In Short
- Start by assigning your distributor a small territory to ensure they can effectively manage it before considering expansion.
- Verify that exclusivity clauses in your agreement adhere to Australian consumer laws to avoid potential violations.
- Establish measurable performance goals and include provisions to terminate the agreement if these targets are not met.
Tips for Businesses
When drafting a distribution agreement, it’s crucial to balance ambition with practicality. Begin with manageable territories for your distributor, ensuring they have the capacity to meet established performance goals. Regularly review the agreement to maintain flexibility and legal compliance, fostering a successful and enduring partnership.
Table of Contents
- Roles of the Parties
- Do Not Over-Commit
- Illegal ‘Exclusive Dealings’ Clauses
- Intellectual Property and Marketing
- Term and Renewal
- No Performance Goals
- Unilateral Price Changes
- Security Clauses
- ‘After Termination’ Clauses
- Termination for Cause or Convenience
- Unequal Market Conditions
- Unclear Order, Delivery or Payment Process
- Key Takeaways
- Frequently Asked Questions
A wide variety of businesses use Distribution Agreements. The manufacturer/distributor relationship represents a relatively easy way for businesses to access markets they wouldn’t otherwise have the funds to penetrate. Unfortunately, it is fairly common to poorly draft Distribution Agreements, which usually leads to disputes and a breakdown in the relationship between the two parties. Getting your Distribution Agreement right the first time is, therefore, of critical importance. This article will explain and list the most common mistakes and problems with Distribution Agreements.
Roles of the Parties
Consider what each party to the agreement will be responsible for, including:
- collection and delivery;
- import costs (if an international agreement);
- designs; and
- any regulatory licenses or permits that the goods may require.
Do Not Over-Commit
Do not assign too large a territory if the distributor has only proven themselves in a small territory. Assign a small territory to the distributor initially, and if the distributor performs well, expand their territory. Additionally, address online sales to prevent conflicts. Clarify whether online sales are permitted and under what conditions. Evaluate geographical restrictions for online sales, establish rules for using trademarks in online contexts, and determine how these sales factor into performance metrics.
Continue reading this article below the formIllegal ‘Exclusive Dealings’ Clauses
Exclusivity arrangements with customers, products or in certain territories may violate Australian consumer laws. Consult a business lawyer to ensure your Distribution Agreement does not violate Australian consumer laws.
Intellectual Property and Marketing
Distribution Agreements must clearly outline IP licensing terms and marketing guidelines. This protects the supplier’s brand while enabling effective promotion. The agreements must also specify how trademarks and logos can be used and set up approval processes for promotional materials. Suppliers risk brand dilution and legal disputes without these provisions, potentially damaging their market reputation.
Term and Renewal
Carefully consider the agreement’s duration. A short-term strategy may not allow market establishment, while a long-term strategy could trap parties in an unproductive relationship. Include explicit renewal provisions, possibly with performance-based criteria. Be cautious with automatic renewals – they can provide continuity but may extend unsatisfactory arrangements. Include clauses for early termination under specific circumstances.
No Performance Goals
A Distribution Agreement must include clear and quantifiable performance targets and clauses that allow the parties to terminate the distribution arrangement if the distributor fails to meet those performance targets
Unilateral Price Changes
Allowing one party to set the prices may not be conducive to a good long-term relationship. Instead, you may consider allowing the parties to mutually agree on price changes or to set a price review each year or every six months based on market factors such as the Consumer Price Index.
Security Clauses
Suppliers may include PPSA clauses to secure interest in supplied goods if credit is granted. Clearly outline any security interests, obligations under PPSA, and default consequences. Distributors should be wary of broad security interests extending beyond supplied goods. Failing to address PPSA considerations can lead to unexpected liabilities.
‘After Termination’ Clauses
A Distribution Agreement should include a clause that clearly spells out the obligations and responsibilities of both parties upon termination and outlines the actions both parties must take immediately after termination.
Termination for Cause or Convenience
If a Distribution Agreement only allows ‘termination for cause’. In that case, you may run into difficulties if a party wants to terminate the Distribution Agreement but there are insufficient grounds. Consequently, termination may not be allowed, or there may be a dispute about what qualifies as a ‘cause’.
Unequal Market Conditions
The other party will often take advantage of the less experienced party during the negotiation process. A more experienced, savvy operator will likely know how to draft a Distribution Agreement to their advantage. A biased or unfair distribution agreement may cost the less experienced party thousands. Steps should be taken to mitigate this risk.
Unclear Order, Delivery or Payment Process
The distribution must clearly outline how the distributor can order goods, who will take responsibility for delivering them and when the company should make payment. Being upfront about this process allows both parties to understand their responsibilities before signing the dotted line.
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Key Takeaways
You should emphasise the importance of clearly defined roles and responsibilities in Distribution Agreements. Additionally, avoid over-committing by initially assigning smaller territories and assessing distributor performance. Moreover, ensure your agreement complies with legal standards to avoid illegal exclusivity clauses while outlining clear IP licensing terms. Finally, it is crucial to consult a business lawyer to prevent common mistakes and establish a fair, flexible agreement tailored to your business needs.
If you need help drafting your distribution agreements, our experienced contract lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.
Frequently Asked Questions
A distribution agreement is a contract between suppliers or manufacturers and distributors. The specific terms of a distribution agreement vary widely based on the product that companies distribute, the responsibilities of distributors, and the obligations of both parties to market the product.
If your supplier is overseas, consider using international commercial terms or incoterms in your international contracts. These standardised international terms can ease complications around the transportation of goods. We also recommend having a dispute resolution clause that considers both parties’ jurisdiction.
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