Distribution agreements have been an important force within the American economy for well over a century. The agreements, which are generally entered into between a supplier (or manufacturer) of goods and a distributor of those goods, operate so as to take advantage of each firm’s assets or skills. The supplier or manufacturer may be skilled at crafting the product, but lack the local expertise to sell it in numbers. The distributor may have skills in moving products and making sales, but not in the design and crafting of it initially. Properly drafted, a distribution agreement can push both the supplier/manufacturer and the distributor to performance beyond their usual limitations. Improperly drafted, the agreements can lead to headaches, loss of business for one or both parties, and bitter litigation. We have identified five common mistakes to avoid in drafting your distributor agreements.
Mistake One: Falling in Love With Legal Terminology
Many businesses become so caught up with current business buzzwords that either (a) they demand that the words be used within an agreement – even when inappropriate – or (b) they become easily satisfied with an agreement’s language just because it has the “correct” labels and headings. Many in business are familiar with terms such as “strategic partnering” and even “joint venture.” They forget that the terms have no actual legal meaning outside the meaning given them in an agreement. Remember: Substance over form.
Mistake Two: Poor Drafting of Termination Clauses
The parties to a distribution arrangement should view the arrangement in a somewhat similar fashion to prospective spouses, both of whom come to the marriage with significant assets. Both parties want things to work out; indeed, both expect them to work out. Sometimes, however, they don’t. Since neither side to the distribution agreement wants to be viewed as a pessimist, and since each side is so sure of its own performance, the parties will sometimes agree to allow termination only for cause. Remember this, if the parties can’t agree on whether one side or the other is performing, they likely aren’t going to agree about whether the accused party has committed a serious enough breach to warrant termination. The alternative: Select an annual or semi-annual date for the agreement to terminate automatically. This gives both parties an incentive to perform.
Mistake Three: Failing to Distinguish Between an Agent and Principal Relationship
Is the distributor’s role to find and service buyers or customers without actually taking ownership of the goods? If so, in most situations, such a relationship would be characterized as one of agency. An agency relationship has a specific set of business and legal risks about which the manufacturer would want to be aware. Alternatively, if the distributor “takes title” to the goods, the shoe is on the other foot. The distributor should consider the business, insurance, and legal ramifications of its choice.
Mistake Four: Failing to Consider Antitrust Issues
Since distributor agreements often allow for exclusive territories and rights, the parties must be aware of any antitrust implications. Will regulators view the agreement as a restraint of trade? Where a manufacturer is negotiating with a group of distributors, this antitrust issue can be particularly problematic.
Mistake Five: Failing to Handle Judicial Jurisdiction Within the Agreement
Since both parties enter the agreement with optimism and hope, there may be a tendency to avoid any issue that leads to a potential business divorce. This can be a huge mistake, however. Just as the distributor is likely to be more familiar with local customs, trade policies, and the like, it also will be most familiar with local courts and regulatory bodies. The supplier/manufacturer should carefully consider the legal implications of any particular jurisdictional clause (or the implications of omitting the clause from the agreement).
Distribution Agreements: Skilled, Experienced Legal Counsel a Key
The law firm of CKB VIENNA LLP provides legal and business consultation to nearly every type of business, from large to small – even to startups and nonprofits. We have crafted distribution agreements for manufacturers and distributors alike. While the firm is skilled in all forms of litigation, our attorneys provide preventive training and offer guidance designed to avoid the consequence and cost of litigation. CKB VIENNA LLP has a long history of representing clients in all types of business issues and disputes. We have offices in Rancho Cucamonga, San Bernardino, and Los Angeles. Contact us by telephone – 909-980-1040 – or complete our online form.