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 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 you also need to be able to judge from a commercial perspective when something may need adjusting for a particular partnership.
Table of Contents
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. ?
These are events that neither you nor your distributor can control. They include things like:
- storms, floods und fires
- border stoppages
- implementation of significant controls or embargoes on imports and exports by any governmental authorities
- Global pandemics (even if we hope there won’t be another one of those in the near future)
- drastic changes to the local government’s foreign exchange policy or significant changes in the local exchange market.
It’s usual to agree that if either party can’t fulfill their obligations due to a force majeure event, then it won’t be construed as a breach of the contract and the associated deadlines will be prolonged.
It doesn’t remove the obligation to pay though, even if you agree that there is the right to dissolve the contract if the situation (eg war) goes on for more than a certain period of time.
Realistically if you have any kind of force majeure situation with your export markets then you need to be in close communication with your partners – you don’t want to potentially ruin years of relationship building because the port workers went on strike…
Duration of the International Distribution Agreement
Include the length of contract in words and numbers as well as any planned renewals as well as the date from which it is valid.
There are various schools of thought on this one & there’s not a one size fits all solution as it rather depends where you are in the partnership & what your company export policy is.
For a long term partnership, one school of thought is that you make a long (eg 10 years) or even indefinite contract that automatically extends for another year each time.
Many distribution companies will push for this kind of agreement right from day 1 – but you wouldn’t get married after one date would you? So don’t bind your company indefinitely with an untried and untested partner.
If you’re discussing with a completely new distributor, then you might want to consider a probationary year, before extending for a certain period. This allows both sides to test the potential of your products in that market as well as your suitability as partners and provides a concrete opportunity to amend any clauses that don’t work well for you.
Set it & Forget it with Established Partners?
Agreeing an indefinitely valid contract with a partner you’ve been working with for some years can be an ok solution. What tends to happen though is that the distributor feels that he’s always “half on the ejector seat” because it perhaps rolls over for a single year each time, which doesn’t allow for his long term planning.
It also carries the risk that neither party treats the contract as the proper basis of day to day working. It just gets forgotten and then it’s easy to arrive at a situation where the conditions actually have nothing to do with your operational working processes.
No perfect solution
This is one of the clauses which can almost always cause long discussions even though neither party has any intention of ending the cooperation. It’s a real energy vampire.
Personally, I like to offer a probationary year, which will be extended to a 3 year contract if both sides are satisfied with the collaboration. Yes, you always need to have a clear definition about the conditions under which a partnership can be ended and how, but having fixed points in time that you will question your collaboration conditions has it’s advantages.
That doesn’t mean that you necessarily call into question whether or not you want to continue working with a partner (although that is what most distributors understand so you have to be sensitive about explaining this point) but rather that both sides should sit down together and discuss the conditions.
Whether you decide after that to stick with 3 or perhaps 5 year contracts is your personal choice. My experience though would suggest that markets change and after max. 5 years, your contract may need a complete revamp in order to still reflect the way you conduct your business. Having a fixed end to a contract forces you to revisit it and consider how you want to move forward.
Treat the negotiations with care – your distribution partner will see this as a huge risk factor in your cooperation.
Termination of International Distribution Contracts
This clause is vital for any supplier to get right.
Under what circumstances are both parties able to end the agreement?
Which timeframes are involved?
How will the handover to a new distribution partner look?
Whilst it’s tough to discuss this at the beginning of a cooperation, it’s a lot easier than waiting until you’re having problems, so be patient whilst negotiating.
You should agree what are the deadlines and which communication methods are acceptable if either decides not to renew the contract (assuming you have some kind of renewal mechanism agreed).
Eg. “If one party informs the other in writing at least 3 months before the renewal date of the contract…”
Termination by notice
This is the condition to say when the contract can be ended IRRESPECTIVE of the end of the agreement.
Eg. In writing with 90 days notice at the end of any calendar month providing one of the conditions below are met…
It is then up to both parties to agree what those conditions should be. They could include:
- The Distributor not meeting the mutually agreed KPIs
- Failing to agree on marketing budgets
- Supplier failing to meet key delivery obligations (except in a case of force majeure)
- Other contract obligations
Usually if you want to end a contract because the other party isn’t meeting their obligations then the contract stipulates that you should first give a warning in writing, including a deadline by which the lack should be corrected.
Of course, this isn’t a clause to invoke lightly – if you want to continue working with a partner then you should continue discussions before taking any formal steps.
Change of Import Partner
It’s recommendable to regulate how any change of import partner should take place. Eg with both Parties doing all they kind to ensure smooth supply on the market so that the consumers don’t suffer.
