If you’re exporting, then sooner or later you have to deal with the question of an international distribution agreement. Why do you need a contract though and where should you begin? Should you use a template?
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.
Why is the commercial perspective so important?
Whilst your legal advisor will be focusing on making sure that your rights are protected, the commercial perspective looks more at the practical side of the business. There’s no point having a legally 100% watertight agreement that can’t be implemented because it was conceived in a legal ivory tower and is simply too theoretical (or perhaps one-sided – after all, dictating terms to your business partner isn’t a great foundation for long term satisfaction).
Why bother with international distribution contracts?
There are a few things that determine when this question comes up. To some extent the question about WHEN exactly in your relationship you discuss the topic of formal agreements is a matter of company culture, whilst there are also countries who have a legal requirement for a written sales contract for any shipment to take place.
These kinds of limited international sales contracts are often simply a minimum requirement to ensure it’s possible to transfer hard currency out of the market you’re exporting to, so the scope is a lot more limited than that of international distribution agreements.
Having some kind of formalised agreement with your distribution partner allows you to clarify the rights and obligations of both parties. Additionally, whilst it may not be what you want to think about when both sides are looking forward with enthusiasm and optimism to a long term mutually profitable relationship, a contract regulates how the partnership should be ended.
Much better to discuss those difficult topics up front than to try and hammer them out when the relationship is on the rocks.
Legal vs Commercial Conditions
Most contract components can be divided up into, on the one hand, the legal conditions that you need to have in every contract, and on the other hand, the commercial conditions.
So by legal conditions, I mean things you should formally include such as,
- who are the parties to the contract?
- Is the contract exclusive or not for the territory concerned?
- how long is your contract going to be valid?
- For an international contract, of course, you’ve got to regulate what language is it in because that is an important point
- Which law is applicable to the contract.
By commercial conditions, I’m referring to topics such as
- What are the payment terms?
- What are the delivery terms?
- How does the order process look?
- What kind of reporting does the distribution partner make?
I have a long list of points that you should consider including in your international distribution agreement, but I will go into those in a later post.
KISS principle for the win
It’s often hard to keep contracts short and compact, but they should be written to include what is really needed and no more. Personally, I like to put things that may change frequently (eg your price list or your distributor handbook) into appendices so that these can be updated without you needing to review the whole contract again.
Remember that in some ways the contract also represents the “balance of power” between you and your channel partner, so you need to be careful that it’s acceptable to both sides. It happens VERY often that the commercial teams from both parties will agree to a contract draft, only to have the legal teams throw it out of the window so be prepared for a lot of discussion loops.
Therefore I try to avoid situations where I need to change something foreseeable & entirely commercial (eg. Prices) and suddenly the legal team of my partner are discussing again why the notice period for ending the contract is as it is… You just don’t need that discussion each time you change something practical, so put those kinds of details into an appendix.
To template or not to template?
Whilst I may get a storm of hate from lawyers for this statement, I’m all in favour of companies having an international distribution agreement template.
However, one size certainly doesn’t fit all, so you need to consider that for any single agreement, you can expect to invest quite a bit of time and energy reviewing and discussing terms, before you reach a consensus that both sides are able to sign. Conditions like INCOTERMS need to be filled out in each individual case, so make sure the template is marked with say a # where the standard points to be altered are – this will save lots of time.
I’m not recommending any specific tools here for collaborating on documents as when exporting you usually have to consider the lowest common denominator, so again KISS applies. Also, this is extremely company specific & usually therefore means Microsoft Word.
So if it’s going to be changed each time, why bother with the template at all?
Firstly from a practical perspective, you probably can’t afford the time or money to have a lawyer draft each contract from a blank sheet up. (And let’s be realistic in 99% of cases, any lawyer that you ask to do that – once they’ve finished rubbing their hands together – is going to base your contract draft on a template of his/her own). So as long as you are generally using the same lawyer each time in your domestic market, then you can save some money by asking them to check the details of a draft which they prepared originally. In practical terms that means working with mark ups in the text so they can quickly see what has been amended or added.
Secondly, for smaller companies, it’s generally the international business development manager or head of sales who are negotiating the contract directly with the distributor, so having a framework in place makes those discussions much easier to structure. You also need some internal discussion up front about how much negotiation room there is on the various points.
