On 3rd November 2017, PwC Legal Switzerland posted for sale a Limited Risk Distribution Agreement. This blog is a question and answer session about the Limited Risk Distribution Agreement with Joanna Murphy, PwC Legal Switzerland's head of IP, Technology and International Contracts.
PartnerVine: PwC has recently posted a Limited Risk Distribution Agreement on PartnerVine. Can you explain when a company would use such an agreement?
Joanna: Limited risk distribution is a supply chain concept commonly used to optimise a corporation's tax position within its trading strategy. A standard buy-sell distributor purchases goods, holds stock, and then sells those goods to customers. In a limited-risk distribution agreement, certain of the risks typically assumed by the distributor (such as inventory and bad debts) are contractually re-allocated to the principal. In line with its functions and risks, the principal earns a larger portion of the corporation's sales margin. This agreement is meant to be used by companies that sell tangible goods, so let's take the example of a manufacturer of component parts for domestic appliances. The manufacturer is based in Switzerland, but has a German subsidiary that manages sales and marketing in Germany. The agreement makes the German subsidiary responsible for marketing and sales in Germany, but limits its risks relating to inventory, product liability and sales. Accordingly, a large share of the proceeds go back to the Swiss principal.
PartnerVine: You mentioned that this agreement is for tangible goods, so I assume you can swap out parts manufacturer for the distribution of other tangible goods?
Joanna: We can't promise it will work in every instance, but that's the idea. We say it's for tangible goods because it is not for electronic products, like software. There are specific provisions you would need for electronic products, such as terms relating to delivery, access and transfer of title to the products, that we have not addressed in this agreement.
PartnerVine: Why is this document called an 'intra-group' document? Can it be used with third parties?
Joanna: It's an intra-group document because the concept of a limited risk distribution agreement is typically used only in the context of a group of companies. The specific risk allocation and transfer pricing arrangements provided for by this agreement are not appropriate for an arm's length distribution agreement with an unrelated third party.
PartnerVine: So if this is a standard contractual structure, do any of the terms vary from one agreement to the next?
Joanna: There are a lot of variables you need to consider in a standard intra-group agreement as well. The appropriateness of each option will depend on the circumstances and standard practice of the group. For instance, what kind of warranty is the principal going to provide to the distributor? How will the product be delivered? What are the exclusivity terms? What obligations apply in respect of sales and marketing? What are the payment terms? Those are some of the configurable items listed in the Author's Note for the agreement.
PartnerVine: Is there anything you are particularly proud of in this agreement?
Murphy: I wouldn't say it is specific to this agreement, but my team at PwC have put together a user experience that really helps the user get from A to B with a minimum of hassle. It really is a faster way to get your document up and running, and that is really satisfying to me.
Nothing in this blog may be relied on as legal advice. Please consult your own counsel for advice specific to your facts and circumstances.