Contract Between Manufacturer and Distributor
A contract between manufacturer and distributor is known as a distributor agreement.3 min read
A contract between manufacturer and distributor is known as a distributor agreement. There are many factors that go into creating the ideal distributor arrangement. To reduce potential problems, whoever drafts the distributor contract needs to verify that certain phrases are included and that each clause is enforceable. Creating a checklist can help you make sure you cover all the necessary bases in your distributor agreement.
Common Mistakes to Avoid
One of the most serious mistakes to avoid is doing too much too fast. There is a limit on how many partnerships suppliers and distributors can enter into. When the supplier signs a contract with a particular distributor, the supplier cannot enter into an agreement with a different distributor.
When you sign an agreement with a new distributor, be sure to pick a manageable territory from the start. If your intended distributor only has proven success in a small market, it wouldn't make sense to assign it a large territory and hope it works out. Instead, pick distributors with proven track records in their respective territories. When you're ready to explore growth opportunities, expand your business gradually.
Here are other common mistakes to avoid:
- Termination for Cause Only Clauses: Experienced distributors and manufacturer agreements allow for termination for both cause and convenience. Inexperienced partners sometimes try to allow termination for specific causes, which can be open to interpretation depending on whom you ask. When a partner wants to invoke the termination for convenience clause, the partner will serve a Notice of Termination to the other party with at least 30 days' notice.
- Semiautomatic Renewals and Annual Terminations: Experienced distributors often include these clauses, which limit opportunities to terminate the agreement.
- Exclusive or Non-exclusive: Agreements can either be exclusive or non-exclusive. Some distributors push for exclusivity by citing concerns that a distributor won't allocate ample resources for sales if there is no incentive. One alternative is to prepare an agreement in a manner that keeps it non-exclusive but to franchise only one distributor. A verbal agreement could suggest that if a supplier's goals are met, additional distributors would be needed.
- Price Change Frequency: Don't be fooled into thinking that restricting price adjustments to once a year is going to serve both parties well. It benefits the distributor but not the supplier, giving them an unfair advantage. Periods of inflation or other instances that cause a rise in prices means the manufacturer needs the opportunity to pass those costs along. The manufacturer should be able to raise prices with 30 days' notice, which can help reduce conflict and reinforce fairness.
- One-Sided Termination: Allowing termination by only one party is considered bias. These type of agreements can often end in legal disputes. The best distributor agreements allow for either party to terminate an agreement when necessary.
- Amendment Frequency: Allowing amendments to be made only once a year could put one or both sides in a difficult situation until the appointed time when changes can be made. Instead, agreements should be flexible, and parties should be able to make amendments as needed.
- Post-Termination: There is often a lack of understanding of processes that should be followed once an agreement is terminated. Both manufacturers and distributors need to spell out what types of products can be returned for credit and what the timetable is for these returns. A solid distribution agreement should detail the obligations and responsibilities of both parties for the life of the agreement and what happens once the agreement is officially terminated.
- Comparing Proven Contracts and Agreements: Mistakes are often written into contracts by parties who do not have much experience with drafting and negotiating distributor agreements. Larger businesses that have years of experience make fewer mistakes, which typically revolve around one party trying to gain an advantage over the other.
When drafting a distributor agreement, look at solid agreements within your industry. You might be able to find examples through a distributor association for little to no cost. These can be good models to use as a baseline to compare with the agreement you are going to sign. Also, it's important to have an experienced distribution agreement attorney review prior to final signatures, but don't rely solely on them.
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