If you’re exporting, then sooner or later you have to deal with the question of an international distribution agreement. Which points to you need to include though and what should you be considering?

This is the 2nd part of my ponderings on this topic. You can find part 1 here & part 3 here.

Disclaimer

Obviously, I am not a lawyer. I’m not a legal specialist. So what I’m about to say in no way constitutes legal advice and in detail, you always need to check with a legal professional. In this series of posts, I’m looking from the commercial perspective, which is also important & should be considered hand in hand with the advice from relevant lawyers. Check out my original post about why you need a contract and why also the commercial perspective is important here.

You should also note that there are a whole list of points that should be included in all international distribution contracts (eg payment terms) BUT you need to also check with the local law both of your own and your client’s jurisdictions for any specifics. The last thing you need in the event of some kind of dispute would be to discover that the contract is missing something vital for that particular country and can’t therefore be implemented. 😬

Distributor’s Services

Distribution

Well, obviously…

Basically this is quite a short point stating that the distributor provides the stipulated services in the territory and that as a distributor, he buys the products in his own name and resells them. All of the costs & expenses associated with that resale are born by the distributor (unless agreed otherwise).

Product Registrations

Depending on the nature of your product, you may require to register them with the local authorities of the country you are exporting to. In many cases, you need to have a local contact in order to be able to do that.

Assuming that you don’t have your own legal entity in the country, then you have a couple of options:

  1. You can find a lawyer who will do this in your name (can be expensive, and it’s not always viable but it offers you more protection)
  2. Your distributor does this and you regulate in the contract what happens to those registrations if the contract and cooperation comes to an end. Trouble is, you can agree what you want, but it is probably really hard, costly & time consuming to enforce so if your distributor does the registration and you need to change partner, just be prepared to start again from scratch with the registrations.

This can really turn into a whole can of worms so IF your distributor is going to do the job for you (which has the advantage of them knowing the system), then make sure that you get copies of any certificates or links to where you can check validity in an online system. And that then needs to be regulated in the contract.

The last thing you need is to change distribution partner and realise that you can’t get your hands on the rights to import the products (& believe me, it can be a long wearisome discussion even if a court decides in your favour).

Labels

With any product that needs labels localising, there are companies who would like the distributor to organise the translation. If you choose to go this route, you have to be aware that the liability towards consumers rests with you so you probably need a mechanism in place to do some checks here.

Ideally, you shouldn’t be asking your distribution partner to do more than check things over. There’s a good reason why this kind of localisation is a specialised profession so it’s essential that you are not using Castilian Spanish in South America or Quebec French in France…

Distributor Obligations or Undertakings

Performance of Duties

There are a number of issues that you might want to reference here & most of them should be explained in detail in a Distributor Handbook or at least in contract appendices rather than the main body of your international distribution agreement.

These could include:

  • need for transparent working & adherence to your company’s compliance and/or ethics guidelines
  • number of team members dedicated to your brand either full (or more likely) part time
  • Transport and storage conditions
  • Maximum acceptable delivery times to resellers after orders are placed (remember though that there are different standards in different countries and that within Brazil vs Montenegro means very different physical transport times)
  • Setting competitive prices (perhaps a calculation model has been agreed which cannot be exceeded without prior consultation – this is a tricky topic where you need to be careful that you don’t land on the wrong side of the law about price fixing so get some advice if in doubt)
  • Is there an obligation to insure stock in the warehouse?
  • Who covers fees such as listings in retail, participation in tenders, product registrations (& the associated analyses or extra certification) – if the distributor pays, what happens if the contract should be terminated?
  • Obligation to inform the principal in good time of legal changes that will affect the business in question
  • Is there a need for traceability of batches through to store level? This is regulated in the EU for foodstuffs but can be a problem to implement in many countries outside – except in China where it’s also relatively frequent.
use this international distribution agreement checklist as the basis for your negotiations

Change of Control

What happens if you or your distribution partner are bought out? Does the other party have the right of termination if the control of the company changes?

Reporting

Personally, I wouldn’t go into details in the international distribution agreement, but would just make it clear that reports need to be sent in the frequency specified also using the method specified in the Distributor Handbook or perhaps just referencing the link.

I may write a separate blog post on reporting at some point, but for here I’d just say “less is more”. Only regulate what you really need to know to manage the business. Remember that your distributor is appointed to sell and not to prepare reports, and that there has to be a point to whatever data you collect. (What will you actually DO with that data?)

Stock Management and Planning

How much stock is the distributor obliged to carry? Don’t just pick a number out of the air – you can calculate by working out how long is needed to replenish with a new order, and adding a margin of safety stock onto that.

Eg. If you are able to ship international orders 14 days after the order is placed, transport is 5 days and you recommend a safety stock of 3 weeks, then the distributor would need to carry stocks for 6 weeks.

For a client on the other side of the world where you ship 21 days after receiving the order (because special certificates are required perhaps), shipping takes 40 days, custom clearance takes 7 days and transport to a local warehouse another 2 days, then the distributor needs to have stock in country, taking a one month safety stock into account, for 3 ½ months.

