EXPORT NEWSLETTER: DISTRIBUTORS CONTRACT

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Many countries have adopted a   generally protective stance toward  distributors. In cases where a distributor has made a substantial investment of time, money of effort to develop a market for a supplier's products, courts have imposed restrictions on a supplier's right to terminate its distributor.

Even if it is the distributor who has breached the contract!

    

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Export contracts: Escape clauses may not be worth the paper they are written on.

Your company decides to enter a potentially lucrative but notoriously difficult  market. Seeking to speed market penetration while minimizing entry costs, the company partners with a local distributor. In short order, the distributor begins to deliver solid returns.  Time passes. sales continue to be healthy, but growth is unspectacular. The foreign supplier concludes that it should go it alone by dropping the distributor and selling directly to its local customers--or appointing another distributor. The supplier gives notice of termination or non-renewal to the distributor.

There are numerous potential roadblocks in the path of a clean termination of non-renewal of your distributor. Two of the most critical relate to both legal and business domains.

First, it is important to know from the start that local law may in fact favor the distributor. Distribution agreements usually have a fixed term of one to three years. At the end of  the term, the agreement may be renewed either upon the express consent of the parties or, in some eases, automatically--unless either party provides the other party with notice of non-renewal. Distribution agreements also ordinarily permit suppliers to terminate the contract prior to expiration if the distributor materially breaches the agreement and fails to cure the breach within a predetermined period of time.  

Some distribution agreements also give suppliers the right to terminate the agreement early "without cause" (that is, for any or no reason) by giving the distributor notice. But here's the catch: In several "wrongful termination" cases, foreign courts have required the supplier to pay substantial damages to the distributor. A rough average is an award of six months to one year's lost profits; the actual damages awarded may be more of less depending on the circumstances, such as the level of the distributor's investment, the distributor's dependence on the supplier's products to support its business and/or the adequacy of notice and the existence and seriousness of any breach.
Foreign companies tend to underestimate their exposure to legal liability but they do so at their peril. If pushed to the wall, distributors are not averse to taking legal action to enforce their actual or perceived rights. Distributors are frequently aware of their legal position and tailor their negotiating arrangements accordingly. You should likewise take legal issues into account when entering a distribution agreement so as to be able to negotiate from a stronger position in case of a wrongful termination or similar claim. If you happen to be a foreign supplier and you carefully pave the way for the eventual termination of your contract with your distributor (preferably from the moment you decide to enter the foreign market), much of the above can be avoided.
 

It tends to be even more difficult to terminate a distributor that is highly dependent for its revenue on a single supplier. From a legal perspective, courts tend to be more sympathetic to a distributor that is heavily reliant on a single business line. From a business perspective, such distributors may be more willing to aggressively fight a planned termination of non-renewal if their survival is at stake. All things being equal, you may be better off selecting a fairly large and diversified company to be your distributor.
As a general rule, the more investment that a distributor is contractually or practically required to make in order to develop a market for the supplier's products , the more difficult or expensive it will be to terminate the distribution agreement. You should consider hiring a distributor that already possesses most of the personnel and resources it will need to market and sell your products.


Careful advance consideration of the structure and terms of the distribution agreement can help reduce your risk of an acrimonious termination or non-renewal.