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?
Of course, not all of these points are MUST HAVES but they are a list of points for you to at least consider and think about.
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. 😬
Half a forest
Including all of these possible points into a contract can easily feel like your final document is the size of War & Peace, so you need to strike a balance between keeping it brief and making a regulation for every possible eventuality.
For any points that probably change several times within the validity span of the contract eg prices or perhaps marketing and branding guidelines then just refer to them in the main body of the text & keep them as an appendix or distributor handbook. That way it’s less hassle when you need to update something.
The Basics up front
Make sure you have the official name correct (as it appears in the company registration). If your business partner is part of a group, you need to ensure you have the contract with the correct legal entity.
Same goes for checking who is entitled to sign as the legal representative of the company – you don’t want to discover your contract is invalid because whoever signed it had no authority to do so.
In many companies, if you are the person responsible as country manager or international business development manager, then you will also as a courtesy be asked to sign & it may be the same with your business partner, but don’t assume that your contact person will sign.
It’s worth asking for a copy of the company registration and passports to get things formally correct here.
For Asian contracts, remember that the round (red) company seal has more power than a signature, so that MUST be applied to a contract in order for it to be legally binding.
Preamble & Definitions
Both of these points are ones that the lawyers probably will insist on, but that for you as a sales or marketing person may feel a little artificial and pedantic.
This is setting the scene if you like, and can be something as simple as:
Company A is a well known producer of premium Italian specialities in many companies around the world. Company B is a long-established distributor of fine foods in the territory defined under §4.
Based on the above, both Parties conclude this International Distribution Agreement for the sale of the Products and agree to be bound by the conditions within.
This will define certain terms that are used in the contract so that the long form doesn’t have to be written out each time.
So if our producer above is called Read’s Amazing Italian Food Ltd, it might be agreed in the Definitions to always in the contract simply refer to the company as “Read’s”. Or the distribution partner may simply be referred to as that (“the distributor”) rather than using the company name (that makes your life a lot easier if you have a contract template, because it’s one less change to make for each new client.)
Exclusive or Non-Exclusive?
You need to define this in your contract. However you might want to consider not giving exclusivity immediately – you might want to consider a probationary year before you’re prepared to discuss that.
Conventional wisdom says that you shouldn’t give exclusivity in huge countries such as the USA, Russia, China or Brazil but that doesn’t mean that you can’t be successful by doing just that.
However you decide to manage this question, you need to remember that a contract means that your business partner has rights and privileges on the one hand and obligations on the other. Especially if you’re giving exclusivity, then you need to be sure that the partner will actually take action with your products and not just sit on the brand rights.
If you have more than one partner in a country. eg North and South regions then you also need mechanisms in place to ensure that they focus on fighting the competition rather than trying to steal part of the other partner’s “pie”.
You also need to define if this is an agency contract or a distribution contract (an agency will probably sell on commission – the contracts are all signed by you the brand owner – whereas a distributor will buy and sell on their own behalf).
Sounds easy, but make sure you use the formal name. Be especially careful around countries which have changed their designation or legal status. Writing “France” is unlikely to be controversial, writing Macedonia instead of the “Republic of North Macedonia” might well be if it came to a court case.
Other areas where you need to be careful are for example Kosovo, Palestine, China, Taiwan, Hong Kong. It’s quite frequent for instance to have different partners for Hong Kong and the Chinese mainland – in that case you need to exclude SAR* Hong Kong (& probably Taiwan) from the People’s Republic of China contract. (*SAR = special administrative region)…& where is Macao included?
If you have more than one partner for a particular territory then the region and/ or the sales channels should also be carefully defined.
Active vs Passive sales
Within the EU at least there are regulations guaranteeing the free movement of goods and services, however you are allowed to agree in the contract that the distributor won’t actively sell outside their territory.
If they receive enquiries from a different region though it will be the strength of your relationship that dictates how the next steps look. It depends on how well you are generally managing the region too and the policies you have in place. Obviously if a partner undercuts the prices of the neighbouring country and is always selling to wholesalers over the border due to enquiries then your relationship will suffer and it probably won’t be a long term partnership.
You need to discuss with your partners how they can handle such situations though whilst still remaining of course within the law.
Order Procedure & Production Forecasting
This is one of those points which is often included, and where I would argue that the information should be included into a distributor handbook or at the very least an appendix. Anything which is the same for all partners should be in a handbook (ideally to be referenced online) and you can make reference to that from the contract. That way if something changes, you amend one online document and send a notification to all partners rather than updating all the contracts.
What is the process for placing an order & what are the time frames involved? What are the MOQs? What is the list of products covered by the contract.
Which delivery documents (& how many copies) does the importer require? This should be in the appendix as it can change with national law or with the payment terms as time goes by.
