Distribution Arrangements: Have You Considered Everything?

Our team at Allied Legal specialises in the provision of legal services to the startup sector. The firm has also recently pioneered a startup sales offering. As such, distribution arrangements are of particular interest to us as these transactions enliven both legal and sales issues. We often prepare and negotiate distribution agreements and this article provides an overview of the key issues you should consider prior to entering such transactions.

Distribution arrangements

A distributorship arrangement is essentially a transaction where one party (i.e. the distributor) distributes and sells goods by arrangement with the principal. The principal is likely to be the manufacturer or importer of those goods. If you have a product which needs to be distributed and you need help with its distribution and sale, you will be seeking out viable third party distributors. Likewise, if you want to be a distributor, you should make sure that each party involved knows exactly what their rights and obligations are before the product is supplied or distributed.

Such arrangements can be key to the growth of any principals’ business and, of course, lucrative for the principal too. Our experience tells us that a collaborative approach to negotiating such arrangements usually yields the best outcome.

So what are some of the key issues you should be aware of when negotiating a distribution arrangement?

1. It must be in writing!

There is often goodwill between parties at the start of a commercial relationship, leading to the assumption that a “handshake deal” or an exchange of emails will be sufficient to cover the parties’ intentions. However, as we all know, relationships can sour, so this can be a dangerous assumption. Accordingly, a distribution agreement must always be put in place to ensure all parties are clear on their rights and obligations.

2. Key issues to consider

Distribution arrangements enliven many legal and commercial factors. Ideally, these should form part of the negotiations between the parties prior to finalising the transactions. To avoid uncertainty moving forward (which could trigger costly disputes between the parties), here is a comprehensive list of issues the parties should negotiate and then clearly set out in the distribution agreement.

1. Whether the distributorship arrangement is exclusive?
2. If it is exclusive, what are the consequences of breaching the exclusivity?
3. The territory covered by the arrangement.
4. The product to be distributed should be clearly identified.
5. A regime for setting the sale price of the products (which must comply with Australian Consumer Law).
6. Will any credit be offered to the distributor?
7. Who is responsible for transporting the products including related costs?
8. Does the distributor have any KPIs such as minimum sales target?
9. The quantum and timing of payments for distributing the goods.
10. How can the agreement be terminated?
11. Who is responsible for the cost of the product?
12. When is payment made for the goods sold?
13. Clearly set out the rights of each party if sales targets are not being achieved.
14. Can the product be changed at the principal’s request?
15. Will promotional costs be shared?
16. Will the principal be required to promote the product?
17. The period of the overall arrangement.
18. A potential framework for after-sales service.
19. How will product returns be handled and costs shares?
20. What rights will the distributor (and those purchasing from the distributor) have in relation to faulty products?
21. Will training be provided to the distributor?
22. From the principal’s perspective, the distributor should be required to provide certain assurances not to seek to circumvent the arrangement.
23. A framework protecting any intellectual property rights in the product should be considered.
24. How will disputes be resolved?

3. Are you triggering a franchise?

Australia has a complex legal and regulatory regime when it comes to franchising arrangement. A failure to comply with this regime can lead to serious consequences for a principal. Clauses in distribution agreements which strictly control a distributor can trigger a franchising transaction for legal purposes. For example, how marketing funds are to be used, imposing strict marketing plans, requiring upfront payments and provisions which allow a distributor to use the principal’s trademarks could be regarded as franchise agreements and be subject to Franchising Code of Conduct. This is even where the parties did not intend to enter into a franchise and even where the agreement is clearly labelled to be a “distribution agreement”, the law may nevertheless say otherwise. Accordingly, we recommend seek early legal assistance when negating such transactions.

Need help? Contact us

Please contact our team should you need assistance with any proposed distribution arrangement. Remember, we offer legal and startup sales services and would be pleased to assist with the legal and / or commercial aspects of such transactions. You can give us a call on 03 8691 3111 or email us at hello@alliedlegal.com.au.