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A distributorship is essentially an arrangement where one person distributes and sells goods by arrangement with the manufacturer or importer of those goods.

If you have a product which needs to be distributed and you either can't or don't want to do it yourself, or perhaps you are wanting to be a distributor for a supplier, you should make sure that each party involved knows exactly what their rights and obligations are BEFORE the product is supplied or distributed.

Distribution Agreements contain terms and conditions such as:
• What product will be distributed?
• Is there a minimum sales target to be achieved?
• What territory does the distributorship cover?
• What payment will be made for distributing the goods?
• Is the distributorship exclusive and what happens if that exclusivity is breached?
• How can the agreement be terminated?
• Who is responsible for the cost of the product?
• When is payment made for the goods sold?
• If the level of sales are not being met what are the rights of both parties?
• Can the product be changed at the supplier's request?

Consider now the roles of each party for each stage and part of the transaction.

Issues Regarding the Supplier

The Supplier
It is the supplier who has the knowledge of the product. Make sure you fully understand all there is to know about the product and what your target market is so that you can direct the distributor.

The distributor may require some information regarding your financial position and likely volumes of the product.

If you have other distributorships operating you may make that information known to the potential distributor as an indication of your expectations.

You may be required to provide warranties as to the fitness and operation of the product if it is manufactured or imported by you.

The Distributor
It is essential that you find out exactly who is the supplier. If it is an individual talk to them about how they see the distributorship being run and find out as much about the product as you can.

Enquire about the suppliers business background – has the distributorship been run by someone else before you. Does the supplier have any financial substance?

Find out if there are other distributorships and how the supplier runs them – this will give you a good indication of the suppliers expectations and business practices.

You should obtain some warranties from the supplier regarding the fitness of the product for its purpose.

Issues Regarding the Distributor

The Supplier

You should find out as much about the distributors experience in selling and/or distributing. It is essential that you get the right person to distribute your product as they are the person on the front line.

If the distributor is a company you should ask the directors to provide personal guarantees to ensure that the distributors obligations will be performed.

It is not unusual for a distributor to appoint sub-distributors to assist them. If you don't want this to happen you should make that clear in the agreement. Make sure the distributor is responsible for payment to the subdistributors and for their actions.

The Distributor
Be prepared to provide your details to the supplier of your experience in selling/distributing.

If you are a company your directors may have to provide personal guarantees that the obligations under the agreement will be performed.

If you want to appoint sub-distributors to assist you make that clear from the beginning. You will be responsible for the actions of the sub-distributors and their payment.

Appointing sub-distributors will not usually release you from your obligations.

The Product

The Supplier

If you are the manufacturer of the product you will have the knowledge regarding the products characteristics, both good and bad. Prepare a package of information of the product as this will assist the distributor in selling and distributing.

Be careful what representations you make about the product as you may be liable for misleading and deceptive conduct under the Trade Practices Act.

Make sure you know how you want the distributorship structured. Will the distributor buy the goods from you and pay upfront and then keep the profits on sale?
OR
Will the distributor take delivery of the goods and then pay you on sale (consignment) plus your supplier's fee.

The taxation considerations and GST implications must be fully investigated by you and you should seek separate financial and tax advice on this issue.

The Distributor
It is essential that you know as much as possible about the product as you will be the front line of selling the product.

If the supplier provides you with product information make sure that there is reference in the agreement to that product information. In the event that the information is false or misleading you may have a claim under the Trade Practices Act.

Distribution agreements can be structured so that the distributor buys the goods from the supplier for a set price and then keeps any profit he makes on sale
OR
The distributor takes delivery of the goods on consignment and then pays the supplier when he has sold the goods plus a distributorship fee.

The taxation considerations and GST implications must be fully investigated by you and you should seek separate financial and tax advice on this issue.

The Territory

The Supplier

The agreement should contain:
• details of the territory
• is the territory exclusive
• if the territory is not exclusive what other distributors operate in this area

The Distributor may want studies and demographics on the territory. If you have these studies but cannot rely on their accuracy it is better to make no representations about the territory.

If you have undertaken some demographic studies you want to rely on, the distributor will want some warranty as to their accuracy and reliability so make sure you are confident of their contents.

The Distributor
Make sure you fully understand the area and demographics of the territory. Request the supplier to provide you with any demographic studies they may have on the territory. Make sure you have these referred to in the agreement so that the supplier may be bound by them.

Even if the supplier does provide you with studies it is always better to double check the information by doing your own studies. If there are any differences then these should be raised with the supplier.

Make sure you ascertain whether the territory is exclusive and what rights you have and action you can take if you find another distributor working in your area.

If the territory is not exclusive make sure you find out exactly how many other distributors are working in the territory and what volume of sales they do so that you can ascertain the impact on your distributorship.

Warranties 

The Supplier
 
As the supplier you will be required to warrant, at least:
• that the information you have provided the distributor is accurate
• that the goods are as described by you
• that the territory is exclusive (if applicable)

If you require the distributor to be liable for the goods distributed and any use of those goods then you should include an indemnity clause so that the distributor indemnifies you in the event a third party customer suffers any loss or damage from the use of the goods.

