28.06.2018

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

 

Do you need expert legal advice?
Contact the expert team at Hesketh Henry.
Kerry
Media contact - Kerry Browne
Please contact Kerry with any media enquiries and with any questions related to marketing or sponsorships on +64 9 375 8747 or via email.

Related Articles / Insights & Opinion

Property
Make Your Premises Good Again
With all the time, effort and cost that goes into taking on a new lease of commercial premises, what happens when it comes time to move on can seem unimportant. It is not surprising, then that make-go...
25.06.2025 Posted in Property
Flooded car
Flooding due to overland flow paths and damaged drainage
Persistent heavy rainfall across the country often results in damage to property due to flooding caused by overland flow paths and defective drainage.  But who is responsible for the cost of the dama...
17.06.2025 Posted in Climate Change & Property
Understanding Indirect Privacy Notification: What you need to know
The Privacy Amendment Bill (the Bill), if passed into law, will require agencies to notify individuals when their personal information is collected from a source other than the individual themselves, ...
16.06.2025 Posted in Corporate & Commercial & Employment
iStock  Succession Plan medium
Family Ties: Intra-Family Succession and Exit Planning
As the second instalment in a series of articles looking at the generational wealth transition and its impacts on business succession in New Zealand, Ben Hickson (partner, Corporate & Commercial...
16.06.2025 Posted in Corporate & Commercial & Private Wealth
Employment law at a glance – June 2025
If you are anything like us, you will be shocked to realise that we are halfway into 2025. As time has been marching on, so too have employment law developments – and there have certainly been quite...
05.06.2025 Posted in Employment
HH Pg  Forrest uncropped
ETS Update: Climate Change Commission recommends minor tweaks to ETS Settings
Last month, He Pou a Rangi Climate Change Commission (the Commission) released its annual advice to the Government on the Emissions Trading Scheme (ETS) settings for the period 2026 to 2030 (Advice)....
HS Scrabble Med Crop Vignette
Health and safety learnings for landowners following latest Whakaari decision
The leasing and subleasing of land, buildings and infrastructure is commonplace in New Zealand business and commerce, but what happens when something goes wrong? Do landowners have health and safety o...
08.05.2025 Posted in Health & Safety
SEND AN ENQUIRY
Send us an enquiry

For expert legal advice, please complete the form below or call us on (09) 375 8700.