Me Patrick Daneau
Is your Distribution Agreement full proof? Does it answer your needs? Is it in line with your expectations? A lot of agreements can be found on the Web where only the names have been changed. Is this your case?
The following is a brief summary of some the most important clauses that should be included in a Distribution Agreement. Of course, as every agreement is unique, other clauses could be necessary.
Remember that, in order to reflect adequately the parties’ needs and reality, each clause of a contract requires careful consideration.
Granting of the right
Provisions pertaining to the granting of the right are without a doubt the most important clauses of an agreement, but they are also the most problematic. This is why they must be looked at closely.
In the first place, let’s talk about the duration clause. It is important to determine adequately the duration of an agreement, which may vary depending on the reputation of the contracting parties, their business relationship and the value of each party’s investments. At the beginning of a business relationship, it could be interesting to limit the duration of the agreement and to include renewal options of more or less length.
Then comes the question of the territory, which must be defined carefully, keeping in mind any opportunity that could eventually arise. It is often recommended that the manufacturer offers the distributor one or many territorial options, which may be conditional upon attainment of certain objectives.
Territorial dispositions usually grant exclusivity to the distributor within a predetermined territory. However, the manufacturer could limit this exclusivity to certain clients within a particular territory. The manufacturer could also ask to be the only supplier of a good within a territory, and demand that the distributor refrains from giving up his distribution right in favor of any third party.
Supplying
These dispositions usually describe the manufacturer’s obligation to guaranty the product’s availability, quality, and delivery within the delays stipulated. They will also indicate which party will be responsible for assuming the cost of delivery and the risks associated to transportation.
It is also in this section that the parties will agree on the manner in which the orders will be made, the specifics of the manufacturer’s customer warranty and the “cost” and “retail” price listings.
It is to be noted that according to the Loi sur la concurrence, the manufacturer is not allowed to impose a price listing upon its distributors. If the manufacturer wishes to suggest a price listing, the agreement must mention that the distributor is under no obligation to respect such a listing and that he will not be penalized if he chooses to ignore it.
Finally, in certain cases, this section will also contain the payment conditions of the product.
Contractual obligations
Here, it could be useful to reiterate the parties’ territorial and non solicitation obligations, as well as those concerning the product itself, and this, even if these items have previously been treated in the agreement.
Furthermore, the manufacturer could also include a series of conditions in order to ascertain that the distributor will do everything he can to promote the sale of the product, either by way of publicity, by attending commercial shows, by offering visibility to the product within his installations, by reaching certain sales objectives, or by developing special customer service practices.
Moreover, in order to keep a certain control, the manufacturer could ask the distributor to favor him with sales reports and a listing of customers who have bought the product.
Indemnifying
The agreement should include clauses pertaining to the indemnifying of one party by the other in case of default by the latter to respect its contractual obligations, or simply when the agreement has come to term.
As customers usually follow the product, not the distributor, a clause pertaining to the payment of an indemnity at the term of the agreement will usually be included when the manufacturer profits from an important clientele put together by the distributor. If the parties agree to such a clause, they will have to determine the value of the indemnity. To do so, they will need to consider numerous factors such as, the duration of the agreement, the reputation of the product before the parties entered their business relationship, the amount disbursed by one party or the other for publicity purposes, etc.
In any case, the delay and the amount of the indemnity related to this obligation could be subject to limitation.
Termination of the Agreement
The agreement must provide for cases where the relationship between the parties should come to an end, either with or without notice. If a notice is required, the agreement should mentioned the manner and the delay in which it will be delivered.
Furthermore, the agreement must also indicate what will happen once the relationship is over. For example, it could mentioned that unsold products will be returned to the manufacturer, or to any other person he shall designate, in exchange for a predetermined amount, and it could also stipulate that the distributor must stop presenting himself as one of the manufacturer’s representatives.
Jurisdiction
Before concluding, we wish to say a few words concerning the choice of jurisdiction, since even if the parties would choose, for example, to submit their agreement to Quebec laws, it does not mean that their rights and obligations stipulated therein would automatically be interpreted according to the Quebec Civil Code.
Indeed, the only mention that the agreement is governed by Quebec laws could be insufficient to avoid the application of certain international treaties and conventions, which could, in some cases, provoke undesirable consequences.
Consequently, provisions concerning the choice of a jurisdiction must be examined closely, especially when the contracting parties reside in different states or countries.
In conclusion, the preparation of a Distribution Agreement requires a good knowledge or each party’s needs, as well as of the related legislation. Even though it can be quite appealing to use a standard agreement found on the internet and simply fill in the blanks, it is most important to verify if the clauses contained therein apply to one’s commercial and legal reality. It is also essential to ascertain that the content of such an agreement is indeed legal.
The present article is not a legal opinion and is published for information purposes only. For more information concerning this subject or any related subject, please do not hesitate to contact the writer or one of our professionals.