This particular Contract is drafted for the supplier’s benefit appointing a distributor to market its PC computer product in a particular territory. Before drafting such contracts, the following points must be considered.
As distribution agreements are vital contracts for the widespread marketing of goods and services, a supplier appointing a third-party distributor to market and perhaps also support its goods or services, sometimes in a specific area, the territory, should ensure that the distributor has already established itself as capable of marketing similar products and has an existing customer base in that territory.
In drafting such agreements, the following points must also be considered in ascertaining the nature and scope of the distributor’s appointment.
1. Should the appointment be exclusive or non-exclusive?
It is preferable from the point of view of the supplier to grant non-exclusive rights in order that other distributors may be appointed to act co-laterally and hence market to a greater number of potential customers. The grant of non-exclusive rights will also enable the supplier to appoint another distributor with the minimum of contractual or practical problems in the event of default or poor performance of the first distributor.
As importantly as the practical issues of the contract, the grant of non-exclusive rights will avoid the question of competition law or anti-trust law affecting the contract.
2. Should the appointment have territorial restrictions?
From the supplier’s point of view, it may be more realistic to restrict the distributor’s appointment to the particular territory in which the distributor has a proven track record which is more often than not the reason why that particular distributor was chosen. The territory may 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 in deciding whether or not the distributor should also be allowed to support the supplier’s products include:
(a) whether the distributor has suitably skilled personnel and systems in place to provide proper support, 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),
(b) whether the distributor can provide sufficient geographical coverage to ensure a reasonable response time;
(c) whether allowing a third-party distributor to contract with the supplier’s customers is desirable;
(d) whether it is desirable to disclose to the distributor sufficient confidential and proprietary information about the products to enable the distributor properly to support them.
4. If the supplier of the product is also supplying software, will the distributor be granted the right to license, sub-license or merely to act as an “agent” on the supplier’s behalf?
It must be remembered that any right which may be granted to the distributor must be compatible with those rights which are held by the supplier, i.e. is the supplier itself the owner, licensor, sub-licensor or merely a distributor of the software. The general preference for the supplier would be for the distributor to pass-on the supplier’s own software license to its end-users so that its own brand name is associated with its software as well as having the continuity of the licences remaining in place even after the distribution agreement has terminated. The Explanatory Notes to Contracts 5 and 6 highlight the advantages and disadvantages of this point.
5. Should the supplier grant the distributor the right to appoint dealers or sub-distributors?
In general, it may not be recommended as a standard offering that the distributor be allowed to appoint any other parties as sub-distributors, dealers, agents, etc. for the following reasons: firstly, the supplier has presumably appointed the distributor for its own name and performance in the territory and may not know of any of its dealers, sub-distributors or other agents (unless the latter are already part of the distributor’s existing successful marketing and/or support network).
Secondly, when too many parties in a wider network of dealers, sub-distributors or other agents become involved in marketing and/or supporting the supplier’s product, the supplier can eventually lose direct control of that market area as well as distancing itself from its end-user customers direct feedback of their problems or requirements and thereby the future enhancement of the product.
Thirdly, the supplier is less likely to be able to control the manner in which dealers or sub-distributors are marketing (and perhaps also supporting) the product and therefore there is a question of accountability for the performance of such parties in relation to both the supplier and the product in the marketplace.
All these points must be considered before drafting or choosing the right distributor and drafting the right agreement.