By Megan L. Petrus
Distributors seeking to satisfy the maxim: “the customer is always right,” can quickly land in another truism – stuck between a rock and a hard place. The distributor’s troubles begin with the false assumption that legal obligations can simply be passed down the distribution chain to the party that is most capable of compliance or most culpable of error, as the case may be.
For example, suppose a supply chain consists of a European Union customer, a United States distributor and a Chinese manufacturer. The European Union’s REACH1 regulation requires that the importer of any product containing more than .1% of a substance of very high concern (“SVHC”) into the EU must register the SVHC with the European Chemicals Agency. As the importer, the European customer may not have first-hand knowledge of the chemical composition of the product. Therefore, the European customer will seek to contractually obligate the US distributor, which sold it the product, to supply this information; however, the US distributor also lacks independent means of establishing the product’s chemical composition. Consequently, the distributor will in turn seek to contractually obligate the Chinese manufacturer to provide it with information regarding the presence of SVHCs in the product.
The Chinese manufacturer will resist assuming the contractual obligation to comply with REACH on at least two bases. First, it is not legally bound to comply with REACH as REACH only applies to manufacturers and importers located inside of the EU. Second, compliance is going to be costly and administratively cumbersome. On the other hand, the EU customer is certainly not going to waive the requirement because it is the party ultimately facing legal liability for failing to comply with REACH.
When the distributor’s bargaining power with the manufacturer is not commensurate to the customer’s bargaining power with the distributor, which, by way of example, could be attributable to: business size, volume of product being sold, or a lack of alternative supply source, the distributor often perceives that its only options are either to assume the risk imposed by the customer or risk getting cut out of the transaction altogether.2 What distributors should instead do is negotiate these contracts to narrow their responsibilities to factors that the distributor can control and to liabilities that will not threaten the distributor’s ability to remain in business.
Please click here to read about contract negotiation techniques that the distributor can employ.