You should consider how to manage the following points:
- Will you as the supplier buy back the stock? And to what conditions?
- What happens to product registrations and import licences?
- Would investments made by the distributor (eg in retail listings or future trade fairs) be reimbursed?
- At which point should the distributor stop selling to the market?
Of course, in practice, such a handover is rarely 100% amicable so you need to be prepared for a certain amount of disruption on the market if you change a partner. Maybe the ex-distributor sells off all of his stock at dumping prices and completely messes up your pricing policy, or tells the retail about “how badly” you treated him as your representative… These are bridges that you have to cross when you come to them though and just do what you can in advance to minimize problems via the contract.
Lawyers usually include a clause that if one clause of the contract should become invalid for whatever reason, then it doesn’t affect the rest of the contract.
Again a formality – it’s usual to agree that all clauses will be agreed in writing and that oral agreements won’t be binding.
Language of Contract
This shouldn’t be a tricky topic – the contract should be in a language which both parties understand and that is usually the language that you conduct your business in, often English.
If you prepare a bilingual contract either because it is your company policy or to assist your partner, make sure it is clearly stated which language prevails in the case of discrepancies in interpretation. Again, in the name of partnership, the valid language should be the one that you both negotiate in.
Choice of Law in an International Distributor Contract
It’s important to agree which nation’s law will apply to the contract. In most cases you can freely choose which law should apply & which court will deal with any claims.
It’s always expensive and stressful to go to court, especially in a foreign legal jurisdiction so in practice each party would usually like the contract to be under their domestic law. Those 2 options are fairly “logical” but you could also choose a neutral third country.
A couple of thoughts on this:
- Europeans usually don’t want to have any contracts under US law because of the difference in culture towards taking things to court and the level of damages or costs involved.
- Countries which work on the basis of written law don’t like contracts signed under the law of countries which work on case law (eg UK, Hong Kong) as this can feel extremely unsettling
- There are countries eg Lebanon where national law may override the agreed contractual law in some cases so you need to take care when checking that the contract can be executed
- Going to court is ALWAYS a last resort and you should try to solve issues otherwise first
If you want to have a more neutral court than your local one (for example) then there is always the option of agreeing an arbitration court in your international distribution agreement. You still need to specify which law is valid though.
This can be a more acceptable solution for both sides as it allows you to avoid litigation in national courts.
The international chamber of commerce has a set of general rules which national international chambers will also adhere to. That means it’s possible for you to agree for an arbitration court in eg Munich or London to take a judgement under the law of your contract (obviously it makes sense for the court to be in the country of law but it doesn’t have to be) as well as specifying the language of the court. To be fair to both parties, this should be the language of your contract and day to day operational business.
Again, this isn’t a cheap procedure but it is a neutral method of resolving disputes across international boundaries.
If you want to have this as an option it should be agreed in the contract up front.
Specify how many original invoice copies are required. Presumably these will in the next years slowly be replaced by electronically signed & archived documents which probably will be recorded using blockchain technology for traceability however in international trade we’re not there yet.
Make sure your International Distribution Agreement is Balanced
If you purely rely on the advice of your lawyer, you probably would end up with an extremely one-sided contract draft that your distributor potentially wouldn’t be able to accept (after all, you’re paying them to protect your interests).
That’s why you need to at least have an understanding of what is essential and what is nice to have as well as what are the considerations.
If you want to have a long term cooperation with your international partners though (& I assume you do, as why else would you be reading this?) then it’s important to understand both sides of the story and be prepared to compromise. If one party or the other feels “badly done by” at the beginning then that feeling will fester as time goes by and potentially poison your cooperation.
It’s also essential though that you take the time to discuss uncomfortable topics at the beginning of your partnership, not because you’re already thinking how to “get out” of your contract, but rather because it’s hard to discuss objectively if you are already in a crisis situation.
Whichever conditions you decide together with your lawyer to build into the contract, it is essential that they can be executed in the market which you are selling to, and that you know WHY you chose to insist on that point.
Keep it concise and ensure that it’s written in as plain a language as possible – you need to be prepared to explain each clause to your partner, so make sure that it’s not written in beautiful legalese that nobody but a lawyer can understand. Yes, it needs to protect the rights and obligations of both parties but should be formulated in a clear way and only then is it a practical working document rather than just a formality that you only look at in the event of a crisis in the relationship.
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- Advantages of Working with a Distributor in Export Markets
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- How to Make an Export Plan Part 2
- Starting to Think About Your International Distribution Agreement
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