It is essential that you check these warranties to make sure you are not warranting something Make sure you have the lease document handy before putting business on the market, so that Buyers can inspect it.

The Distributor
You should obtain the usual basic warranties that the goods to be distributed are fit for their purpose.

If the territory is exclusive you need a warranty that it is exclusive. This includes whether the supplier is entitled to sell into the territory.

You may also require an indemnity from the supplier if third parties are going to be the recipients of the goods, so that if those third parties suffer any loss because of the goods, the supplier is liable.

It is essential that you check these warranties to make sure that your interests are protected and that any liability in respect of the services lies with the provider.

Termination of the Distributorship 

The Supplier
 
If the distributor fails to meet minimum sales volume or does not pay you any fees and other moneys due under the agreement you should have the right to terminate the agreement.

However including a dispute resolution clause in the agreement so that you and the distributor can sort out any disputes rather than terminate the agreement is a good idea.

You should always make sure you have a clause in the agreement so that you can terminate the distribution on giving written notice.

On termination of the agreement you must make sure you will be paid any outstanding fees or moneys by the distributor and that this right remains after termination. You may also be required to allow a run-down period to allow the distributor to sell-off or return existing stock. 

The Distributor 

If you fail to pay the price of the goods sold or any fees payable to the supplier or you fail to meet minimum levels of sales, the supplier will usually want to terminate the agreement.

However including a dispute resolution clause in the agreement so that you and the supplier can sort out any disputes rather than terminate the agreement is a good idea.

You should always make sure that you can terminate the agreement (for no particular reason) by giving the supplier some written notice (usually 14 – 28 days).

On termination you will usually be required to pay any outstanding fees or moneys due to the supplier. However make sure your other rights to sue for breach of contract or misrepresentation remain after termination.

If you would like help or advice in negotiating, drafting or checking a Distribution Agreement please ring us on 9687 9322, fax the document to 9687 9467 or email at gmartin@mblawyers.com.au

Agent / Distributorship Agreements Checklist

You have decided to export through an intermediary - an agent or distributor. Before you commit yourself be sure that you are clear about the distinction. The terms are sometimes used interchangeably, but there are important differences.

An agent sells your products on your behalf using your name and you pay him a commission on the sales made.

A distributor buys products from you and on-sells them in his own right making a profit from the difference between what he pays you for the products and the price for which he sells them.

It costs you more to maintain stock under an agency arrangement, but you have more control over an agent than a distributor.

The following is a guide to some of the matters that may need to be considered when preparing an agent or distributor agreement:
• Parties included.
• Territory involved.
• Products involved - description, catalogue.
• New products - policy for new products.
• Period of agreement - depends on the product, usually three years with right of renewal. A termination clause should be included - so many months' notice by either party and any time by mutual agreement.
• Probationary period - one year with review of performance after six months.
• Prices - refer to the price list.
• Discounts - promotional discounts and responsibilities. The agreement should include the principles to work on, not the detail.
• Method and timing of payment.
* Minimum orders.
• Production scheduling and lead times.
• Territory exclusivity for distributor.
• Exporter to refer enquiries to distributor.
• Distributor not to re-sell out of territory.
• Restraint of trade following termination of agreement.
• Spares and stock - distributor to hold stock/spares only, not an agent.
• Communication costs - each party to cover their own costs.
• Performance measures.
• Training and technical support.
• Samples.
• Advertising and promotion.
• Ownership of brand.
• Distributor to protect trademarks, patents, etc.
• Exchange of market information.
• Procedures for defective goods.
• Distributor to keep books of accounts.
• Relationship management - contact list, official addresses, etc.
• Confidentiality.
• Early termination for breach of agreement.
• Transfer of rights - distribution rights cannot be transferred without permission.
• Country in which legal action/arbitration to take precedence.
• Arbitration - a last resort.

DIY or Seek Legal Advice?

A brief exchange of emails may constitute a contract that will prevent you from changing your mind, but is without the necessary details to ensure your products will be marketed effectively.

The issues which are not addressed may be the ones you need to protect you if your agent or distributor stocks your goods, but recommends your competitors' products stored alongside them, becomes insolvent, or uses your logo inappropriately.

An informal agreement may prove to be unclear, ambiguous or, for other reasons, misunderstood by your overseas agent or distributor.

Every territory has a different regime of local laws which may affect your agency or distributorship. Anti-competition is a sensitive point in the European Union and the USA. Termination is contentious in the Middle East. There may be legal requirements for registration, signing or notarisation which will invalidate your agreement if you do not comply.

Final Considerations

When establishing an agreement, always:
• run a credit check on the distributor and a search at the local companies' registry, if one exists;
• obtain references if appropriate;
• date the agreement and ensure that it is signed by a properly authorised representative on behalf of each party. Each party should keep one signed copy;
• get your own independent legal advice. Do not use the agent's or distributor's agreement of their lawyer.

Word of Caution - If you do not negotiate all the necessary details at the outset problems are bound to occur. Assumptions will be made, expectations created and the result is likely to be confusion or misunderstanding. More court cases are the result of misunderstanding than of malice.