Given the international background of our attorneys, at Cea Legal, we are often hired to regulate the business relationship between a foreign manufacturer/producer selling its products and the US distributor purchasing the products for resale in the United States, and we have considerable experience in representing either party. Setting aside some cross-border issues, which are not analyzed in this article, here are the most significant provisions of distribution agreements:
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A comprehensive description of the products and of the territory. The lines and the brands should be carefully detailed to avoid misunderstandings (and therefore potential litigations), and the territory should be clearly circumscribed, together with a mechanism to provide for sale leads generated outside the territory;
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Exclusivity terms. The agreement needs to define the role of the distributor as an exclusive (or not) agent in the territory. In the event of an exclusive relationship, restrictive covenants (such as non-competition and non-solicitation agreements) will play an important role in preventing the distributor from selling products from the manufacturer’s competitors. Exclusivity clauses are often paired with sales goals and performance targets, which if not reached by the distributor, will bring the exclusivity arrangement to an end;
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Placement of orders, pricing, and payment terms. The parties may want to establish minimum order thresholds and how the manufacturer needs to manifest its intention to accept orders. Specificity is very important because if one of the parties wants to cancel the order before being fulfilled (a very common situation during the first pandemic outbreaks in early 2020), contractual omissions will generate costly problems. The price can be either fixed or floating pursuant to a predetermined schedule. Inconsistent payment terms easily give rise to unnecessary litigations. Therefore, at Cea Legal we suggest comprehensive language concerning timing, late fees, and set-off rights;
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Delivery and acceptance. The terms regarding failure to deliver or delays will have to specify when the non-defaulting party can cancel the agreement. Typically, the risk of loss vests with the distributor when the products are delivered to the carrier but the parties can agree otherwise. Rights in connection with the inspection of the goods are often heavily negotiated, especially with respect to the defects not immediately detectable after the first inspection;
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Warranties and Limitation of Liability. The agreement should conspicuously show the warranties granted by the manufacturer and disclaim all other express or implied warranties. When representing the manufacturer, we do suggest including language to limit the buyer’s remedies to the return of the products and a refund and exclude consequential damages. It is advisable to include a force majeure clause to avoid liability if a party cannot complete its performance due to an unpredictable event (the recent pandemic showed the issues created by poorly written or boilerplate force majeure clauses, which left parties in many commercial agreements wondering whether the contract was still enforceable);
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Termination. A breach of contract will allow the non-breaching party to terminate the agreement unless the breach is cured within a certain number of days. The parties may also want to include the option to terminate the agreement without cause by providing notice to the other party. Whatever the cause of termination is, one item that is often neglected regards what happens to the products in the distributor’s inventory; specifically, the parties should decide whether the manufacturer will have an obligation or an option to repurchase the products.