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Distribution-agreement

Distribution agreements in 3D

"What product exclusivity am I getting?" This is a common first question asked by prospective distributors considering a draft distribution agreement.

It's usually followed with a money question such as: "How much do I have to pay the supplier or manufacturer?"

Let's consider these questions and techniques for assessment of distribution proposals and draft distribution agreements. The aim is to design realistic, workable and practical arrangements between manufacturers, suppliers and distributors.

The starting point is to recognise that these exclusivity and money questions are often based on assumptions due to what we'll call a 2D view of distribution arrangements. Having drafted or reviewed over 350 distribution agreements, I see them in 3D.

1. Identify and eradicate assumptions

The question about "the product" assumes certainty about what it is. The person who wants the contract may be certain as to what the product is. It's the job of that person and his or her lawyer to put the product's precise description into writing. That can trigger thought to test assumptions, for example:

  • Is the product to include all current versions and enhancements?
  • Is the supplier prohibiting the distributor selling competing products?
  • Is the supplier prohibiting the distributor to own derivative products?

Lately we've been reflecting on common assumptions about distribution agreements. This arose due to advice needed in response to a series of really badly drafted draft distribution agreement. The internet and the world of business is awash with trashy distribution agreements. Some are even issued by the largest of law firms.

In recent work we've completed distribution agreement drafting and advice for many types of products. There's been imported dentistry products from the Middle East, imported rubber floor matting from South Asia, sports shoes from the United States, China-manufactured DVD players for cars, and software to manage professional services firms. Some products required design of multi-level arrangements, eg distribution Australia-wide with local agents.

This stream of projects led us to search for more effective techniques for testing distribution arrangements to improve and speed-up contract drafting and advice.

distribution-agreementsOnce we reviewed draft distribution agreements, to make progress in these projects our clients needed to: (a) see the law, technology or commercial problems we identified, (b) give us their directions on next steps, and (c) approve further work by us to craft how and what to communicate to the other side about the reviewed draft. All parties could then see the improved proposed distribution arrangements in 3D and come to realistic decisions for project implementation.

2. Use good documentation

One technique we applied for testing the draft distribution agreements is a traditional technique, and almost always works. It is to improve documentation. For us this means upgrading in-house template or model distribution agreements. These are then used to fix poorly drafted agreements.

We also this week created a new Distribution Agreement Questionnaire. It has 39 questions in a table format designed for clients to use it before anyone drafts anything.

3. Apply a good methodology

Another technique perfected due to recent work was to communicate to our clients the methodology to follow to design and negotiate a proposed distribution arrangement. This too is best done before anyone drafts anything.

To help apply a pre-contract methodology, I advised one of our clients to consider four fundamental questions as listed below.

  1. distribution-agreement-3dProduct - what precisely is the product? What does it do, for who and where and how is it used?
  2. Value-add - what is each participant or stakeholder to do to earn revenue (or add value) for itself or others. There is always a chain linking them, and it can be long. For example some products involve a a product chain linking from conception, through to design, development, testing, manufacturing, marketing, distribution, assembly, customising and assets management.
  3. Workflow - among those stakeholders, who is to do what, when and why? Selling is often a critical job. Importantly, what must be clear is the marketing cycle from assessing customer needs, through to making proposals, negotiating those proposals, and ultimately locking in arrangements with contracts.
  4. Risk and Reward - which are the significant risks for a contract to manage and hence what are the appropriate payments or other benefits to be given in return? This money and legal question is best dealt with only after the more practical business questions 1 to 3 have been answered.

distribution-agreements-3dThese questions are not book learning, they are not what is taught in law school or in legal continuing professional education. It's proof I'm still learning even after drafting or advising on hundreds of distribution agreements.

As you read down from 1 to 4, the questions become less concrete and hence more abstract.

Answers to questions 2 and 3 shape answers to subsequent money questions such as "How much do I have to pay the supplier or manufacturer?"

Question 4 is best dealt with by an experienced lawyer or business manager, but only after questions 1 to 3 are answered.

4. Draft in haste, repent at leisure

There's a an unfortunate tendency good documentation and methodology seek to fix.  The tendency is that many anomalies in draft distribution agreements arise because some lawyers or businesses draft agreements in haste or way too early or without adequate understanding of situation-specific requirements in 3D.

Everything should begin with a clear product description. Understand the subject matter of a distribution contract and you can fast track to draft realistic statements of rights, obligations, prohibitions, and warranties. Not understanding is among the fastest roads to wasted effort or failure such as poor drafts, or worse still, disputes and litigation over poorly drafted agreements.

Short form, imprecise or poor product descriptions are a very common cause of legal problems. The authors responsible have failed to follow this drafting rule: Contracts should be drafted so unrelated parties have a clear understanding of the intent of the parties unaided by additional input. Remember, a judge reading a contract can't call a personal "brains trust" to decipher it.

Ultimately a contract worth having is one that meets practical needs and has perspectives on such topics as who gets what, when, how and why.


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