Debunking The Top Ten Myths About International Distribution Agreements
Many companies use contract templates with their international distributors. A medical device company, for example, agreed to distribute Chinese-made gloves. The products self-combusted and burned down the California warehouse where they were stored. The U.S. company demanded compensation from the Chinese supplier, but unfortunately, the template distribution agreement never addressed product quality–only quantity and price.
As this company learned, templates are a great place to start. But they are only the START, and should not replace competent legal review.
First, Make Sure You Start With an Appropriate Template
These days, it’s easy to find templates on the internet. You can purchase them online, or obtain them from colleagues, trade associations, or government agencies. Even most lawyers will admit they start with a document repurposed from somewhere.
Make sure the one you use fits your situation.
Some questions to ask to ensure you’re starting with a good template:
Do I Have an Agent or a Distributor? A lot of companies use the term “distributor,” but they really mean an agent or manufacturer’s representative. Both distributors and agents help manufacturers sell their products to foreign customers, but that’s where the similarities end.
A distributor purchases your products and then re-sells them to his/her own local customers. Agents help find customers and arrange the sale, but never purchase the products. The manufacturer in this model sells directly to the local, in-country customer.
Why is this important? Because the legal agreements for the two types of arrangement are totally different. If you pull a “distribution agreement” off the internet, but you have an agent, you’re not even starting with the right kind of agreement.
Does the Template Cover All the Key Points? Make sure your template is comprehensive. This does not mean the longest form, or the one with the most sections and subsections. It means one that sets out all the key points for your business.
Many templates omit essential provisions like governing law, or how international disputes will be resolved. Many do not specify title transfer of the goods transfer, or are unclear about international shipping terms.
Further, most companies have specific needs that a template may address, such as forecasting, demand planning, amount of local inventory to be held, specific regulatory requirements, or reimbursement for various investments. You may want to have your template customized so that it clearly fits your needs.
Does It Adequately Address Services or Software? Distribution templates are typically product-focused, and may not address related service and software issues. Today, there is often a service component to many product sales. For example, is installation required for your products? What about trouble-shooting, maintenance, upgrades, and warranty repairs?
Be sure your template clearly addresses these issues, if relevant. Spell out which repairs will you do, which your will distributor do, and which require the product to be returned for repair. Be sure your template sets protections for your source code, as well as how distributors become certified to perform certain services.
Second, Templates are NOT a Substitute for Competent Legal Review
Used wisely, a good template can facilitate the negotiation process. Unless you’re very experienced with legal agreements, however, you’ll benefit immensely from having a qualified lawyer review the document with you.
Agreements without legal review often omit important provisions. Many are worded poorly and the interpretation is subject to dispute. Often the annexes are not attached. Many template agreements do not even reflect what the parties say they agreed to, much less what they are disagreeing about!
Review by an experienced international lawyer is especially important for crossborder agreements. We’ll explain why in more detail in our next article, but these agreements really are not like your typical domestic contracts, and require specialized expertise.
Otherwise, you’ll have a written contract, but one that won’t help much when you need it.
The contracting process is also a great way to build a relationship with your new partner. Conflicts and disagreements should not be avoided – by working through these, a good partnership is made stronger as each gains trust in the other that tough issues can be worked through with give and take.
Doris Nagel is president of Blue Sky Consulting Services, a company that helps clients enter the global marketplace and and works with them to build the foundation for sustained global sales growth. Previous articles in this series can be found here and here.