A wide variety of businesses use Distribution Agreements. The manufacturer/ distributor relationship represents a relatively easy way for businesses to get access to markets they wouldn’t otherwise have the funds to penetrate. Unfortunately it’s fairly common for Distribution Agreements to be poorly drafted, which will usually lead 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.

Set out below is a list of common mistakes in, and problems with, Distribution Agreements.

Don’t Over-Commit

Don’t assign a territory which is too large if the distributor has only proven themselves in a small territory, or not at all. Assign a small territory to the distributor initially and if the distributor performs then expand their territory.

Illegal ‘Exclusive Dealings’ Clauses

Exclusivity arrangements with customers, products or in certain territories may contravene Australian consumer laws. Consult a business lawyer to ensure your Distribution Agreement doesn’t contravene Australian consumer laws.

No Performance Goals

A Distribution Agreement must include clear and quantifiable performance targets and clauses that enable the distribution arrangement to be terminated if the distributor does not meet those performance targets.

Unilateral Price Changes

Allowing one party to set the prices may not be conducive of a good long term relationship between the parties.

Lack of Flexibility in Changing the Distribution Agreement

A Distribution Agreement should be flexible. It’s important that the parties can come together and make changes to it as circumstances change. The permitted number of changes should not be limited or otherwise constrained.

‘After Termination’ Clauses

A Distribution Agreement should include a clause which clearly spells out the obligations and responsibilities of both parties upon termination and outlines what must be done in the period immediately after termination.

Termination for Cause or Convenience

If a Distribution Agreement only allows ‘termination for cause’ then you may run into difficulties if a party wants to terminate the Distribution Agreement but there are insufficient grounds to do so. Consequently, termination may not be allowed or there may be a dispute about what qualifies as a ‘cause’.

If a Distribution Agreement allows ‘termination for convenience’ then either party may be able to terminate after a period of notice (e.g. 30 days).  Care should be taken with such clauses. If one of the parties has gone to a considerable expense in order to set up their business to work effectively in line with the Distribution Agreement a ‘termination for convenience’ clause could be unfair

Market Asymmetry

Often the less experienced party will be taken advantage of during the negotiation process by the other party. A more experienced, savvy operator will be likely to know how to draft a Distribution Agreement to their advantage. A biased or unfair Distribution Agreement may end up costing the less experienced party thousands in the end. Steps should be taken to mitigate this risk.

Conclusion

You should speak to a business lawyer before entering into a Distribution Agreement. Speaking to a business lawyer will help ensure that you end up entering into a fair and flexible Distribution Agreement which will be beneficial to your business.

Lachlan McKnight

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