Drafting a distributor agreement demands utmost care because the mistake, if any, you make could cost you a lot and you will only realize by the end of the distributor partnership. To avoid problems at the time of termination of the agreement, make sure that the agreement does not have any important phrases omitted or have any unsound clauses.
Here is a list of 10 mistakes that you have to avoid while drafting distributor agreements.
Partnering With Too Many Distributors Within A Short Time
Handling partnerships with too many distributors overwhelms any manufacturer. In fact, when a supplier aligns with a new distributor, they are not allowed to sign an alternative distributor. The rule applies to distributors as well. When they align with a new supplier, they are asked to refrain from signing an additional supplier immediately.
If a distributor is influential only within a small territory, assigning a large territory to them is a bad idea. Initially, assign the small territory to the distributor and expand the territory gradually if the results are satisfactory.
Termination By One Party Alone
There is no valid argument against the fact that the distributor agreement that allows one party alone to terminate the agreement is biased. Lopsided agreements of this kind end up in legal disputes that can be avoided if both parties are granted the right to terminate the agreement. Allowing either party to terminate the agreement is characteristic of the best distributor agreement.
Not Mentioning Responsibilities Of Both Parties After Termination
The distributor should cover the responsibilities of both parties not just during the lifetime of the agreement but after termination too. Manufacturers and distributors mostly have a clear understanding of their responsibilities during the period when the agreement is operational. But many lack a good level of clarity in their understanding of their responsibilities after the termination of the agreement.
The manufacturers and distributors have to be specific about the products that are to be returned for credit and schedule a timetable for these returns. A reliable distribution agreement should have the obligations and responsibilities of the mentioned parties during the lifetime of the agreement, upon notice of the termination of agreement and after the agreement cease to be operational.
Termination For Cause Only
Distributor agreements that involve experienced manufacturers and distributors allow termination for convenience and termination for cause. Sometimes less experienced parties attempt to allow termination for a specific set of clauses alone.
Termination for cause is often a straightforward process that does not lead to any controversy like in cases one partner declared bankruptcy. However, partners may disagree over the presence and responsibility of the cause.
For a distributor agreement to be regarded of a high standard, it should allow termination for cause and convenience. If termination for convenience is allowed by a distribution agreement, a partner who wishes to terminate the agreement will have to send the Notice of Termination to the other party with a notice period of thirty days. If the convenience clause is cited, the cause and responsibility of the cause is not argued, and there is hardly any legal dispute.
Granting Exclusive Distribution Rights To A Party In A Territory
Distributor franchises can be exclusive or non exclusive. In the former type, there will no more than one distributor franchised in the territory while in the latter, more than one distributor will be franchised in the territory.
In manufacturer-distributor deals, distributors often appeal for exclusive territory by arguing that without an exclusive territory, allocation of resources will not yield them the expected returns. If a supplier allows an exclusive territory to a distributor, it does not franchise an additional distributor for a period.
When a supplier is assigning an exclusive distributor, they are taking a big leap of faith that is not practical in a business relationship. An alternative way is to draft the distribution agreement in such a way that the distributor party is non-exclusive, but the supplier will be able to franchise only one distributor. In simple words, it means that no additional distributor will be assigned if the requirements of the supplier are met. If not, the supplier can add distributors additionally.
Not Allowing Annual Termination And Semiautomatic Renewal
People who are experienced in handling distributor relationships and drafting distributor agreements understand the importance of semiautomatic renewal and annual termination of the agreement. In the case of annual termination of the agreement, the distributor agreement allows for the termination of the agreement at the end of the full calendar year and each year thereafter. Either of the party signing the agreement can submit a Notice of Intention to Not Renew the agreement 30 days before the end of the calendar year.
The addition of annual termination and semiautomatic renewal in the agreement allows both parties to exit the distribution agreement without proving cause.
The relationship between the distributor and supplier is built on the foundation formed by distribution agreements. A well-written agreement helps the business relationship to flourish. The legal disputes that arise due to poorly written distribution agreements cause unnecessary expenses to the involved parties.