In manufacturing, distribution agreements are a key method of broadening the application of a product in a global market. Julia Cameron and Katerina Poulakis of AMTIL corporate partner Rigby Cooke Lawyers set out some of the most common issues to serve as a reminder to principals and distributors when negotiating and reviewing distribution agreements.
We regularly assist our clients in drafting and negotiating distribution agreements (both as principal and distributor) to serve our client’s key commercial objectives. We are also often called on to assist clients who come to us as victims of pro-forma or poorly worded distribution agreements and in circumstances where there is no documented agreement in place at all.
Document, document, document
There is often substantial goodwill between a principal and distributor at the start of a commercial relationship, leading parties to assume that a ‘handshake’ deal or an exchange of emails is sufficient comfort that the parties will do as they have agreed and that the arrangement is legally enforceable. This is a dangerous assumption.
From a principal’s perspective, if you do not have a binding agreement in place which specifies the period of notice required to be given to a distributor to terminate the agreement, the risk is that a court may find that the distributor is entitled to a period of ‘reasonable notice’ of termination, or damages in lieu of such notice.
Damages are generally calculated by reference to the profit the distributor would have made during the notice period and the notice period can be in excess of 12 months if the arrangement is long term.
Who are you?
It is critical to understand who you are contracting with to ensure there is a solvent, legal entity standing behind the agreement who will assume liability under the agreement. Is it an individual, a sole trader with an ABN, or a company? Is it a foreign entity?
If it is a foreign entity, your recourse when things go wrong may be limited, particularly if the entity has no presence or assets in Australia. We can help you with due diligence on prospective parties and recommend appropriate guarantee or security arrangements where you contract with foreign entities.
Governing law
If you contract with foreign entities, the governing law of the contract will generally determine the place in which legal proceedings relating to the agreement must be brought and the law under which the agreement must be interpreted. It is generally preferable to insist that the governing law is an Australian State or Territory, but this should be considered on a case by case basis.
Targets need a bullseye
A distribution agreement should set out clear performance or minimum purchase targets for its distributor. Performance targets should be reviewed and updated regularly to deal with market-related factors and other factors.
Principals should also turn their minds to the consequences of a failure to achieve performance targets, whether it be loss of exclusivity or an ability to terminate the distribution agreement. When a principal tries to impose consequences for a failure to achieve performance targets and those targets are not accurately documented, this can be more readily challenged by a distributor and can damage the principal who can get ‘stuck’ with a poorly performing distributor.
Franchise trap
Clauses in distribution agreements which tightly control how marketing funds are to be used, impose strict marketing plans, require upfront payments and which allow a distributor to use the principal’s trade marks can be franchise agreements and subject to Franchising Code of Conduct. Even though the parties may not intend to enter into a franchise, the law may say otherwise.
A failure to comply with the Franchising Code of Conduct can lead to serious consequences for a principal.
To arbitrate or not to arbitrate
An effective dispute resolution clause is dependent on a number of factors, including the location of each party. Careful consideration must be given to the chosen jurisdiction and the dispute resolution procedures to be implemented (such as mediation, arbitration and court proceedings) and whether any notices need to be issued before a party can enforce the dispute resolution procedure.
Bad territory
It is harder to confine a territory once it has been set. So, whilst it may seem beneficial to have your product sold in a wide market, it is often sensible to start distribution within a smaller territory. Once a distributor has proven themselves to be successful and suitable for the principal’s needs, the territory can be expanded.
Are we exclusive?
Distributors often want exclusivity in the market. This can work in a principal’s favour by ensuring that a distributor is focused on their product only. However, there will be circumstances where it is beneficial to start with a non-exclusive territory. This allows a principal to make sure that the distributor is right for before handing over the reins of exclusivity.
If you would like us to review your current distribution agreements or just discuss distribution agreements more generally, please contact us. AMTIL members will qualify for a discount on fees.
Julia Cameron is a Partner in the Corporate and Commercial Group at Rigby Cooke Lawyers and regularly works with clients to draft and negotiate distribution agreements.
Ph: +61 3 93217807; E: JCameron@rigbcooke.com.au
Katerina Poulakis is a Senior Associate in the Litigation Group at Rigby Cooke Lawyers and often assists her clients to navigate through complex disputes relating to distribution agreements.
Ph: +61 3 93217818; E: KPoulakis@rigbcooke.com.au