What is a Sub Distributor Agreement?
A sub distribution agreement is a type of contract that governs the relationship between a manufacturer or wholesaler and an intermediary, who is authorized to sell the manufacturer’s product in a specified market, territory, or customer base. It is important to note that a sub distribution relationship is always subordinate to a principal distribution relationship; that is, the sub distributor must tack on to the sales that its principal distributor accomplishes in that market, territory or customer base. The sub distributor cannot, for example, sell above the principal distributor on a price basis, and sometimes cannot even do so on an invoice basis.
A sub distribution agreement typically is separate from its "principal" agreement in that it is codified under separate terms and conditions . This separation can afford the principal distributor certain advantages and disadvantages in managing the ultimate product sale. To be sure, sub distribution agreements are often (but not always), utilized by principal distributors as leverage against end buyers in the market place, ie., "don’t go around me by buying product directly from the manufacturer". In different contexts, however, this leverage could be diminished as against the ultimate end customer, in that the end customer might prefer to deal directly with the manufacturer on key contractual terms such as price. As such, if this end customer truly wants to deal with the manufacturer, it might not purchase from the principal distributor and the sub distributor. In effect, such a situation would run counter to the purpose of the sub distributor relationship and the sub distribution agreement.
Parts of a Sub Distributor Agreement
The essential components of a sub distribution agreement template will correlate with the product or service involved and, in turn, the scope of distribution. While no two sub distribution agreements are the same, some components are universally understood within the context of the master agreement, including parties, territory, terms, conditions, termination, liability, and sales forecast.
To fully understand the agreement, the sub-distributor must know:
Parties:
Territory:
Term:
Conditions:
Termination:
Liability:
Sales Forecast:
When a party executes a Master Distribution Agreement, they are concurrently entering into several ancillary agreements. For this reason, it is important to understand that every sub-distribution agreement template comes with internal cross reference by smart writers looking to save time and space. Most will include language that sets forth the agreement between the parties, terminates all prior agreements between the parties, and is subject to the general commercial provisions (sections) contained within the Master Agreement.
With specific reference to the territory, if the parties intend to further limit the territory of the sub-distributor to the vendor’s exclusive territory, it must specify the same throughout the sub agreement. The same applies to the term of the agreement. While the Master Agreement may spell out the duration, those operative facts must be included in the sub agreement in order to avoid voiding the exclusive nature of the arrangement. While some Sub Distributors may attempt to informally negotiate the terms in the Master Agreement, understanding the difference can impact franchise agreements.
Legal and Regulatory Compliance
Compliance, both with local laws and international regulations, is essential in drafting a sub distribution agreement template. Importantly, businesses may be tempted to use terms and clauses from their own primary distribution agreements when drafting the sub distribution agreement template. However, it is crucial that a business determine, whether the terms of the primary distribution agreement are compliant with all local laws of the sub distributor. This is particularly true in countries that have a number of restrictive local laws with regard to distribution agreements.
Another point to remember is that compliance with the laws of the home country of the manufacturer or supplier of the product is not an acceptable defense to compliance with the laws of the sub distributor’s home country. For example, the fact that a primary distribution agreement states that the distributor does not have exclusive rights to the territory will not be a valid defense to a claim of exclusivity under the laws of the sub distributor’s home country. In such circumstances, a court will usually rule that the distributor shall be granted exclusivity to the territory and award appropriate monetary or equitable relief as it sees fit.
As an illustration, again using India as an example, a non-resident company that has sales in India and appoints distributors in India and outside India, or uses other means of distribution within India, must be cognizant of the Foreign Exchange Management Act (FEMA) as well as any rules and regulations issued by the Reserve Bank of India (RBI) under this Act. Part of those rules stipulates that a non-resident can get paid certain sums from Indian companies for the supply of goods or services into India only through an authorized dealer bank in India and in accordance with the prescribed provisions. If the manufacturer fails to comply with these stipulations, the RBI has the authority to impose fines up to three times the amount involved in the contravention.
Advantages of Using a Template
One of the most obvious advantages of using a template is that it saves time. If a supplier or distributor has created a sub distribution agreement template, then they likely already put significant time and resources into developing an effective document that will be useful to the distributor. Thus, instead of having to spend hours researching sub distribution agreements, companies can do their own research, sometimes with the aid of their legal counsel, so that they are prepared to execute the template as-is or with very little editing needed.
