The pace of international business deals is reaching a fever pitch. Lately, Ive seen a significant uptick in the number of international distribution transactions taking place.
Like all international contracts, many factors are taken into consideration when drafting a solid distribution agreement.
While a manufacturer and distributor may enjoy a close relationship at the outset, it’s critical that the parties minimize mistakes in drafting the international distribution agreement to avoid problems down the road.
In order to avoid problems at the time of termination, there are a number of ways a party can “bulletproof” their international distribution agreement. These are detailed below:
1. Duties and Responsibilities
A well-drafted distribution agreement should clearly articulate the responsibilities and obligations of both parties during the life of the agreement, upon notice of termination, and after the agreement is terminated officially.
Initially, keep the size of a territory to a manageable dimension, i.e. not too large. The territory can be expanded gradually after results in the smaller territory suggest that an expanded geography is in order.
3. Termination for Cause and Convenience
The termination clause of a distributor agreement is usually drafted to allow for termination only for specified circumstances. This inevitably leads to full-blown legal battles over whether a specified circumstance actually occurred. An excellent way to avoid this is to permit termination for cause and for termination for convenience. When an agreement allows termination for convenience, a party wanting out of the agreement provides a Notice of Termination to the other party with XX days notice. When the convenience clause is invoked, the issue of cause does not need to be argued. Having avoided a legal fight, the distributor and manufacturer are able to move on without wasting time and resources on protracted litigation.
4. Exclusive or Nonexclusive
A distribution agreement can be exclusive, however it represents an unnecessary leap of faith on the part of the supplier. An excellent alternative is to come to an understanding that if a supplier’s objectives were met, no additional distributor would be added to the nonexclusive territory. Such an arrangement provides encouragement for the distributor to perform without restricting options of the manufacturer.
5. Termination by Either Party
Distributor agreements that allow for termination by only one partner are biased and often lead to legal battles. By allowing both parties to terminate the agreement, many legal disputes can be avoided. The best distributor agreements allow either party to terminate the agreement.
A well-drafted international distribution agreement will go a long way towards building a long lasting relationship between a manufacturer and distributor. Follow the guidelines outlined above and you’ll avoid many of the problems that can arise in a distribution partnership.