While in my first article I covered how to find the best international distributor for your needs, it’s also important to remember that “all good things must come to an end.”
Whether or not your relationship with your distributor is about to end, it’s important to start preparing now for when that eventuality occurs.
Would more marriages endure if significant others listed their expectations of one another in writing before going into the relationship? Are divorces easier to manage where there is a pre-nuptial agreement that both parties approve?
Know exactly what you’re getting into
I can’t offer marriage advice, but I do know the principal-distributor relationship runs more smoothly where each party clearly understands what is expected of them, and those expectations are memorialized in a distributorship contract.
I also know that the principal usually saves significant money when termination conditions are contractually agreed.
The Parties’ Expectations:
- Contract Territory – Explicitly limit the contract territory, whether by geographic area or specific customers. There is no reason to let a vague definition result in a later misunderstanding.
- Independent Relationship of the Parties – Granting the principal extensive control over the distributor’s business methods may initially seem like a good idea, but doing so might result in the relationship being construed as an employer-employee relationship in some countries. This could result in a host of tax, legal and contractual problems.
- Commissions – It is prudent to delay payment of commissions to the sales representative until after the principal receives final payment. It is a far more difficult matter to chase a payment when the customer is on the other side of the globe, rather than down the road. When a representative is not paid until you are paid, there is a greater incentive for the representative to do the collections work for you.
- Securing Governmental Licenses and Approvals – To avoid the burden of familiarizing yourself with the rules and regulations of each of the myriad foreign countries where you do business, shift this burden to the local distributor.
- Compliance with Domestic and Local Foreign Laws – Don’t run afoul of trade laws in your home country or in the distributor’s country. Contractually obligate the distributor to comply and educate your distributors as to prohibited destinations, customers and product uses, as well as export licensing requirements.
The end of the relationship – when the music dies
We all desire long and profitable business relationships. Wise international managers, however, have exit strategies and precautions in place. The termination of a distributor, or the non-renewal of the distributorship contract (which is tantamount to termination in some countries), may result in significant penalties in the form of damages or indemnities.
Additionally, if a principal utilizes the distributorship form, the principal may be effectively prevented from terminating a poorly performing distributor where the principal is not privy to the distributor’s customer list information.
Faced with the choice of continuing with the under-performing distributor or spending years starting anew to build a customer base in the foreign country, some principals find themselves stuck with poorly performing distributors.
Avoiding or at least mitigating those penalties and downsides may be addressed in a number of ways, many of which can be incorporated into the distributorship contract. For example, consider the following:
1. Choice of Law – Choice of Forum
Many countries have default laws, in the absence of a contractual designation, that provide for the distributor’s country laws to apply. They may further provide that a dispute regarding the relationship will be heard in the distributor’s country rather than in the principal’s country.
Most, but not all, countries permit the parties to choose applicable law, the applicable venue for dispute resolution and the mechanism of dispute resolution (e.g., arbitration, mediation or litigation). The wise principal chooses his home country or at least that of a neutral venue.
2. Customer Information
A seasoned distributor will not share end customer information with its principal. This withheld information provides leverage for the distributor and prevents the principal from “going around” or in some instances from terminating the distributor.
How does the principal get around this? If a distributor does not agree to voluntarily share this information, the principal might consider making the disclosure of customer information mandatory in those instances where the distributor seeks discounts in addition to the standard price structure.
Alternatively, the principal might provide that the principal’s warranties are extended only to those customers of which the principal is aware at the time of the sale.
3. Term and Termination
Avoid indefinite term agreements and automatic renewals.
The laws of certain countries and regions provide protections to the distributor; laws that provide for significant penalties (or “indemnities”) when a principal seeks to terminate, or opts not to renew the distributor relationship that has either existed for a significant period, or has an indefinite period from which a lengthy intended term may be inferred.
4. Objective Performance Standards
There is no provision in the distributor contract of greater potential financial significance than the objective performance standard.
Requiring the distributor to meet a specific sales volume removes much subjectivity from the contract, and keeps courts from conducting an after-the-fact consideration of subjective arguments distributors raise to seek damages from principals.
Include a concrete, specific sales volume requirement, and designate the distributor’s failure to meet that volume as a material breach of the distributorship contract.
This will provide the distributor with an objective basis for declaring the contract in breach, not to mention providing an unequivocal standard for the distributor’s performance. Please be assured that inclusion of this provision will save many future headaches.
Following these suggestions will help you set realistic expectations and avoid potential problems.
Have you had any issues with international distributors in the past? What areas of your contract is the greatest current area of need?