What is a distribution agreement?
Is a distribution agreement enforceable in South Africa?
“5(1) An agreement between parties in a vertical relationship is prohibited if it has the effect of substantially preventing or lessening competition in a market, unless a party to the agreement can prove that any technological, efficiency or other pro-competitive gain resulting from that agreement outweighs that effect. (2) The practice of minimum resale price maintenance is prohibited. (3) Despite subsection (2), a supplier or producer may recommend a minimum resale price to the reseller … provided … the recommendation is not binding … and … the words “recommended price” appear next to the stated price.”
“On the resale price of its Ferodo brake products, the Tribunal held: “The cutting of the discount was merely the sanction utilized to compel the complainant to restore the fixed price. The contravention resided rather in the fixing of the resale price.” The first respondent was “found to practice resale price maintenance, a contravention of Section 5(2)”, and was “ordered to pay an administrative penalty of three million Rand (R 3 000 000.00)”.”
When you need a Distribution
- When you are a manufacturer or importer appointing someone to buy your products and resell them — whether across South Africa, in a province, or into a particular channel such as retail, hardware, or hospitality.
- When you are a distributor taking on a brand and want exclusivity, minimum-supply commitments, pricing freedom, and territory protection recorded before you invest in stock, staff, and marketing.
- When an overseas supplier is entering the South African market through a local partner and needs the relationship structured as a distributorship (buy-and-resell) rather than agency (commission), with the competition-law limits built in.
- When you want to grant or take an exclusive or sole distributorship and need the exclusivity, performance targets, and territory carve-outs drafted so they hold up under section 5(1) of the Competition Act.
What a Distribution should contain
Appointment, territory and channel
Define exactly what the distributor is appointed to do, for which products, in which geographic territory and/or customer channel. Specify whether the appointment is exclusive, sole, or non-exclusive — this is the commercial heart of the deal and the clause most likely to be tested under section 5(1).
Exclusivity and reservation of rights
If the distributor is exclusive, record whether the supplier reserves the right to sell directly to named accounts, online, or to other territories. Over-broad exclusivity or absolute territorial protection that forecloses competitors can fall foul of section 5(1), so the carve-outs and justification matter.
Pricing and resale price (the s 5(2) clause)
Set the price at which the distributor buys from the supplier — but leave the distributor free to set its own resale price. Minimum resale price maintenance is prohibited outright by section 5(2); at most the supplier may state a clearly non-binding “recommended price”. This is the single most dangerous clause to get wrong.
Minimum purchase / performance targets
Record minimum volumes or values the distributor must buy or sell each period to keep the appointment (especially exclusivity). Tie failure to meet targets to loss of exclusivity or termination — a legitimate efficiency justification that helps the agreement under the section 5(1) rule-of-reason test.
Title, risk and stock ownership
State clearly that the distributor buys the goods, takes ownership and risk, and resells on its own account (with the supplier’s ownership reserved until payment if a retention-of-title term is used). This confirms a distributorship rather than agency and fixes who bears credit and stock risk.
Intellectual property and brand use
Licence the distributor to use the supplier’s trade marks, brand names, and marketing material only for permitted resale, with quality and approval controls. Make clear the licence ends on termination so the distributor cannot trade off the brand once the relationship is over.
Term, termination and post-termination
Set the duration, renewal, and notice periods, plus termination for breach or insolvency. Address run-off of remaining stock, return or buy-back, ceasing brand use, and protection of customer data — abrupt termination of a long-standing exclusive distributor can also raise abuse-of-dominance concerns for a powerful supplier.
Product liability, warranties and indemnities
Allocate responsibility for defective products, recalls, and consumer claims. Because the distributor sells to the customer in its own name, the Consumer Protection Act 68 of 2008 may make it liable as “supplier”, so back-to-back warranties and indemnities from the manufacturer are essential.
Distribution agreement vs agency agreement in South Africa
| Feature | Distribution agreement | Agency agreement |
|---|---|---|
| Who takes title to goods | Distributor buys and owns the stock | Agent never owns the goods |
| Whose account the sale is on | Distributor resells on its own account | Sale is on the principal’s account |
| Contract with the customer | Between distributor and customer | Between principal and customer |
| How they earn | Profit margin (buy low, sell higher) | Commission paid by the principal |
| Who carries credit & stock risk | Distributor | Principal |
| Resale price control | Supplier may NOT fix it (s 5(2)) | Principal sets the price it sells at |
Common South African pitfalls
- Fixing the distributor’s resale price: telling, requiring, or pressuring a distributor to sell at or above a set price — or capping the discount it may give — is minimum resale price maintenance, prohibited per se by section 5(2) with no efficiency defence. It exposes the supplier to a penalty of up to 10% of turnover, as Federal Mogul learned (R3 million).