What I would be careful about though, is just buying a random template from the internet, so yes a template can be useful, but it’s worth discussing your specific needs with a lawyer up front to make sure you’re not creating problems for yourself further down the line.
A template evolves over time
With contracts, the evolution is often as a result of some bad experience. Something goes massively wrong with one of your partners and so you realise that your international distribution agreement isn’t as watertight as you’d believed.
The consequence is usually a discussion with your lawyer to add a “patch” – a clause to cover the gap that you’ve discovered.
Also of course, markets and business sectors change over time, so you may need to update your contract template to take account of market conditions or new laws.
Negotiating an international distributor contract isn’t a fast process
If a contract is for a period of several years or a single project of high value, then it’s unlikely to be a fast negotiation. Chances are that rather a lot of stakeholders and advisors need to be agreed that the contract can be signed as it is.
Manufacturer/brand owner side
You probably need the following parties to confirm the contract draft:
- Commercial team who are negotiating (probably sales)
- Other internal departments affected by the decisions (supply chain, marketing etc)
- Top management
- Legal advisor in home country
- Legal advisor in the country you are exporting to
- (possibly also a legal advisor in the jurisdiction of your contract if it’s not your home market or the one you’re exporting to)
On the distributor side you also need the commercial team (& all internal departments), as well as the top management and legal teams to be agreed before the contract can be signed.
Of course, in many smaller companies the owner may sign agreements without checking with a lawyer but that obviously involves the risk of “not knowing what you don’t know” and you don’t want to sign anything where you are not fully aware of the implications for your business. If you are on the brand owner side, it’s also not in your interest for your distributor to sign something that their legal team hasn’t checked because you don’t want any negative repercussions to your relationship or to be forced to rediscuss at a later time – better to get things right up front.
Why consult a lawyer in the country you are exporting to?
It’s a false economy to save money on this point. You can spend all the time in the world negotiating the most wonderful agreement ever but if you can’t execute it in the country where your distribution partner is based that won’t help you at all.
Always remember that law isn’t based on what seems to you like common sense, so you need to check that you actually can implement everything that you’ve agreed upon. It’s also complicated so if your distributor hasn’t consulted a legal advisor, they may simply not realise that one clause isn’t possible where they’re based. …or they may realise but it might not be in their interest to warn you of it.
For example, in many countries it can be extremely difficult to get recognition of a court decision made overseas. So if you are forced to end your contract and the court named in the agreement orders the distributor to pay the monies they owe to you, you might have a long fight on your hands to actually get that money.
Having the moral high ground and being right is all well & good, but it won’t help you if you can’t implement, so check with a local lawyer in advance. You don’t want any nasty surprises.
Litigation is a last resort
Whilst international distribution contracts are designed to cover you for the worst case scenarios, in practical terms you are going to want to do everything in your power to avoid going to court with a partner.
It’s not only expensive and stressful, it’s also extremely bad for your business as that partner will potentially be screaming from the rooftops in your export market how badly they’ve been treated by you. Obviously, this may or may not be true, but whichever way it leaves you possibly with a kind of scorched earth situation that makes it much harder to move forward with a new partner.
Your International Distribution Agreement should be a means to an end
Whilst this kind of contract mean a lot of work up front, they should lay the groundwork for your future collaboration. If it includes a “distributor handbook” then it means that you have a checklist about how you want to work and your expectations.
The kinds of KPIs you might include are something I’ll look at in another post but realistically your written agreement should provide clarity for both sides about their rights and obligations, as well as how to work together smoothly.
My advice would be to make sure that you only include as much legalese as possible and try to keep the whole thing compact. Your distributors are probably not native speakers of English, never mind legal specialists so keeping things straightforward & practical will help the international distribution agreement to be a tool that is used on a day to day basis rather than a document locked away in a filing cabinet gathering dust.
It’s important though to check with a lawyer in your home jurisdiction and that of the exporting company, to make sure that all the terms you want to agree are possible to actually implement.
I’ll look at what you need to include and the considerations about exclusivity in a later post.
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If you are interested in working with distribution partners in your export markets, you might find these posts also interesting:
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- Carrying out an Annual Distributor Performance Review
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- 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