International distribution contracts are the new black and this is a good thing. I estimate that the number of international distribution contracts my law firm is writing has been increasing by at least 50% every year since COVID started.
I see this increase due in large part to companies realizing that doing business in a foreign country by setting up a company in that country (be it a wholly owned subsidiary or a joint venture) is invariably difficult, time-consuming, and expensive. Going into a foreign country via a distribution contract (or a reseller agreement) is a relatively fast, easy and inexpensive way to stick your company’s toes into a foreign country’s waters.
And here’s one more thing that distribution agreements have over foreign direct investment (which usually means going into a foreign country by forming a company in that country): they allow your company to enter into multiple countries at roughly the same time. These days, it is almost as common for a company to use our international lawyers for multiple distribution agreements as for one. In other words, these companies are pushing their products into many countries all at once and all via distributors and distribution contracts.
Today’s post focuses on the following key questions you should be asking yourself and your potential foreign country distributor.
1. What will be the payment and shipping terms? If you ship your products before receiving payment for them, you are taking the full risk of not getting paid. Conservative manufacturers usually require full payment before they ship. Less risk averse manufacturers ship on 30 days after the date of shipment (Net30) terms. These manufacturers provide for the right to shift to payment before ship terms if there is a problem. Shipping terms can be CIF or ExWorks. ExWorks is more common, since estimating shipping and insurance costs can be difficult.
2. Will you have sales milestones? This is always a good idea in an exclusive distributor arrangement. Sales milestones for distributors are usually set on a quarterly basis. The issue of sales milestone is usually a big issue, so setting the milestones in a way that is clear and simple to understand is important.
3. What will be the term of your distribution agreement? f you are going to have here an exclusive agreement its term/length becomes of critical importance. The normal procedure is to provide for a term long enough to give your distributor time to earn back its efforts in promoting your products. A three year term is typically the minimum, with five years more common. Most distributors that plan to put in substantial work to market and sell your products will require the distribution agreement to automatically renew if they achieve their sales milestones and they often want a provision stating that if the parties cannot agree on new milestones after the end of the first term, renewal will be automatic based on some predetermined formula. Distributors that do not require something like this are oftentimes not planning to do the work necessary to succeed.
4. What about your brand name? When selling products in a foreign country, you typically will want English language and local language trademark protection for each product that will be sold. Serious distributors insist such protections be in place. You can use your own trademark lawyers to handle the appropriate trademark registrations or you can have your distributor take care of this on your behalf as your agent. In either case, you should take care of the trademark registrations as soon as possible, preferably before any distribution gets signed or, better yet, before any negotiations even begin. If your distributor takes care of this for you, you will want to ensure that the registrations are done in your name and not in theirs.
5. What law will govern your distribution relationship? You will usually (but not always) want the governing law to be that of the foreign country.
6. How will you protect your trade secrets? NNN (non-use, no disclosure, non-circumvention) language should go into your distribution agreement and if your distributor will not accept this, it will usually make sense for you to find a new distributor.
7. Who will pay for what? Are you going to pay for marketing/advertising your product in the foreign country or will your distributor do that or will you share. Clarity is the key here. Will your technical product documents be translated into the local language? If yes, who will do this and who will pay for this?
8. How are you planning to deal with warranties? A standard approach is for you to draft the warranty and then have your distributer provide this warranty to consumers/buyers without any changes. Under this approach you will need to work with your distributor to craft a warranty that a) works for your products, b) works for your company and your distributer, c) meets market demands, and d) complies with foreign country law. The alternative is to allow your distributor to provide whatever warranty it wants. Your warranty is with the distributor and you will not cover any warranty beyond that which you have specifically agreed with your distributor. Under this sort of arrangement you have no contractual relationship with the consumers/buyers and the consumers/buyers have no legal basis to assert warranty claims against you. They are limited to making claims only against your distributor. This option is consistent with the legal status of a distributor that buys and then resells your products. However, under this approach you no longer control the nature of the warranty and many companies do not want to give up this control. Much will depend on the nature of your product, your consumers and your trust in your distributer.
9. Who determines the sales price to consumers? Normally, the distributor is free to set the prices it wants for the products, since it has purchased the product and therefore owns them. However, many of our clients wish to exercise at least some pricing control. Many countries prohibit absolute resale price maintenance, so in those countries you cannot dictate the sales price. You can, however, require your distributor to work with you on pricing and perhaps even set a pricing product range, both maximum and minimum.
10. What training will you provide your distributor? Where will you provided this (in your home country or in the foreign country)? How will training costs be determined and who will pay those costs?
Go forth and prosper.