What You Need to Know about Distributor & Reseller Agreements

 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 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 his territory.

 Once you have decided on the territory that you want to cover, 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 advice on how to go about this in Exporting Made Easy , a book that I have co-written and it is available online at www.exporting-made-easy.com

Once you have selected your distributor, be sure to have a written agreement with him setting out the terms of the deal which allows you to bring the arrangement to an end if things do not work out satisfactorily. You should also get local legal advice before signing an agreement because there could be local laws which you need to take into account – for example, it might be necessary for a distributor 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 – i.e.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 cover 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 etc.

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.

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.

  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, minimum 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 etc.

 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 in his territory.

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.

Non-competition 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. 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 well be preferable and we have some free information on our website concerning this topic.

Our template for appointing a distributor can be found here http://www.contractstore.com/A117-distributorship-agreement