By Arjun Ahluwalia, Osman Aboubakr, Tamer Nassar

Your company has just received an opportunity to distribute a highly demanded product in your jurisdiction’s market from a well-known supplier or manufacturer (the “Principal”). As you think through the commercial parameters around the opportunity, we include a quick reference checklist of items to look out for in any suggested contract to ensure you are appropriately protected:

1.     Exclusivity.  Ensure the contract is explicit and clear regarding whether the arrangement is exclusive on defined parameters. To protect yourself from other distributors that the Principal appoints, it is in your interests to push for sole and exclusive rights for a defined territory.  But beware, a demand for exclusivity generally raises expectations of minimum purchase volumes, post-sale service requirements and other potentially onerous obligations.

2.     Prevent Principal from Direct Sales.  Be clear regarding whether or not the Principal has a right to direct sales in your territory and to what extent, as it would impact your sales and they could compete.  If direct sales are a sticking point, consider taking a fee or commission thereon at a lower rate (e.g. lower commission for commission-based arrangements).

3.     Marketing, Advertising, Promotions and Training. Agree with the Principal expectations regarding marketing, advertising, promotions and training investments – this should happen on an annual basis. If the product is technical or otherwise complex, training of your sales personnel will be an important consideration. If you do not have exclusivity for your territory, your marketing, advertising and promotional spend will subsidize the other distributors (and the Principal!).

4.     Territory. We often see poorly defined territory definitions, with use of the terms “Middle East” or “East Asia”.  Be specific and clear and list the relevant countries. Careful when agreeing to territories that are smaller than a country as you may find it hard to defend against other distributors and competitors.

5.     Sub-Distributors.  It is important to have clear agreement on your right to appoint sub-distributors and resellers if these rights are conditioned on any Principal approval.  If so, it is best to have the criteria be objective rather than subjective.

6.     Non-Compete and Restrictive Covenants.  Principals will often push rather onerous restrictive covenants on your ability to sell, market or promote what they define as competing products.  It is critical that you define such covenants as narrowly and specifically as possible to not eventually unduly restrain your business in case better products come to market. Broader restrictions could also be used by you as justification to push for exclusive agency for those products.  If you commit to a non-complete, ensure the obligation is extinguished upon the expiration or termination of the agreement (or soon thereafter).

7.     Minimum Purchase Levels.  Look out for stringent minimum purchase volumes, and the consequences if those levels are not met.  We have seen onerous provisions such as Principals demanding security deposits or swift termination rights (or alternatively loss of exclusivity) as consequences for not meeting such levels.  On seasonal sales, it may be beneficial to consider true-up reconciliations at the end of every financial year.  Moreover, consider what obligations the Principal will undertake to support achieving the minimum purchase volumes (e.g. marketing, sales support, etc.). Finally, ensure you have a appropriate force majeure clause that allows you to miss the minimum purchase volumes for reasons that are out of your control.

8.     Duration.  Consider whether a longer term, and automatic renewable agreement  (as long as no unremedied breach has occurred, or minimum purchase levels are maintained) is beneficial for you to protect the value you will have generated as a distributor in your territory. Short term agreements with easy termination clauses by Principals are a red flag.  A short-term agreement may not enable you to obtain a reasonable return on your investment in helping the Principal establish a market presence.

9.    Definition of Products.  Make sure this is wide enough and clear enough such that you can protect your distributor rights in your territory.

10.  Product Availability.  Keep an eye out on what assurances the supplier provides on ensuring availability and on-time delivery. Look out for the supplier retaining an unfettered right to discontinue or remove products for any reason, and consider requiring them to supply replacement products at their cost with same price, quality and specifications or otherwise indemnifying you for losses incurred as a result of the unavailability.

11.  Quality and Specifications.   Ensure you have the appropriate safeguards on quality assurance and specification, including standard warranties on working order, functionality, safety, etc.  Push for indemnification on liability from any third-party claims on IP infringement, manufacturer defects or damage from the products, etc.

12.  Title and Risk.  Ensure you are crystal clear on when precisely title and risk for the products shifts from the Principal to you.  Generally speaking, title should only pass once you are able to exercise physical control of the products directly or indirectly (e.g. through your appointed logistics services provider).

13.  Statutory Registration.  In certain countries the distribution/agency contract can be registered availing statutory protections for you.  Our agency law experts can assist with global assessment on where such registration is possible and, if no, how to best preserve your interests in the long term.

14.  The Boilerplate.  The standard clauses that tend to get pushed to the far edge of the contract are critical and are often overlooked.  Take the time to ensure that clauses such as the representations and warranties, termination, amendments, limitations on liability, force majeure, assignment, governing law and dispute resolutions clauses are reviewed by your legal counsel.  For example, a standard arbitration provision may work well in some circumstance whilst in others (e.g. small claims), the cost of arbitration effectively precludes you from pursuing your rights.

As you bring the product to market, it is important that you are clear-headed and focused on the business ahead while an experienced and strategically business-minded legal team has your back.  Contact Argentum Law for any assistance you need and to leverage the deep experience of our global agency and distribution law experts.