The Explanatory Note to Contract 36 explains the nature and importance of distributors in the marketing network and whilst it is essential for the supplier in the agreement drafted for the supplier’s benefit to retain control over the appointed distributor, it is equally important for a distributor, in an agreement drafted for its benefit to avoid overbearing controls and unnecessary interference from the supplier yet ensuring that there is sufficient back-up from the supplier when required. It is the role of the drafter to find the workable balance. The Explanatory Note to Contract 36 also highlights some points for consideration in drafting any distribution agreement including the following:
1. Should the appointment be exclusive or non-exclusive?
It is preferable from the point of view of the distributor to be granted exclusive rights in order that other distributors cannot be appointed to act in competition and hence allowing it to market to a greater number of potential customers.
It should be noted however that, the grant of exclusive rights may have questions of competition law or anti-trust law affecting the contract.
2. Should the appointment have territorial restrictions?
From the distributor’s point of view, it would be preferable to have an unrestricted territory or “worldwide” rights though if this is not an option, then certainly to have exclusive rights to its preferred territory which can be (a) a geographical area; (b) a particular market sector; or (c) a particular product range.
3. Should the appointment include a right to support the products?
The factors which should be considered by the distributor in deciding whether or not to support the supplier’s products and thus adding additional revenue to its business include whether the distributor already has suitably skilled personnel and systems in place which are providing support for other products and it has capacity to provide similar services to this new range of products. Such existing support would include, for example:
(i) an online support ticketing portal (“Help Desk”) through which customers can report faults or problems with the products which are then logged and dealt with by the distributor’s support team,
(ii) a remote access support facility whereby the distributor can take control of a customer’s supported workstation or server via online connection to identify the problem and provide a resolution,
(iii) a telephone “Hotline” contact number to provide fast, direct advice on product or operator problems,
(iv) a regular product update service which can provide repairs or replacement parts for hardware problems and analyse errors or “bugs” in software so that it can liaise with the Supplier to provide a “fix”, “patch” or updated release which can then be made available to the customer as part of the support charge).
4. If the supplier of the products is also supplying software, will the distributor want the right to license, sub-license or merely to act as an “agent” on the supplier’s behalf?
It may be an easier option for the distributor to have customers accept/sign the supplier’s own license thereby passing on the risks and obligations to both monitor compliance as well as correct errors to the supplier. The Explanatory Notes to Contracts 5 and 6 highlight the advantages and disadvantages of this point.
Other factors which the distributor should consider in the agreement:
(a) The distributor’s ability to obtain the product as soon as required for onward shipment to dealers or end-users without having to buy “up front”, or take deliveries in accordance with a fixed delivery programme or agree minimum volume or minimum revenue, irrespective of sales.
(b) The supplier’s commitment to provide technical and marketing support for the products.
(c) The supplier’s commitment to continue to enhance and develop the products to keep them competitive and to keep the development along a similar, or at least compatible, architecture. This is particularly important where the products form an integral part of a larger computer system or network assembled by the distributor from several sources, where any unscheduled change or modification may affect the working of that system or network as a whole.
(d) The supplier’s warranty as to the quality of the products and the supplier’s undertaking to repair or replace immediately if found defective within a minimum period of one (1) year of customer installation.
In addition to warranting the quality of the products, the distributor should also obtain the supplier’s warranty that it is fit for sale in the particular territory relating to that distributor agreement. This is obviously more relevant in overseas distribution agreements, since each country has its own rules and regulations as to, e.g. safety standards, wiring and labelling.