Great products, from the paperclip to the clothes hanger, are both well-designed and satisfy a genuine need in the market. The retail industry offers opportunities to

  • retailers or distributors; and
  • manufacturers supplying retailers and distributors with products.

If you are a manufacturer, you should consider documenting arrangements with retailers and distributors in a distribution agreement. A distribution agreement should cover the key commercial terms of the relationship, mitigate your risks of liability and ensure that the relationship with your retailer or distributor runs smoothly. This article will provide five issues to consider when drafting a distribution agreement.

1. Will You Extend Credit to the Distributor?

To bring a retailer on board or secure large orders of your products, you may choose to extend credit terms. Credit allows a retailer to place orders without paying upfront.

In any arrangement involving deferred payment, there is some risk. If a retailer’s financial situation becomes strained, you face the risk of:

  • late payment; or
  • no payment.

However, there are commercial steps that you can take to mitigate this risk, such as:

  • undertaking due diligence on the retailer;
  • building a trusting relationship with the retailer; or
  • requiring that a guarantor is included in the distribution agreement.

A guarantor is a separate party who agrees to fulfil the retailer’s obligations under the distribution agreement if the retailer fails to do so. So, if the retailer fails to pay, the guarantor can be pursued for the debt. Many guarantor clauses allow you to pursue a guarantor without first pursuing the party that owes money.

2. What Are Your Payment Terms?

Payment terms are the conditions on which you will provide products in exchange for payment. A manufacturer’s payment terms may vary depending on who the retailer or distributor is.

You may choose to offer generous payment terms to a distributor or retailer who frequently places large orders. Often, large retailers and distributors may require extended payment terms in their contracts. In contrast, for smaller retailers and distributors, a 14 or 30-day payment period is standard practice. Your payment terms often depend on what you can negotiate.

When considering payment terms, it is essential to consider more than “business as usual” circumstances. Above all, it is vital to know what your rights are if a distributor or retailer:

  • ceases to pay; or
  • pays late.

Dispute Resolution Clause

Distribution agreements commonly include a dispute resolution clause that sets out how the parties will resolve issues. In the midst of a dispute, it can be difficult for parties to put differences aside and focus solely on the issue at hand, thereby reaching an agreeable outcome. A dispute resolution clause should anticipate this situation and provide clear steps to ensure that parties can move forward productively.

In addition to a dispute resolution clause, a distribution agreement will commonly state that failing to make payment as per the payment terms is an event of default. When a party is in default (i.e. the party is not upholding one of their obligations), it is typical for a distribution agreement to allow the wronged party to:

  • terminate the agreement immediately or with minimal notice; and
  • if a loss was suffered as a result of the default, sue for damages.

3. Do You Plan on Setting Maximum and Minimum Resale Prices?

If you intend to set maximum and minimum prices for re-selling your products, you must ensure that your distribution agreement complies with the Australian Consumer Law (ACL).

For example, although you can recommend a retail price for a product or set a maximum retail price, you cannot prohibit a retailer or distributor from selling below that price.

Ensure that you seek advice before making any prescriptions regarding pricing. Above all, this will help you avoid any penalties. For example, if you are found to be in breach of the ACL for a restrictive trade practice, such as retail price maintenance, the Australian Competition and Consumer Commission (ACCC) can order penalties to a maximum value of $10 million for corporations and $500,000 for individuals.

4. How Will You Deal With Faulty Products?

Often, despite your best efforts to maintain quality in your production of goods, it is possible that some products will be faulty.

You should ensure that you deal with any faulty products in accordance with the ACL. If your products are dangerous, you should seek advice on notifying the ACCC and recalling the products.  

Usually, your products come with automatic consumer guarantees under the ACL. This depends on the price and purpose of the goods sold. The ACL’s consumer guarantees stipulate that goods should:

  • be safe, lasting and without faults;
  • look acceptable; and
  • do all the things that someone would expect that kind of product to do.

Additionally, your distribution agreement should also outline a process for managing the return of faulty goods from your retailers and distributors. For example, you may require retailers and distributors to:

  • notify you of faulty goods within a set period from when the goods are delivered; and
  • provide photographic evidence of the faults along with a description.

5. What Rights Do Consumers and Distributors Have Against You as the Manufacturer?

You need to ensure that your distribution agreement anticipates your statutory obligations as a manufacturer under the ACL.

The ACL notes that manufacturers have obligations to distributors and consumers of goods when a good does not meet a consumer guarantee. A manufacturer only has obligations to distributors and consumers if the goods:

  • are acquired for personal, domestic or household use; or
  • cost less than $40,000.

Generally, a consumer can seek the same remedies from a manufacturer that they can from a retailer. For example, asking for a repair or replacement of the faulty goods. However, a consumer may only request a refund from the person or entity with whom they completed the transaction.

On the other hand, a retailer or distributor can claim against a manufacturer if the:

  • retailer or distributor provided a remedy to a consumer; and
  • remedy was provided because the manufacturer’s product did not meet a consumer guarantee.

In that circumstance, a manufacturer is liable to the retailer or distributor for the cost that they incurred in replacing or repairing the goods.

Key Takeaways

If you are entering into a distribution or supply arrangement with a retailer, ensure that you invest in a well-drafted and comprehensive distribution agreement. Further, if you are the recipient of a distribution agreement, ensure that you seek advice on the:

  • terms of the agreement; and
  • rights and responsibilities you have under the agreement.

The best time to negotiate an agreement is before it is signed. If you have any questions about drafting, reviewing or negotiating a distribution agreement, contact LegalVision’s contract lawyers on 1300 544 755 or fill out the form on this page.

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