic independence. In addition, the customer base developed by the distributor must effectively pass to the manufacturer after termination.
Simply describing a party in the agreement as an “independent distributor” does not automatically exclude such consequences. Once again, the way the relationship is actually structured is decisive.
A potential pitfall for Thai companies
Under Thai law, a distribution relationship is also generally understood as one in which the distributor purchases products from the supplier and then resells them in its own name, for its own account and at its own risk. Since there is no specific statutory regime for distribution agreements, the relationship is generally governed by the general rules of contract and sale under the Thai Civil and Commercial Code.
A distribution agreement used in Thailand may nevertheless be insufficient for the Swiss market. Swiss law has developed additional principles through case law for long-term and particularly exclusive distribution relationships, including the possibility of a goodwill indemnity by analogy with agency law in exceptional circumstances.
Swiss competition law also needs to be considered. A distribution agreement may be subject to Swiss competition rules even if it was concluded in Thailand or is governed by foreign law, provided that the restriction of competition has effects on the Swiss market.
A distribution model that is permissible in Thailand should not be transferred to Switzerland without first reviewing whether it complies with Swiss law.
Conclusion
A Swiss distributor can provide Thai manufacturers with a relatively fast route into the Swiss market and take over a significant part of sales, warehousing and customer support. In return, however, the manufacturer gives up some control over pricing, customer relationships and market development.
A well-drafted distribution agreement should clearly define the contractual territory and exclusivity, minimum purchase requirements and marketing obligations, ordering and delivery terms, Incoterms, trademark rights, reporting, product recalls, as well as the duration and consequences of termination.
Particular attention should be paid to minimum purchase obligations and exclusivity, as well as restrictions concerning prices, territories and online sales. These are precisely the areas in which a manufacturer may wish to exercise greater control over its distribution network, but where Swiss competition law also imposes important limits.
This article provides a general overview of B2B distribution agreements between Thailand and Switzerland and does not constitute legal advice for any specific case.
