Distributor and reseller agreements: what you need to know

Article posted by Giles Dixon, on behalf of Giles Dixon, Solicitors

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Giles Dixon is a commercial solicitor with over 30 years’ experience in energy, infrastructure and construction projects, and he is also the co-author of Exporting Made Easy, a practical guide to selling overseas with agents and distributors. Here he gives advice about how to draw up a distribution agreement to ensure you have the appropriate agreement for sale in your selected market

If you want to increase sales in a new area whether in your own country or overseas, there are two principal methods, apart from setting up a branch of your business there.

One is to appoint an agent or sales rep who will promote your goods and find buyers for you. The other is to appoint a distributor or reseller who will buy your products and then resell them in their territory, which is what this article will cover. The article on the differences between agents and distributors may also be useful if you’re undecided about which you’d be better off using.

Get legal advice before signing a sale and purchase agreement

Once you have decided on the territory that you want to cover, and decide you want to use a distributor or reseller, then you will need to find a suitable candidate to resell your products.  This is not an easy task and it certainly needs to be undertaken with care and plenty of due diligence. There is also advice on how to go about this in Exporting Made Easy.

Once you have selected your distributor, be sure to have a written contract of sales or sales and purchase agreement with them setting out the terms of the deal and which allows you to bring the agreement to an end if things do not work out properly.

You should also get local legal advice before signing an agreement of sales because there could be local laws which you need to take into account – for example, it might be necessary for a distributing company to be owned by nationals of the country.

Set out below are some of the main issues that you need to consider and to cover in your distributorship agreement.

Specify the products and the territory

If you have more than one product line, it may be sensible to restrict the agreement to one or two lines initially to see how things go. You can always add more products later. As for the territory, this needs to be clearly defined. 

Exclusive or non-exclusive

Are you going to appoint the distributor on an exclusive or non-exclusive basis – will he be the only person in that territory who is entitled to sell your products? Even if you agree to an exclusive arrangement, you might want to reserve some existing customers to deal with direct, in which case refer to this in the agreement.

Duration

What is the initial term of the agreement?   Make it long enough to give the distributor time to get established and into the market with your products, but no longer. It can then be renewable yearly if things work out.

Orders, prices and payment

The agreement should set out the arrangements for ordering products as well as prices and payment terms.   Depending on the nature of your business, it can be useful to have forward estimates of orders so that you will have sufficient stock to meet the distributor’s requirements.

It is usual to specify that each order which is accepted constitutes a separate contract between the two parties and that the sales are made on your standard terms and conditions.  You might want to attach a copy of these to the agreement.

There will probably be a schedule setting out the prices of the various products and this could include some trade discounts depending on volume, and so on.

As for payment terms, you do not want any more exposure than is necessary. Payment prior to shipment is one possibility and another is to have the distributor set up a confirmed irrevocable letter of credit with you.

The agreement should also specify the currency of payment.

It is not normally lawful to fix the resale prices that your distributor will charge so there is always a risk that he will offer your products at a lower price than another distributor or below your own recommended price.

Sales targets 

You should certainly include some agreed sales targets in the agreement because this allows you to monitor the distributor’s performance. Coupled with the sales targets should be a provision that not only allows you to revise the targets but also entitles you to bring the contract to an end if, for example, targets are not achieved for two or three consecutive quarters.

General obligations

It is sensible to identify what marketing material and technical data you will provide and if training of the distributor’s sales staff is needed.  You may also want to have terms that require the distributor to have a marketing budget, to report on sales on a regular basis, and so on. 

Intellectual property

Make sure that you protect your copyright, patents and trademarks. Your distributor should only be allowed to use them while the agreement remains in place and it is sensible to have a clause which requires him to notify you and to act to protect your interests if, for example, counterfeit goods appear in the market.

Termination

Always include a clause that allows you to bring the contract to an end if the distributor fails to meet his targets or commits some other breach of contract or becomes insolvent.

Terminating an agreement of this type in some countries might lead to substantial compensation claims so you need to take legal advice before finalising the wording.

Noncompetition and confidentiality

You may want a clause that prevents the distributor from selling any products that compete with your own both during the agreement and perhaps for a period after it has come to an end as well. In addition, you will probably want to be sure that the terms of the agreement are kept confidential.

Dispute resolution and governing law

While you might want English law to apply and any disputes to be dealt with in the English courts, if the distributor is based overseas and has no assets in this country, getting a judgement and then enforcing it against him might prove rather difficult.  An international arbitration clause could be preferable.

Templates for appointing a distributor or agent will be useful for you. These can be used without legal advice but they are also very useful in terms of giving you an idea of the sort of issues that should be covered. You can save on legal costs if you work out what you want included in your agreements first and give a draft to a lawyer, rather than asking the lawyer to write your agreements from scratch.

You are recommended to get legal advice before finalising an agreement, not only in this country but also from a lawyer in the distributor’s territory.

See also Giles’ article with tips for appointing overseas agents.