Those are just rough calculations as of course there will also be some stock in the market.

Make sure you specify if and what needs to be forecast for your production and in what frequency. If you produce everything on demand then the distributor also needs to know what lead time to expect, but usually you will still need a forecast of some kind for raw material planning.

Again, this should be kept as short as possible in the actual contract but regulated in the Distributor Handbook (the easiest option) or appendices.

Confidentiality

This is one of those legal clauses that are pretty formal in nature – your distributor should be obliged to keep your internal company secrets confidential (& vice versa obviously).

Marketing

Again, define it in detail (process, where to find all the details etc) outside of the contract. The mechanism for planning and approving activities (if relevant) needs to be clear as this avoids unpleasant discussions at a later date, but it doesn’t have to be in the contract but rather in a Distributor Handbook.

In the contract itself, I would regulate who is responsible for organising which activities and who pays for what.

Eg does your distributor make a contribution to the budget or do you dictate everything?

Does the distributor have to get approval from the brand owner for activities?

checklists are always valuable when negotiating international distribution contracts

Supplier Credit

Do you offer the distribution partner any kind of credit frame? This is more likely to be relevant with a long standing partner than a new one and depends on the payment term agreed. Whilst you can potentially insure customer credits, it’s worth being strict here on what you’ve agreed unless there’s an exceptional reason for a change. Of course, any credit frame needs regular review to make sure it’s still adequate, especially in times of growth.

Retention of Title

One of the trickier legal clauses: manufacturers love to have this in contracts but you need to check in each individual country whether or not it can be implemented. There’s really no point in agreeing that the goods belong to you until paid for (& all that may mean should you change distributor or your partner goes bankrupt) if courts in that country don’t recognise such clauses.

Collateral

Depending on the nature of your business, asking for collateral to be supplied in return for a supplier credit might be normal (not needed if you have a secured method of payment such as in advance or a letter of credit). The most frequent form of collateral would probably be a bank guarantee, but could also include a guarantee deposit, a guarantee made by a parent company (if you have reason to trust the parent company more) or assignment of receivables (this is one that’s hard to implement in a foreign jurisdiction though).

Quality guarantees, Warranties & Liability Limitation

Besides stating clearly what your quality guarantee or warranty looks like, you might want to explain the limits to your liability.

Check carefully what your destination market requires for all of these points as you shouldn’t contradict that in your international distributor contract.

Regulate in the contract that there IS a process for dealing with complaints and potential crises (authorities, media, whatever else…) but keep the process itself separate, otherwise your contract will be as long as a novel.

Shelf life obligations

If you’re dealing with a food product then you need to consider that the topic of shelf life is viewed differently in various places around the world. Eg in Asia, consumers are reluctant to buy something that “only” has 6 months remaining, whilst a Western European consumer might not even check the dates on a packet of biscuits.

Do you accept any liability for returns from the trade? If not, at which point do you expect your distributor to remove products from the shelf. My experience would suggest, it’s worth obliging them to control this point and make sure you don’t have expired goods on the shelf – that doesn’t only apply to markets such as sub-Saharan Africa, but also in eg the former Yugoslavian republics.

An International Distribution Agreement Checklist – there’s more to this than you might think

Obviously this isn’t legal advice, as I mentioned at the beginning. It’s my thoughts on how you might go about structuring a contract and what you probably should be considering.

It’s a tough balance to get right: on the one hand you want to have a legal basis with your new partner that will be water tight (whilst not making your partner feel that you’ve got them completely over a barrel with unfair clauses) but on the other hand, you don’t want to sacrifice half a rainforest to print it because it’s so long.

You also need to make sure that it contains enough detail to stand up in court and protect you on the points which are important for you. In lots of places, I’ve mentioned the concept of a distributor handbook. This has the advantage that you have one online version which is valid for all your overseas partners and if you need to update something, it’s easily done.

What I would say though is that if your contract contains the wording ” as per the current version of the Distributor Handbook” then you need to consider how to document the version history for the event that you need to prove something in court later. Your lawyer can probably advise in more detail on this.

It sounds horrible at the start of a partnership to be talking about court, but at the end of the day, a contract is there to protect both sides in a worst case scenario and to ensure a smooth transition going forward.

In practice that’s not always possible to achieve, but you at least need to consider these things. It’s always easier to discuss tricky topics whilst your relationship is on good terms rather than trying to negotiate something to your advantage at a time when you are on poor terms.

From my commercial perspective, I’d say that a lawyer will always go for the “belt and braces” approach, whilst the sales team will prefer KISS…but you need to find a solution in the middle that’s acceptable to both sides.

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3 Comments

  1. […] A Distributor Contracts Checklist Part 2 […]

  2. […] A Distributor Contracts Checklist Part 2 […]

  3. […] is the 3rd & final part of this checklist. You can find part 1 here & part 2 here. This final section will cover more the conditions that your lawyer should be insisting on, however […]

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