Defeating the Most Common Mistakes With Distributor Agreements
A solid distributor agreement is a result of many factors. A distributor agreement can make mistakes that are nearly invisible during the courtship between a manufacturer and distributor. These same errors can quickly become glaring mistakes in the end. To avoid potential problems during termination, the distributor agreement creator must make sure that no unsound clauses or phrases are included. This checklist contains common mistakes that distributors and manufacturers should avoid when creating their following distributor agreements.
Comparison with Proven Industry Agreements
Parties with little or no experience in creating and negotiating distribution agreements often make mistakes. Large companies that have years of experience in contracts will rarely make mistakes. Many errors are caused by one partner trying to gain an advantage over the other by inserting a bias in the agreement favoring the person with more experience.
How can an inexperienced party negotiate distribution agreements to level the playing field? There are many ways to do this. The first is to request a model agreement from the distributor association for your industry. Many distribution organizations offer a model agreement at no cost or at a minimal price to their members (Electronic Components Industry Association and Independent Medical Distributors Association). The model agreement is an excellent way to see how the deal you will be asked to sign compares to.
Second, make sure to use your industry friends. It is unlikely that your direct competitor will lend you a copy of their distributor agreement. However, indirect competitors are likely to share a deal that has been successful over time.
Third, you should use the foreign network if your goal is to sign a distributor agreement. There are many American Chambers of Commerce around the globe, including the American Chamber of Commerce Shanghai, American Chamber of Commerce France, and American Chamber of Commerce Argentina. If your foreign subsidiary doesn’t have a connection to the local chamber, you should immediately do so. These organizations are accessible and cost-effective, with many benefits beyond the ability to reach a balanced distribution agreement.
Fourth, you can ask the supplier or distributor with whom you are negotiating an arrangement for a blind copy. This will include two to three agreements currently in force. You don’t need to know the names of the parties; you are simply trying to get a better understanding of what is expected.
Termination by One Party Only – Not Both
Distributor agreements which allow only one partner to terminate are biased. These lopsided agreements are more likely to end in legal disputes, as evidenced by history. Some legal disputes can be avoided by allowing each party to terminate the contract. Distributor agreements that will enable both parties to end the deal are the best.
What happens after termination?
Both parties must agree to the distributor agreement. Distributors and manufacturers both understand that the agreements must clearly define the responsibilities for the duration of the operation. Fewer people know that the parties must clearly define their responsibilities for the time after termination. Manufacturers and distributors must clearly state which products can be returned for credit and when. Reliable distribution agreements must clearly outline the obligations and responsibilities of each party during its life, as well as the timeframe for such returns.
Leave the negotiation process to attorneys.
Distribution agreements problems are often discovered only after they have been signed and negotiated. This is true even if the agreements were reviewed by outside lawyers or corporate counsel. How is this possible? Too often, lawyers remove unnecessary clauses but don’t know the industry norms. They don’t have a good understanding of the most common problems that can arise from agreements. It is a good idea to have both a lawyer and a professional industry review the deal.
The contract can be accepted by the law if it is reviewed by a professional who is not a sales manager. However, the document may prove to be ineffective commercially. The resulting agreement may be legally acceptable if it is reviewed by a qualified sales manager but not an attorney. Problems can result when only two eyes look at a sales channel agreement. However, if there are four eyes reviewing a contract, two from an attorney and two from a seasoned manager, the likelihood of a legal dispute upon termination is significantly reduced. Four eyes are better than two.
Too Much Too Quick
A period of optimism is necessary for every new partnership between a manufacturer and distributor. There is a limit to the number of alliances a distributor or supplier can enter into. A supplier cannot sign another distributor by joining a new distributor. A distributor cannot sign an additional supplier immediately after he has signed up with a new supplier. It is essential that you do not assign too much territory to a new distributor when you are forming a partnership. It is best not to give too much part to a distributor who is already established in a small area. It is better to establish a new distributor relationship within the distributor’s territory of proven success and gradually expand the settlement. After the results in the smaller domain have shown that it is worthwhile, this would be a wise policy.
Termination of Cause
Most distributor agreements that involve seasoned manufacturers and distributors allow for termination for cause or termination for convenience. Sometimes, less experienced partners will try to enable stop for a restricted set of reasons. Sometimes, termination for cause is straightforward and not controversial. For example, when one partner declares bankruptcy. Partners may disagree about the existence of causality. Partner disagreements often arise over the responsibility of cause.
Distributor agreements that are best allow for termination for cause or termination for convenience. A distributor agreement that provides for termination for comfort can be terminated by a partner who wishes to end the relationship. The notice of termination must be served to the other partner within 60 days. The convenience clause does not require that cause or responsibility be established. Notably, the distributor agreement doesn’t end in a legal spat. The distributor and manufacturer can focus on their customers and businesses without having to engage in a legal dispute.
Semiautomatic Renewal and Annual Termination
Inexperienced parties with distributor agreements may try to limit the possibility of termination. For experienced players, it is common to request a semiautomatic renewal and annual termination. These agreements contain a clause that allows for the termination of the contract after the first calendar year of its inception. The agreement also provides for the renewal of the agreement each year thereafter. Either party can submit a Notice to Not Renew within 60 days of the end of the calendar year.
Each party can terminate the agreement at any time by writing it in, except for the semiautomatic renewal and annual termination. This method holds the partnership together and is not based on a series of words. Experiential partners prefer performance to be the binding force of the block.
Exclusive or nonexclusive
A distributor franchise can be exclusive, meaning there is no other distributor in the territory or nonexclusive. This means that the new distributor could be one of many distributors in the region. Distributors may request an exclusive environment. This is because the distributor doesn’t have the incentive to invest in the development of new sales. A supplier who agrees to a whole territory forfeits the chance to franchise another distributor. The supplier should not be required to assign an exclusive distributor to a part. This is a dangerous leap of faith. An alternative to giving a territory is to create a distribution agreement so that the distributor is not exclusive but to franchise only one distributor. If the supplier meets his objectives, he will not allow any additional distributors to be added to the territory. This arrangement encourages the distributor to perform without limiting the options of the manufacturer.
Distribution agreements are an essential tool for establishing a relationship between a distributor or supplier. An agreement that is well written can help to develop this relationship. Once a relationship ends, the agreement will not extend its life. Poorly written agreements can lead to legal disputes that consume management time and financial resources. This can also result in the need for lawyers, courts, arbitration, and additional costs. An agreement that is well written can prevent waste of resources and allow the distributor and manufacturer to continue their respective businesses after the end of the relationship.