This Agreement contemplates that a manufacturer or supplier (referred to as the Principal) in one country will appoint a Distributor of its goods in another country for the resale of those goods in that local market.
The Agreement contemplates a fixed initial period which may be subject to renewal.
A Distributor buys for resale and each order placed by the Distributor will constitute a separate contract and be governed by the Principal's terms and conditions of sale. Unlike an agent, a Distributor is selling on his own account and not on behalf of the Principal. The Principal will nonetheless want to be sure that the Distributor has adequate information and literature concerning the products as well as having a workforce capable of handling sales and any after sales or maintenance which may be required.
Since this is a cross-border agreement - i.e. each of the parties is in a different territory with different laws - it is important that the Principal has the agreement checked by lawyers in the Distributor's country - and vice versa - to see that it is legally binding. In some Gulf States, for example, the law does not recognise a distinction between a distributor and an agent and a Distributorship agreement could be subject to local agency law and in some circumstances the agreement may be registrable and governed by the local law whatever the document itself may say.
Specific comments on the model form are set out below:
This is the date upon which the Agreement is executed - not necessarily the date upon which it comes into effect - that is dealt with in clause 2.2.
Here set out the full name of each of the parties and the official address of that party - if it is an English limited company, this will be the registered office.
This is self-explanatory and briefly introduces the Agreement.
We have inserted 4 definitions including that of the territory which needs to be defined. The territory may cover a complete country, part of a country or more than one country, but whatever the case, be sure to define it precisely - do not, for example, say "any country in South East Asia" since there could be an argument as to what is meant by the South East Asia. The Distributor often wants a larger territory than the Principal, but should beware of taking on too many territories which it cannot control, particularly if the Principal insists on minimum quotas being met.
Products need to be clearly defined. The Principal may try to appoint different distributors for different products, whereas the Distributor may want the right to sell as many different products produced by the Principal as he can.
2. APPOINTMENT OF DISTRIBUTOR
The Agreement states that the Distributor is being appointed on an exclusive basis. If more than one distributor is contemplated for a particular territory, this wording will need to be changed. Clause 2 makes it clear that the Distributor is able to sell/distribute other products that are materially different from the Principal’s Products. The Principal may wish to consider specifying in some detail what constitutes a product that is materially different.
In clause 2.2 the date upon which the Agreement comes into effect should be stated as well as the initial period - say 2 years. If notice of renewal is required, clause 2.2 might say that it will expire at the end of the initial period "unless it is renewed by agreement between the parties at least 3 months before the expiry date".
Clause 2.3 is usually inserted by the Principal to give him some protection if the relationship fails, since by setting agreed targets for sales of products, the Agreement contains a yardstick against which the Distributor's performance can be measured. If performance is very important, then the Principal has the right to terminate under clause 2.3. For this reason the Distributor will prefer not to have this clause. However, whatever the Agreement may say about termination, it can be difficult for the Principal to terminate in some jurisdictions and substantial compensation may be payable if the Distributor can show that he has invested money and/or his time and effort on developing the distributorship. The local legal position should be checked.
3. ORDERS FOR PRODUCTS
This clause sets out the arrangements for ordering and includes provision for the Distributor to give the Principal estimated requirements in advance so that he can plan accordingly. Clearly, the precise details of this clause will need to be tailored to the particular arrangements in place within the relevant organisations.
Clause 3.3 makes is clear that each sale constitutes a separate order for goods and that order is governed by the Principal's standard terms and conditions of sale. It may be sensible to state that a copy of the standard terms are annexed to the Distributorship agreement so that there is no doubt as to terms which are to be incorporated.
Clause 3.5 gives the Principal the right to modify products and to change product lines. Clearly, it is in both parties' interests to ensure that early notice is given of any changes.
Clause 3.6 is intended to give the Principal continued ownership of the products until full payment has been made.
4. PRICES & PAYMENT
Clause 4.1 assumes that the standard list price of the Principal will apply to all sales but there may be some pre-agreed discounts, in which case the words in square brackets at the end of this sub-clause should be incorporated in the document. It is not uncommon for the discount to be referred to in an appendix to the Agreement.
Clauses 4.2 and 4.3 deal with additional payments over and above the list price which may be payable.
Clause 4.4 says that all products must be paid for on shipment: this may need to be changed, e.g. if payment is due 30 days after delivery, although this clause needs to be read in conjunction with clause 4.5.
Clause 4.5 provides for payment to be by way of irrevocable letter of credit - certainly the safest method of payment, especially if the letter of credit is confirmed by a bank in the territory of the Principal. Clause 4.5 also provides that payment is to be made in the currency of the Principal’s (export) price list and clause 4.6 makes it clear that the Distributor is responsible for all charges and customs clearances at the port of arrival.
