Exclusivity in China Distribution Agreements

Going through my emails and came across one from one of my law firm’s China business lawyers to a client on how to handle exclusivity in a China distribution agreement for a retail product.

Nothing earth shattering here, but since our clients for whom we do China distribution agreements frequently ask us about exclusivity, I figured writing this makes sense.

This responds to your questions on how exclusivity is usually handled in China distribution agreements. These are the ways it is typically addressed from the perspective of the manufacturer of the product:

1. Provide for a non-exclusive agreement. Note, however, that two distributors in the same market is usually not a workable situation. Option two below is therefore more common.

2. Limit the territory. You could limit this particular distributor to City1/City2/City3.

3. Limit the contract term to one year, with you having the exclusive right to renew. This is a common solution when the product does not require the distributor put in extensive time or money to create the sales market. This solution is not common if the distributor will need to put in extensive time or money to create the market.

4. Provide for a specific sales target. If the distributor reaches the sales target, renewal of the distribution agreement is automatic. If the distributor fails to reach the target, you have the option to terminate and appoint other distributors. Usually the sales term is for three to five years, with the sales targets set for each year.

Some agreements provide for automatic renewal at the end of the initial term with a fixed percentage increase in sales targets. Other agreements require negotiation of a new agreement with negotiation of new sales targets as part of that process. This approach is most common where the distributor will be investing considerable time and/or expense in the early years of the distribution cycle to create a market for the product.

In our experience, option 3 is the most common in China. Chinese companies seem to have a problem with negotiating specific sales targets. Worldwide, options 3 and option 4 are common, depending on the specific circumstances.

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