23.07.2018

Distribution Agreements – 6 Key Considerations

While the exact nature and terms of a distribution agreement will vary between industries and jurisdictions, these 6 issues will always be important.
    1. Territory and exclusivity
      1. The distributor wants:
        1. sole (i.e. also excluding sales by the manufacturer) and exclusive distribution rights to as wide a territory as possible (with online sales and web enquiries for the territory being highly relevant).
        2. rights of 1st refusal on new territories in return for good performance.
        3. if the distributor does have a sole and exclusive distributorship, the agreement should clearly protect the territory from sales by the manufacturer and its other distributors.
           
      2. The manufacturer:
        1. seeks to leave its options open – i.e.,:
          1. it may seek to offer only a non-exclusive distributorship;
          2. the manufacturer may already be directly supplying into the territory and may wish to continue to retain that right or may wish to pick that up in the future
        2. Further, the manufacturer might want to prevent certain types of online sales (i.e., via eBay, Amazon or similar).
           
    2. Length of Agreement – For its investment, the distributor will seek a decent term and a right of renewal (perhaps an automatic right if it has met all targets). The manufacturer/supplier desires good performance (targets met) each year/period.  The distributor might ask for a bonus for exceeding the target (perhaps increased rebates).
       
    3. Termination: Neither party will want the other to be able to terminate without cause.  However, if that right is a “must”, then perhaps it should only be exercised: 
        1. after an initial fixed period (12 or 18 months); and
        2. subsequently, following a period of notice and there might be financial consequences attached.

      Both parties will want the ability to quickly terminate if the other party materially breaches the agreement or faces liquidation or a similar event.

      It is typical for a distributor to still have products in stock at the date of termination. The agreement should deal with whether the distributor can continue to sell stock, and for how long, and what other obligations it has (including in relation to the new distributor).

    4. Products and pricing: Which products or lines of products are included?  What rights does the distributor have in respect of new products?  How much is the distributor required to pay the supplier for products? How often should prices be examined and when can they be varied?  Do currency variations matter?  What are the payment terms?  Note that recommended or fixed resale prices may result in breaches of competition laws, and specific legal advice should be sought before a supplier fixes the price at which its distributors can sell products.  What servicing and warranty support are provided for defective products – is there any limit on the supplier’s liability?
       
    5. Intellectual property/customer list: Whilst the supplier typically retains all IP rights relating to their brand, they will need to grant the distributor a licence to use some or all of their IP to market and sell products in their territory.  The nature and extent of that licence will need to be carefully considered and agreed by the parties. A key question will be who owns the customer list.
       
    6. Confidentiality & Restraint Also key will be whether any post termination restraint is attempted and how enforceable that might be.

First published in the BNZBA quarterly newsletter in March 2018

 

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