If you want to oblige your partner to at least give new product groups a shot, that can be included into the main body of a contract.
The sales or purchasing planning process can also be regulated in detail in a distributor handbook.
This is a hot topic especially in FMCG, and I would suggest you define who is responsible for what and who carries which costs in the contract. Exceptions can always be managed on a case by case basis ad hoc.
If local language stickers are needed (because for some reason the language can’t (yet) be printed on the packaging:
- who prepares the translations of the stickers?
- where will the stickers be applied to the product (it might be cheaper in-country, but is it necessary to be labelled according to local language regulations at the time of customs clearance??)
- who will bear which parts of the costs?
Generally, product liability remains with the brand owner, so you probably need to carry the costs there. However you may be able to negotiate that the labour costs will be born by the distributor if it is a market where his name and address as a local contact also needs to appear on the product.
Delivery Conditions – a core feature of International Distribution Contracts
What is your agreed INCOTERM? Make sure you choose appropriately and include the version of the INCOTERMS that is being applied (so INCOTERMS 2020 at the moment).
eg. FCA Stuttgart or FOB Southampton (not just FOB)
Invoices and Prices
As I mentioned above, I’d personally include the prices into an appendix that can easily be updated as required. However in the contract body you need to consider including the following points:
- which currency are invoices issued in?
- presumably invoices will be without VAT (foreign shipments) however within the EU you still have to ensure you have proof of export as well as the data for reporting to EUROSTAT each month.
- outside of the EU with some INCOTERMS you also need to regulate that you will receive the proof of export from your partner (T1 or perhaps TIR carnet) within a certain time frame. Neglecting to obtain these proofs of export could leave you liable for the VAT amount.
- what is the mechanism for changing prices? How much notice do you need to give your distributors?
- do you need to agree a mechanism for managing large fluctuations in the exchange rate?
A “must have” clause in any international distribution agreement! You should also read my post about selecting the right payment term for your situation. Not only should you include very precisely the terms of payment, but also the bank details/account where the money should be paid to.
Do you as a company charge interest on overdue payments? If yes, the interest calculation mechanism should also be included here.
KPIs and Turnover Targets
This is a slightly controversial point. Any actual turnover target numbers should be in an appendix but in the first couple of years of business, I’d argue that it’s more productive to agree on task based KPIs.
eg. the 5 sales team members should spend 15% of their working time on our brand, meaning x calls per week or gain listings in 2 of these 5 major supermarkets or attend 4 regional exhibitions with a stand
It’s virtually impossible to predict turnover from a standing start and often a project requires more time than anyone would like which is why I prefer to define activities appropriate to your situation and brand in the first couple of years.
After that you can make turnover targets, however it’s unfair to pluck numbers out of the air as a criterium for continuing the partnership if you don’t have any sales history to base the numbers on. This creates unnecessary stress for your importer and can result in them focusing on short term turnover rather than key foundational tasks to secure the long term growth of the business.
The Considerations for an International Distribution Agreement Checklist is as long as my arm
This is just the first part of my thoughts on this topic, however I don’t want this to turn into a monster post that’s literally too exhausting to read. So I’ll continue next week with some more points that you need to think about including into your contracts.
You always need to remember that a contract is something you agree at the beginning of a cooperation but it has to support you, should that relationship turn bad. Very few companies in the manufacturing or distribution space ever want to have to sue a former business partner but it’s worth planning for the worst case scenario up front.
As I mentioned in my initial post on contracts, you should get each one checked by a lawyer in each of the markets concerned (so your home jurisdiction as well as where you are selling to) as well as having a commercial check.
I don’t know any international sales person who’d jump up & down in excitement shouting “yippee, I’ve got to negotiate a new contract with our partner in X next week”. Realistically speaking though we are often the ones doing the leg work and explaining our company point of view to the partner, so you need to understand your company’s reasoning on the topic. You also need to ensure that the contract is as balanced as possible. Yes, of course you can force a partner into something that’s really one sided but that’s hardly a great start to your collaboration is it?
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If you are interested in working with distribution partners in your export markets, you might find these posts also interesting:
- Define Your Ideal Distributor Company Profile to Succeed Internationally
- Carrying out an Annual Distributor Performance Review
- Are you a great supplier?
- Factors to Consider when Deciding on Payment Terms
- Advantages of Working with a Distributor in Export Markets
- Making the Best First Impression in International Business Meetings
- Finding the Perfect Partner: Distributor Dating in a Hybrid World
- Store Checks in International Sales: a Retail Audit Example
- How to Make an Export Plan Part 1
- How to Make an Export Plan Part 2
- Starting to Think About Your International Distribution Agreement