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A distribution agreement sets out the terms and conditions under which a manufacturer or supplier will supply goods to a distributor. Both parties need to understand their rights and obligations under the arrangement. This is even more crucial in the case of an international distribution arrangement, where the parties are in different countries and, therefore, different legal jurisdictions. This article sets out the key clauses to look out for or include if you are a distributor for an overseas manufacturer.
Title and Risk
Risk
Risk is a term that describes who is responsible for the goods. This also includes responsibility for:
- loss;
- damage;
- transport; and
- storage of the goods.
A risk clause will often be similar to the below clause:
| Distributor Friendly Clause | “Risk in the Goods passes from the Manufacturer to the Distributor at the time the Goods are delivered to the Distributor” |
| Manufacturer Friendly Clause | “Risk in the Goods passes from the Manufacturer to the Distributor at the time the Goods are dispatched to the Distributor” |
As a distributor, you will ideally only be responsible for the goods when they are in your possession. That is, you assume responsibility when they are delivered to you or collected by you, as applicable.
Depending on your bargaining power, you may or may not be able to negotiate the terms of such a clause. Despite which clause you agree to, ensure you have adequate insurance in place from when risk transfers to you. This is to ensure that you mitigate any loss you might incur for any loss or damage to the goods.
Incoterms
Parties may use International Commerce Terms (or Incoterms) in international arrangements in place of a ‘risk’ clause. Incoterms identify when risk will pass from a manufacturer to a distributor. They also specify who is responsible for the delivery costs (including international taxes).
Title
The title is a term that describes who owns the goods and identifies when ownership will transfer from the manufacturer to you.
| Example Clause | “Title to the Goods will pass to the Distributor on the date the Distributor pays the amount for the Goods”. |
Usually, the title of the goods will pass from the manufacturer to you after paying for the goods in full. However, you should check your distribution agreement to ensure this is the case. Where you do not have title to the goods, your distribution of such goods may amount to a breach.
Governing Law
The governing law clause in an international agreement is particularly important as it sets out which country’s laws will be used to interpret the clauses in the contract. The governing law can often be a contentious issue, and it is not unusual for the parties to agree to a neutral location to govern the agreement. A neutral location is generally a state, territory or country where neither party is based.
| Example Clause | “This Distribution Agreement will be governed by the laws of New South Wales, Australia. Each party submits to the exclusive jurisdiction of the courts operating in New South Wales and any courts entitled to hear appeals from those Courts”. |
Say, for example, if the manufacturer fails to supply goods you have already paid for you. You would need to initiate legal proceedings under the governing law clause, and as such, you should ensure that you are comfortable with the specified jurisdiction.
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Key Takeaways
If you are an international distributor, you should ensure that you have read the terms of the distribution agreement and are comfortable with the various risks of contracting with an international party.
If you need help drafting a distribution agreement for your international arrangement, 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
Risk is a term that describes who is responsible for the loss, damage, transport and storage of the goods. The title describes the goods’ ownership and identifies when ownership will transfer from the manufacturer to a distributor.
A governing law clause specifies which country’s laws will be used to interpret the terms of the contract.
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