16 January 2017

Key considerations for International distribution agreements

When a business decides to trade internationally, distribution and agency agreements are often the most efficient and cost effective means to reach a wider audience. If you have established that a distribution arrangement is more appropriate, there are several considerations and factors to be borne in mind, particularly in an international arrangement.

Local law 

You should ensure that you take time to look into the local laws of the territory your distributor will be trading in. It could be that there are legal restrictions in place that might have a significant impact on your agreement such as requiring that the distributor be local to that territory. In this example, to ensure that your distributor is local, you should look at their company registration information and where the distributing company is based. Failing to undertake adequate research may result in you breaching the national law, which will have a prejudicial impact on your business and reputation.

Whether or not the law requires your distributor to be local, it could be the case that there are different rules in place with regards key terms such as termination and exclusivity. You should not assume that your standard distribution agreement will work in the same way in every region.

You should check whether a distributor acquires any rights by virtue of the relationship, such as employment status or an entitlement to compensation on non-renewal. These are additional costs which you will need to factor in. Failure to consider additional costs and liabilities may result in the arrangement not being as financially beneficial as you initially envisaged.

Formalities and translation

The procedure for appointing a distributor in another country might be complicated. You should check that the agreement is legally enforceable there, and that it doesn’t need to be registered or signed before a notary. It is also advisable to have the agreement translated to ensure there are no surprises in the event of a dispute. It is likely that there will be permits and licences to be obtained ahead of the commencement of your distribution arrangement. It is important to establish funding arrangements and confirm who is liable for obtaining and paying for such consents. It is advisable to identify an individual responsible for compliance and consents, to prevent a dispute arising or a more serious breach occurring.

Your distributor 

Being unfamiliar with the territory, it is important that you undertake research about the distributor you have instructed. You should ensure they are not selling competing products and check whether they have sold similar products in the past, or if this is a new sector for them. Unless you have first-hand experience or extensive knowledge of the  territory and the distributor, be sure to check their experience and reputation in the area, often in more unregulated countries and sectors, the reputation of a company is the best or only indicator of their worth as a distributor.

Do not feel pressured to enter an agreement before doing your research. Undertake whatever due diligence enquiries you feel necessary and request as much information as you feel comfortable with.

Where you are dealing with a distributor in another jurisdiction it will be harder to ensure your distributor is marketing your product appropriately, training staff correctly and maintaining adequate records and warehouse conditions and these points should all be addressed in your distribution agreement.

If you have concerns over controlling international distributors, this is something you should discuss with your solicitor prior to entering an agreement. There are clauses which can be incorporated into your agreements to enable you to have a watchful eye over their distributor’s activities.

Territory 

Whilst it is always important that you correctly define the territory, more detail is required with international distribution arrangements, where you are unfamiliar with the area, and what constitutes a particular territory. You should for example be sure to clarify whether the territory of the UK includes the Isle of Man, and if the defined territory of ‘Europe’ includes the UK following the Brexit vote. A further consideration should be the territories in which your trade marks are registered in. Although you may have unregistered trade mark rights in a foreign territory, these are not as strong as a registered trade mark. Even if you do have a registered trade mark in the UK this will not cover you for territories you have not registered it in.

Competition law 

UK competition law restrictions can be more complex when trading internationally. You should establish at the outset, whether the agreement is subject to any provisions of national competition law or EU completion law; this will obviously depend on the country you are trading in and will vary with each distribution arrangement you have in place.

EU competition law for example will restrict you from entering into a distribution agreement which imposes minimum resale prices, restricts cross supplies or restricts internet sales. Any provision which affects trade between member states and restricts or distorts competition will be prohibited. There are exemptions available, for instance if your distribution agreement is deemed to be an agreement of ‘minor importance’ and in some instances, exclusive agreements may also be excepted. EU competition law is applied strictly and you should seek legal advice on the issue of competition law.

Governing Law and Jurisdiction 

As with all international contracts it’s important to decide from the outset which of the parties governing law and jurisdiction should apply.  Generally you should seek to enforce the law of England and Wales if you are a UK based manufacturer, and generally the wishes of the supplier are followed by the distributor. Be wary of distributors seeking to enforce their own jurisdiction in the event of a dispute. In circumstances where the distributor refuses to be subject to any governing law or jurisdiction other than their own an arbitration clause might be the safest method of protecting yourself from potentially lengthy and expensive foreign court proceedings.

Force Majeure

When trading internationally, extra consideration should be given to your force majeure clause, depending on what country your distributor is based in. A force majeure clause will give a party a right, usually to terminate, an agreement on the occurrence of an unexpected event, such as a flood, fire or a terrorist attack.  Some countries may be more likely than the UK to experience a force majeure event, such as war, internal conflict or extreme weather conditions and it is key to factor this in when entering a distribution arrangement with these countries.

All of the above considerations should be borne in mind when entering any distribution or agency agreement, but consequences of failing to consider them may be more detrimental in international agreements. Ensure you obtain legal advice and speak to us before entering such agreement.

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About the Author
Robert Capper, Partner, Head of Commercial Team and Sectors
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