All About Distributor Agreements
An agreement between a manufacturer or supplier for a product or line of products and independent parties interested in distributing them to end-users is known as a distributor agreement. Typically, it will include terms that will regulate the inclusion of materials with or packaging of the products, the pricing of products and services, including discounts , rebates and zone pricing, the compensation of the distributor, warranties of the manufacturer, indemnities by both parties, dispute resolution procedures, and termination procedures. The distributorship may be for a designated period of time or it may be a continuing distributorship that terminates with notice of either party, e.g., the supplier or the distributor.
Distributor Agreement Template Must Haves
A distributor agreement template should include all of the major components generally included in any basic type of commercial contract. What is critical is that the template be tailored to fit the specific type of distributorship (wholesale distribution, retail distribution, etc.) and the product(s) being distributed. Your distributor agreement template will at least contain the following key components:
i. Description of scope of distribution. Your distributor agreement template should set forth the territory or geographical area to be covered by the distributor as well as whether the distributor’s distribution rights are exclusive or non-exclusive with respect to other distributors and suppliers of the product in the territory.
ii. Term of the distributor agreement. Unlike a non-disclosure agreement where most of the value is found in the confidentiality obligations, a distributor agreement template should address, at a minimum, the term or duration of the distributor agreement.
iii. Pricing/Minimum Sales Commitments. Your distributor agreement template should also address pricing for the product(s) to be distributed and whether the distributor is required to pay in advance for the product(s) or simply post a deposit.
iv. Payment/Delivery/Packaging. Some of the other essential elements of your distributor agreement template will include payment terms, delivery terms, terms for packaging and labeling of the product.
v. Termination/Remedies. Finally, your distributor agreement template should cover remedies and default provisions, including any provisions related to termination of the distributor agreement in the event of a default.
Legalities In Distributor Agreements
With the exception of certain industries and relationships, such as in the context of franchise relationships, there is generally a large degree of freedom in the way that parties structure their distributorship arrangements. However, there are several legal issues that need to be given careful attention, and which will be discussed in greater detail below.
At the federal level, laws and regulations that have an impact on distributor agreement include the Tariff Act (particularly Sections 301, 303 and 506), the Lanham Act (particularly 15 U.S.C. §1125(a)), the Federal Trade Commission Act (particularly 15 U.S.C. § 45), federal securities laws (if the arrangement involves a security or interest in the issuer and is not exempt from securities registration requirements), and the enforcement of intellectual property rights laws, including unfair competition, patent, trademark, copyright, and trade secret law. In addition, state law must be reviewed to ensure the distributor agreement does not violate any applicable state or local laws, such as usury, consumer protection, franchise, antitrust, and intellectual property laws.
Termination Clauses. The inclusion and type of termination clause(s) may be restrictively construed under state franchise relationship laws, and care should be taken in drafting termination clauses which do not give rise to a claim. Moreover, if the relationship is determined to constitute a franchise, in some jurisdictions the supplier may be required to provide advance notice of termination and comply with other requirements before it can end a distributor agreement.
Dispute Resolution. If litigation becomes necessary, the ability to choose the governing law and forum may be restricted by local law or public policy. Moreover, the imposition of such clauses is not enforceable with respect to franchisees in many jurisdictions and municipalities.
Modifying A Distributor Agreement Template
Getting the details right in a Distributor Agreement can be made easier by using a template to start. That said, each Distributor Agreement should be specifically tailored for your particular equipment, software and supplies businesses and/or products, customers and distributors and sales agents. This is often a much larger project than a Distributor Agreement template.
A few of the options you will want to customize in your new Distributor Agreement template include:
(a) whether you will allow any form of termination without cause or force a one (or multi-) year period for termination without cause.
(b) whether the Distributor must meet minimum purchase quotas and/or pay a fee in order to get exclusivity. (A fee is not advisable from my point of view if you can avoid it.)
(c) how damages will be handled and whether to account for lost profits and/or lost market share damages.
(d) whether to allow a form of partial or total waiver of State law where the Distributor sells outside of the U.S.
(e) whether to allow multiple or cross distribution channels which might lead to Eagle v . Raybestos – I have lost bigger litigation cases to infringers who copied our stuff because of the inconsistency we had between National distributors and local distributors.
(f) whether to allow liquidation of stock and/or return of defective items.
(g) how to treat product modifications and improvements.
(h) how to set out the distribution territories – countries, states, cities, zip codes, and/or demographics.
(i) whether or not to include a non-competition clause, i.e., I will not sell your product in my own territory.
(j) how to treat advertising expenditures and promotional materials.