- Calling it a “recommended price” but enforcing it: a recommended price is only lawful under section 5(3) if it is genuinely non-binding and marked “recommended price”. If the supplier threatens to cut supply, withhold rebates, or terminate when the distributor undercuts it, that is unlawful resale price maintenance in substance, whatever the label.
- Over-broad exclusivity and territorial restrictions: absolute territory protection, customer-allocation, or exclusivity that substantially lessens competition can breach section 5(1). Unlike section 5(2) it allows a pro-competitive justification, but the restriction must be no wider than needed and capable of being justified.
- Confusing distribution with agency: drafting that mixes buy-and-resell with commission language creates uncertainty over who owns the stock, who is liable to the customer, and how the deal is taxed. Decide which structure you want and keep the document internally consistent.
- Ignoring the Consumer Protection Act exposure: because a distributor sells to consumers in its own name, it can be liable as a “supplier” for defective or unsafe goods. Without back-to-back warranties and indemnities from the manufacturer, the distributor carries risk it did not create.
Frequently asked questions
Are distribution agreements legal and enforceable in South Africa?
Yes. A distribution agreement is enforceable in South Africa as an ordinary commercial contract — there is no special distribution statute. The main limit is the Competition Act 89 of 1998, which regulates the relationship as a vertical agreement under section 5 and, in particular, prohibits the supplier from fixing the distributor’s resale price.
What is the difference between a distributor and an agent in South Africa?
A distributor buys the supplier’s products, takes ownership, and resells them on its own account for a margin — the customer contracts with the distributor. An agent never owns the goods; it introduces or concludes sales on behalf of the supplier (the principal) and is paid commission, with the sale contract forming between the principal and the customer.
Can a supplier set the price at which a distributor resells its products?
No. Section 5(2) of the Competition Act 89 of 1998 prohibits minimum resale price maintenance outright, with no efficiency defence. A supplier may only recommend a price, and section 5(3) requires that recommendation to be genuinely non-binding and marked “recommended price”. Enforcing a minimum price can attract a penalty of up to 10% of annual turnover.
Can a distribution agreement be exclusive?
Yes. A distributorship can be exclusive (only this distributor for a territory or channel), sole (the supplier still sells directly but appoints no other distributor), or non-exclusive. Exclusivity is lawful, but if the territorial or customer restrictions substantially lessen competition they can be challenged under section 5(1) unless justified by a pro-competitive or efficiency gain.
What happens if a distribution clause breaches the Competition Act?
An offending clause — typically a resale-price or absolute-territory restriction — is prohibited and unenforceable, and the conduct can be referred to the Competition Tribunal. For minimum resale price maintenance the Tribunal can impose an administrative penalty of up to 10% of the firm’s annual turnover, as it did against Federal Mogul, which paid R3 million.
Who is liable to the customer if the product is defective — the supplier or the distributor?
Often both. Because the distributor sells to the customer in its own name, the Consumer Protection Act 68 of 2008 can make the distributor liable as a “supplier” for defective or unsafe goods, alongside the manufacturer or importer. A well-drafted distribution agreement includes back-to-back manufacturer warranties and indemnities so the risk sits where it belongs.
How is a distribution agreement terminated?
On the notice or expiry terms in the contract, or for material breach or insolvency. The agreement should deal with run-off and buy-back of remaining stock, the distributor ceasing all use of the supplier’s brand, and handling of customer data. For a dominant supplier, abruptly cutting off a long-standing exclusive distributor may also raise abuse-of-dominance concerns.
Do I need a written distribution agreement?
It is strongly advisable. A distribution relationship can exist on a handshake, but a written agreement fixes the territory, exclusivity, pricing freedom, targets, IP licence, liability split, and termination terms — and lets your attorney ensure the resale-price and exclusivity clauses comply with the Competition Act before a dispute or a Commission complaint arises.
Sources & authority
- Competition Act 89 of 1998, ss 1 (“vertical relationship”) and 5 (restrictive vertical practices; s 5(2) minimum resale price maintenance prohibited)
- Competition Act 89 of 1998 — LawLibrary consolidated version
- Competition Commission v Federal Mogul Aftermarket Southern Africa (Pty) Ltd (08/CR/Mar01) [2003] ZACT 43 (21 August 2003)
This guide is general information, not legal advice. It reflects the law as at June 2026.