In the September 2013 issue of MM&D, lawyer and columnist Marvin Huberman explained what goes into a good distribution agreement and offered some advice on how they should be written.
He has also provided this checklist of key terms and conditions that should be considered when negotiating and drafting a distribution agreement:
Legal description and identity of the parties to the distribution agreement
Appointment of the distributor.
Exclusive or non-exclusive appointment of the distributor.
Sub-distribution rights to the distributor.
Territory and markets defined with precision.
Term, renewal option, and termination of the distribution agreement.
Products/goods or services to be described and identified specifically.
Improvements/additions to products/goods or services.
Pricing terms—initial, change notices, discounts, and renewal terms.
Payment terms—up-front deposits, full payment due dates, distributor’s credit worthiness, currency, letters of credit, and terms relating to payment timeliness.
Price protection policies/guidelines.
Performance requirements—quotas, minimal purchase requirements, sales targets, and remedial measures.
Legal status of the distributor (independent contractor or otherwise) and authority of the distributor, (if any at all) to commit the principal to warranty repairs; potential vicarious liability of the principal for the acts of the distributor.
Ordering and shipping procedures and risk allocation.
Obligations of the distributor—ordering products on a timely basis, achieving adequate sales, managing inventory, warehouse, and service facilities, maintaining appropriate service levels, training, office maintenance, attending product training, obtaining permits and licences, complying with relevant laws and regulations, insurance, access to premises, accounting and reports, etc.
Obligations of the supplier—minimum and maximum orders, product literature, advertising, technical support, marketing, training seminars, sample products, sales leads in the defined territory and market, sales support, product and service quality controls, policies and procedures for returned and/or defective products or services, attending distributors premises’, etc.
Compliance with applicable regulatory regimes—adhering to pertinent industry specific statutes and regulations and compliance with required government filings and approvals.
After-sales service—product servicing and warranty claims, and compensation for the distributor servicing the product.
Shipping and delivery—inspection, possession, title, risk of loss, insurance, change of circumstances.
Product/goods or services warranty—full/limited, minimum required by law, policies and procedures regarding defective products/goods or services, and disclaimers.
Terms and conditions of sale under the distribution agreement and over its term—balanced certainty and flexibility especially regarding increases in the price of products or carrying charges over the term of the agreement.
New products—giving the distributor the right or first right of refusal for market new products/goods or services of the principal in the defined territory and market.
Competing products—permitted or prohibited.
Intellectual property issues—parties’ rights and obligations, remedies; patents, copyrights, trademarks, and confidential information; licensing rights; transfer of know-how, responsibility to maintain the intellectual property rights; sales within the territory; confidentiality, improvement, assignment or sub-licensing of rights; renewal of licensed rights, rights after termination of the distribution agreement; grey market considerations; enforcement of intellectual property rights; statutory remedies, and negotiation of fundamental terms and conditions such as representations and warranties, royalties for the use of intellectual property, implications of invalidity, and competition issues which impact on the distribution agreement.
Termination of the distribution agreement—procedures, grounds to terminate the distribution agreement, giving of written notice and what happens after termination in connection with the products/goods or services, amounts owed and servicing or other obligations; automatic renewal clauses and special circumstances.
Confidentiality terms for the distribution agreement.
Non-competition (during/after/limited time period) and non-solicitation clauses in the distribution agreement.
Force majeure—risk allocation for extraordinary circumstances beyond the control of the parties, including war, strike, riot, crime, or “act of God”.
Limitation of liability clauses—must be inclusive/exclusive and specific.
Indemnification—the scope and intent must be crystal clear.
After termination rights, obligations, and remedies.
Choice of law provision—the law that will govern disputes under the distribution agreement.
Dispute resolution clause, for disputes arising under the distribution agreement (consider negotiation, mediation, arbitration, and litigation).
General/standard contractual provisions—severability, entire agreement, limitations and waivers, non-assignment, etc.