Many businesses grow and benefit by utilizing distributors. Suppliers can gain both financial leverage and local market knowledge by utilizing distributors. On the other hand, distributors leverage product innovation, development, manufacturing, and advertising investments by contracting with suppliers. But before appointing a distributor or being accepted as a distributor, it is important to consider a number of key factors and to make sure that you have a contract that adequately addresses the concerns of your specific market area and the products you will be distributing. Many problems can be avoided by dealing with these issues up front.
Some important issues to address are:
1. Clearly identify the parties to the contract.
a. Determine the role of parent and affiliate companies/individuals.
b. Determine whether personal guarantees are warranted or desirable.
2. Clearly identify products and services.
a. What are the products involved?
b. Will the distributor be selling the supplier’s full range of products?
c. What ancillary services will the distributor provide and will the distributor earn compensation for such services?
3. Clearly identify the territory.
a. What are the geographic areas in which the products will be distributed?
b. What happens if distributor sells outside the territory?
c. What happens if other distributors sell within the distributor’s territory?
d. How are internet sales into the territory handled?
4. Clearly identify the scope of the distribution rights.
a. Is the appointment for an exclusive distributorship or a non-exclusive distributorship?
b. Is the appointment for a fixed period?
c. Is there any automatic renewal clause?
d. Is there any minimum period?
5. Clearly identify distributor obligations.
a. Must the distributor purchase a minimum quantity?
b. Must the distributor maintain inventory?
c. Must the distributor to promote the products?
d. Must the distributor provide sales records?
e. Must the distributor to provide after sales service?
f. Can the distributor sell competing products?
g. Must the distributor to participate in the supplier’s promotional events?
h. How is cost of conducting promotional events allocated?
6. Clearly identify supplier obligations.
a. Supplier duty to supply the products and timing of same.
b. Supplier duty to provide information of the products.
c. Supplier duty to provide education and technical support.
d. Supplier duty to provide advertising.
7. Clearly identify trademark and intellectual property permitted uses.
a. Can distributor use suppliers’ trademarks and other intellectual properties?
b. Does supplier have right to approve advertising copy?
8. Clearly identify terms of sale and pricing issues.
a. How are prices charged to the distributor?
b. How are prices charged to the consumer?
c. Is the distributor free to set its own prices?
d. Can the supplier change the prices?
e. What are the payment terms for the distributor?
9. Clearly identify warranty issues.
a. Does the supplier provide warranty for the products?
b. What obligations does the distributor have with regards to the warranties?
c. Is the distributor authorized to repair the products?
d. Will the supplier train distributor in the repair of the products?
e. What happens if the distributor receives defective products?
f. What are the procedures for defective products?
10. Termination of the Agreement
a. When can the supplier terminate the distributor (e.g. failure to pay, failure to meet quotas, failure to comply with terms of the agreement)?
b. Can either party terminate the agreement without reason?
c. Is there any notice period required for termination?
d. What happens to the unsold products when agreement is terminated?
e. How to return unsold products (e.g. original condition)?
11. Clearly identify the applicable law and jurisdiction.
a. Which country’s or state’s law to prevail in event of a dispute?
b. What dispute resolution procedures are in place?
c. Where will disputes heard?
d. Is arbitration or mediation desirable?
12. Understand the legal and regulatory environment.
a. Is the arrangement a franchise (i.e. involves a trademark, marketing plan, and payment of fees)? If so, and no exemption applies, franchise laws may govern and may provide rescission rights or limit termination or non-renewal rights.
b. Is arrangement a business opportunity? If so, business opportunity laws may apply.
c. Does arrangement arguably constitute employment? If so, employment laws may apply.
Robert S. Boulter is a certified specialist in distribution law and represents distributors and suppliers in virtually all matters. If you are contemplating purchasing a distributorship or setting up a distribution system, please call or e-mail Robert S. Boulter at [email protected] or by calling (855) 372-6529 for a free, no-obligation consultation.