HOW TO TERMINATE YOUR DISTRIBUTOR

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Every new partnership between a manufacturer and a distributor is written in a period of bright optimism . But honeymoon don’t last forever and  most problems  will  occur when one of the partner is pulling out of the contract or distribution agreement 

If you want  to avoid problems at the time of termination, there are some important clauses that cannot be omitted.

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Terminate your foreign distributor... without complains.

Many mistakes are the result of one partner attempting to gain advantage over the other partner by inserting a bias into the agreement favoring the party with greater experience.

Avoiding  most problems with International  Distributors  means preventing these when writing the agreement  Experience shows that failing to communicate with your distributors on a regular basis will lead to misunderstanding and contract termination . Rare, indeed, is the manufacturer who doesn’t have complaints about the performance of its independent distributors.  Likewise, distributors are constantly carping about the poor support they receive from the manufacturers they represent.   And minor complaints can quickly escalate into destructive  conflict. The solution is simple.  Talk it out.  Open, honest, and ongoing communication between manufacturers, distributors,   is the key to reducing conflict and improving sales and marketing effectiveness.

Visit your International distributors often, meet with their  team  and even meet  some of their customers . That is the best way to understand the differences with your domestic market and improve your tools and aids to  support your  distributors Communication is the “glue” that holds a distribution channel together.  As independent businesses, distributors have a high degree of autonomy in their relationship with a manufacturer.  Good communication is therefore critically important in ensuring that the activities you and your distributors engage in are properly aligned and focused.   

But as the French say “ Shit happens “ and sometimes  termination is the best way out

Annual Termination and Semiautomatic Renewal. Neither parties can afford to minimize the opportunity for termination.   Annual termination and semiautomatic renewal is a routine procedure among experienced players. In these cases, there is a provision in the agreement calling for termination of the agreement and semiautomatic renewal at the end of the first full calendar year of the agreement, and each year thereafter. Terms and conditions allow either party to submit a Notice of Intention to Not Renew 60 days prior to the end of the calendar year.

When the agreement contains annual termination and semiautomatic renewal, both parties have the opportunity to exit the agreement, without proving cause, once per year. Performance, not a collection of words in the agreement, binds the two parties together. Experienced partners usually prefer to have performance as the binding force in the partnership.

Termination for Cause Only.Most distributor agreements prepared by We Globalize, allow for termination for cause and termination for convenience, (or no cause at all). Less experienced partners sometimes attempt to allow for termination for a limited set of specific causes. Termination for cause is sometimes straightforward and without controversy, as when one partner declares bankruptcy. However, partners sometimes disagree over the presence of cause. Partners often disagree over responsibility for cause.

The best distributor agreements allow for termination for cause and for termination for convenience. When an agreement allows termination for convenience, a partner wishing to disengage from the agreement serves Notice of Termination to the other partner with 60 days notice. When either party invokes the convenience clause, neither party needs to argue cause or responsibility for cause. More important, the distributor agreement does not end in a legal skirmish. Without a legal confrontation, the distributor and manufacturer are able to focus on their respective customers and businesses without consuming management time, corporate focus and financial resources on attorneys, courts and arbitration.

Termination by Only One Party — Not Both. Distributor agreements that allow termination by only one partner are biased. Experience teaches that such lopsided agreements more frequently end in a legal dispute. By allowing both parties to terminate the agreement, power of the supplier is in balance with that of the distributor. Balance in distribution agreements leads to less litigation upon termination. The best distributor agreements allow either party to terminate the agreement.

Frequency of Amendments.        Relationships between manufacturers and distributors are organic. They are born. They develop. They grow. They mature. They decay. Ultimately, they expire. External factors periodically apply pressure to the distributor and the manufacturer. Those pressures sometimes call for a change in the distributor agreement. If the agreement allows changes to be made throughout the year, there is little problem. However, if the agreement allows for changes only once per year, one or both partners must survive undue pressure until the agreement can accommodate such an annual change. In the best distribution agreements, either party may suggest changes to the agreement throughout the year. When both parties agree, they can easily approve and amend the existing agreement.

What Happens after Termination? The distributor agreement must spell out responsibilities of both parties during and after the life of the agreement. All distributors and manufacturers understand that the agreement must define responsibilities of both parties during the period that the agreement is in effect. However, fewer truly understand that the agreement must spell out responsibilities for the period after termination. Distributors and manufacturers must be specific about which products are eligible for return for credit, and the timetable for such returns. A reliable distribution agreement must clearly state the rights, responsibilities and obligations of both parties during the life of the agreement, upon notice of termination, and after termination is effective.
 

So how to avoid termination problems ?  We Globalize provides a model  agreement to its customers  This model  is based on years of experience and is a good baseline from which to build a new agreement  It is also a good practice to have your attorney involved , but keep in mind that Too often, attorneys eliminate onerous clauses, but are simply not aware of industry norms. They lack an understanding of the problems with agreements that arise most frequently.  

And what if there was no contract?   LETTER OF INTEND , VERBAL DEAL OR CONTRACT ? SAME DIFFERENCE!

In the US product sales are governed by the UCC, the Uniform Council Code. Companies are so used to these terms that they use them for orders, purchase orders, shipping documents and invoices . But outside the US the UCC is largely unknown.

So now comes the CISG, The Convention of International Sale of Good, which is intended to govern sales of goods between parties located in different countries .In the US , the CISG  has the force of Federal law and supersedes UCC laws. So contracts for International sale of products may be automatically governed by the CISG, even if your contract tries to give you a different law.

Unlike US laws under which agreements must be in writing to be enforceable, CISG allows verbal contracts or modification. Additionally, any evidence can be used to prove the parties intent, even if it changes the terms of the written original contract. 

This means that pre contract negotiation, proposals, or letter of intent, orders already shipped can be used as evidence to show the intent.Companies should minimize these risks by including a statement in all pre contract documents, that no representations where made that where not incorporated into the    pre contract document, and that the pre contract document or Letter of Intent will be superseded and extinguished by the final written contract.

Under the CISG firm offers can be verbal, and do not need to be supported by consideration. You cannot effectively opt out of CISG simply by including a statement in your documents rejecting the buyer's law or /selecting yourself the US law.Using the new CISG takes practice and legal advice should be requested before contracting with foreign buyers .

Distribution agreements are an integral tool in the construction of a relationship between a distributor and a supplier. A well-written agreement can assist in developing that relationship.   A poorly written agreement often leads to a legal quarrel that in turn consumes management time, financial resources and the involvement of attorneys, courts and arbitration.