(k) how to allocate expenses between you and your distributor.
(l) whether or not to allow the distributor the rights to assign or transfer its rights and obligations to a third party and whether or not a fee should be assessed.
(m) whether or not to allocate channel conflict or competition of interests issues via payments or arbitration.
(n) whether or not to include an over-reach provision.
(o) how to treat material breaches and what breaching party’s rights are when a breach occurs.
(p) what to do about the "software" problem, download, mixed system, and overload issues that are a problem with U.S. distributors of offshore software developers.
Mistakes To Avoid
The drafting of the distributor agreement is a critical step that too many companies treat in a cursory fashion. While it may be true that a poorly drafted agreement is better than no agreement at all, the recent influx of litigation, arbitrary interpretation and confiscatory legislation in distributor-related transactions argues convincingly for a more sophisticated approach.
What are some of the common mistakes that companies continue to make when drafting their distributor agreements in an effort to "save money" by doing it themselves or base it on a distributor agreement that someone found on the Internet? What are the pitfalls and their unintended consequences? How can they be avoided in order to ensure that the relationship is as clear and succinct as possible, that the agreement is enforceable and that total costs of performance are minimized?
One of the biggest pitfalls is not reading up front thoroughly and consulting with counsel on the laws governing distributor relationships in both the country of domicile of the manufacturer and the country where the sale of products will take place. Depending on the goods and the markets and jurisdictions involved, specific laws relating to trade and commerce, unfair competition, intellectual property and even licensing could apply. These laws must be carefully reviewed and evaluated prior to any drafting taking place.
Too often, businesses choose to include disclaimers in their agreements. For instance, a disclaimer section which states that products are sold "as is" or "with all faults" has a huge downside. In many countries where distribution statutes protecting the distributor are in force, these types of disclaimers are illegal. By having such a disclaimer in the agreement, the distributor can then sue to collect for damages caused by the existence of the disclaimer.
In many cases in the drafting of the distributor agreement, the company involved (or its counsel) views the agreement from the point of view of the company alone. It does not address issues that could arise from the point of view of the distributor. This leads to an unbalanced document that the distributor may or may not sign. It leads to difficulties in the future when questions arise as to why the distributor has failed to conform to the written agreement. Review and incorporation of the distributor’s points of view into the agreement can avoid these problems.
Another common error arises from the use of what are commonly termed "standard provisions" in the agreement. While the intent seems to be proper, in that the company wishes to impose uniform provisions on all distributors, these provisions can prove quite difficult and expensive to incorporate in other parts of the world. One very common example of this is the warped and incomprehensible attempt to incorporate language from the Uniform Commercial Code or the Uniform Sales Act into a country whose jurisprudence is not based on common law principles. It is well known by now that the UCC does not "work" in major civil law jurisdictions. The UCC relies upon conformity, good faith, reasonableness, commercial standard of practice, delivery dates and many other concepts that cannot be found in many nations’ commercial codes. Attempting to make a commercial or licensing agreement "uniform" is thus a process that requires careful and deliberate thought and evaluation. An attempt to force all distributors into an agreement that has incorporated inconsistent or "un-American" provisions without checking in with regard to local law will result in a distributor who is not held to be bound by those provisions. It is better to create a distribution agreement for each locality that is consistent with local laws but that remains unique rather than to attempt to impose a single agreement on all without adequate legal research.
Best Practices For Distributor Agreement Templates
Using distributor agreement templates effectively is essential to both streamlining processes and maintaining distributor relationships. First, they are a vital tool to maintain efficiency, because having a template means that the bulk of the work of generating agreements on behalf of multiple distributors is essentially done at the outset. Second, templates allow you to update your contracts more easily in the future, reducing costs and maintaining consistency with respect to agreements and resulting policies. Third, using agreements gives you the standardization necessary to equip your enforcement personnel with a "baseline" for the enforcement of distributor rights, as well as providing them with the guidelines they need to identify problematic distributors.
As helpful and necessary as distributor agreement templates are, they, like tax forms and other legal documents, can also be confusing . No set of templates is likely to meet all the needs of any one business, which means that a business must have legal input into its template drafting process in order to draft its agreements to fit the particular needs of the business and its industry. Further, it is all too easy to have distributor agreement templates written in such a way that they are both vague (causing problems when applied to the specific facts of a case) and too arbitration-predictable (making it easier for distributors to engage in some prohibited behavior and then getting a third party to declare an agreement invalid or unenforceable).
No single template will be sufficient for your entire business (particularly if you have multiple types of distributors or sales representatives), but the investment required to develop the right set of templates will pay off many times over in efficiency and improved relationships.