5. DISTRIBUTOR'S OBLIGATIONS
The list of obligations is fairly general and reasonably self-explanatory.
Clause 5.9 is an important provision. A Distributor should not give warranties, which are not authorised by the Principal. Although there will be no direct contractual relationship between the Principal and the Distributor's customers, unauthorised representations can be dangerous and may damage the Principal’s reputation. In addition there is a reference here to Principal’s code of conduct. It is common for certain standards to be laid down by manufacturers in order to ensure ethical conduct by their agents and distributors. Also in the UK the Bribery Act 2010 could make a supplier liable to prosecution if one of his distributors bribes an official in another country, so it is sensible to get the distributor to comply with any such code of conduct.
Clause 5.11 assumes that the Principal will arrange for visits to the Distributor's territory from time to time - from a commercial point of view this is certainly to be recommended.
Clause 5.12 deals with the all too common possibility of goods being sold on to another territory; if that other territory has another exclusive distributor of the Principal, problems could clearly arise.
This Agreement does not contain any provision which allows the Principal to sell directly into the territory to its existing customers but if that right is required, a clause on the following lines may be inserted:
"Principal reserves the right to make direct sales to existing customers of Principal in the Territory whose names have been supplied to Distributor prior to the date of this Agreement."
Situations can also arise where a government agency in the territory wants to buy the Principal's products but will not deal with the local distributor. Here again, additional wording may be appropriate to cover such a situation.
6. PATENTS & INTELLECTUAL PROPERTY
It is always advisable for a principal to try to protect its IP rights. Whatever the Agreement may say, advice on the local position and the possibility of registering trademarks etc. in a territory should be examined.
The main purpose of this clause is to prohibit the Distributor from registering any of the Principal's rights as his own and to ensure that the Principal is notified by the Distributor if, for example, counterfeit goods appear in the territory.
To the extent that information passing between the Principal and the Distributor is confidential, it should be identified and the Distributor should be under a confidentiality undertaking.
Whether or not termination is as easy as the Agreement might suggest, because of local law, it is important that any distributorship agreement does set out the grounds upon which the Principal or Distributor may wish to terminate.
Clause 8.1 sets out four different grounds on which the Principal may terminate. In addition to breach of contract, failure to meet targets can be a reason for termination as can a change of control of the Distributor, e.g. if the Distributor company is taken over by a competitor of the Principal.
It is also useful to specify the consequences of termination and these are dealt with in clauses 8.3 to 8.5. The Principal has to complete existing orders and buy back recently purchased products but otherwise there is little obligation on him. However, as previously mentioned, local aw needs to be investigated here.
This covers a number of issues:
9.1 Indemnity. A fairly broad indemnity designed to protect the Principal against any breach by the Distributor or any misrepresentation on the part of the Distributor. Note however that a distributor may demand that such indemnities are mutually applicable.
9.2 Assignment. The relationship is one which would not normally be assignable and an express prohibition on assignment is included unless this is with the Principal’s prior written agreement.
9.3 Sub-contracting. It is advisable for the Principal to keep a check on any sub-contracting so that not only the Distributor but also sub-distributors/agents are vetted by the Principal before they are appointed. Note that the Distributor remains liable to the Principal in respect of any losses caused by an act or omission of a sub-contractor or agent.
9.4 Notices. This is a mechanism for giving formal notices under the Agreement and is usually advisable. Reference to airmail should be removed if this is not relevant.
9.5 Language. This specifies the ruling language. Where the Agreement is translated into another language and both versions are signed, it is advisable to specify which is the ruling version, in case of any discrepancy. Equally important, when this happens, an independent check of the translation should be made to ensure that it is an accurate translation.
9.6 Entire Agreement. Quite often a distributorship agreement is only entered into after a course of dealings and/or an exchange of letters. The purpose of this clause is to make it clear that the Agreement replaces those earlier arrangements.
9.7 Resolution of Disputes. The principal objective of this clause is to have any disputes which may arise resolved by an independent tribunal, not necessarily in the territory of either Principal or Distributor. This clause proposes arbitration in accordance with the UNCITRAL (United National Commission on International Trade) Rules. See our separate free documents on Dispute Resolution.
9.8 Governing Law. The law of the Principal's territory would normally be selected by the Principal as the most appropriate, but it may not always be observed by the courts in the Distributor's territory. We have a free download on our website dealing with governing law and jurisdiction.
Each party should ensure that the Agreement is signed by a director or other duly authorised officer. The signing clause assumes that each signature will be witnessed by a third party.