A second major advantage that is often overlooked is thoroughness. Often, the smaller the distributor, the less experience they have in this area. Utilizing a pre-written sub distribution agreement template can greatly increase the odds that all of the important provisions have been included. It can also hopefully help the distributor identify issues they may not have thought of.
Personalizing Your Agreement
When tailoring an existing sub distribution agreement template, it is essential to begin with an accurate understanding of the business situation and available alternatives, which may also lead to some choices as to how to customize the template to meet specific needs of the client. Whether it is a matter of adding language to meet certain state or federal requirements or simply adding more detail about a contemplated business deal, customization is an integral aspect of legal drafting.
Traditionally, an experienced lawyer can quickly and easily add the language to a sub distribution agreement template that is necessary to meet specific business requirements, or a particular legal standard. But in modern practice, a great deal of time and effort is spent on drafting a new type of agreement based on an existing sub distribution agreement template (the method of customizing that is most cost-effective in this age where both time and money are at such a premium). Almost every day, a template is modified or customized in a way that requires extensive explanation.
The customization will be discussed in several parts.
When personalizing or customizing a sub distribution agreement template, it can be essential to carefully review all the provisions. In many cases, there may be red flags that certain language will not transfer well to the new agreement . In some instances, certain provisions may be of little use if the agreement is not a binary one. The bottom line is that even a short "form" or template agreement generally will contain a clause or provision that should be carefully reviewed, since what makes a template a template is the fact that it is a "form" agreement.
To begin the process of customizing your agreement, you can take a look at the following provisions. Since no two agreements will ever be perfectly interchangeable or interchangeable, all sections of the agreement should be reviewed. Even issues that may not be directly related to state or federal law should also be reviewed carefully.
As you begin to finalize your agreement, you will want to determine what is readily available on the market. Even small details, such as fonts, headings, spacing and even the size and type of paper, can greatly impact the chances of success.
Once you have determined that a certain section will not be included in the agreement, all references to that section must also be reviewed and updated. This will involve looking through all provisions that make reference to the section that will be deleted and removing those references.
Formatting is another essential element of customizing sub distribution agreement templates.
Common Mistakes to Avoid
Sub distribution agreements, although often overlooked, are a crucial element when doing business with distributors. Many companies make common mistakes at this stage of the business relationship that can lead to major headaches and lawsuit bills later on. Outlined below are some of the common mistakes that new distributors encounter. But luckily, all of them have a way to be avoided.
Don’t Be Lax With Control:
In order to maintain strict control of your product and its use, have strict requirements as part of your contract. The distributor’s right coupled with his responsibility for satisfactory performance would give him an incentive to use the greatest efforts to promote and sell the product.
Hasten Slowly:
If you see something that you do not like or are not comfortable with, THINK before you ACT. On some occasions, distributors present a contract that is pre-drafted before the parties’ negotiations begin. It looks good at first but upon further review, important provisions have been omitted or changed. The most common overlooked provision is the forum selection clause. When there is a dispute, you must act quickly. Where a dispute could arise should be thought out in advance so that if the time comes for dispute resolution, you have already determined the best forum to bring suit. If this is omitted, unforeseen and many times expensive or unjust results can occur.
Let It Work Before You Sign:
If it is a product that can be used as a sample (e.g., – hair care, bathroom consumable, grocery store item), take pictures of the product on the shelf or the display in the grocery store. This is important and gives an opportunity to see if the product they pitched matches the product they sold. Sellers are tempted to misrepresent their product or its advertisement function. Remedying misrepresentations after the contract is signed is an arduous task, if it can be accomplished at all. Therefore, before you enter the contract double-check the product.
Don’t Try To Change the Agreement The Day Of The Signing:
Don’t play poker with the agreement. If you have done all the negotiating and discussing before the signing, don’t open the contract on the day of signing and start making changes that you never discussed. It’s not only bad faith but it can be considered fraudulent and your whole agreement can be rendered void from the beginning.
Final Steps for Agreement
Once you have drafted your agreement, it is essential to go through a few steps to finalize and implement the sub distribution agreement template you are using so that it meets your expectations and goals. After all, as with most written contracts, the distribution agreement is only as good as the terms and provisions it contains. In order to ensure that it can be helpful in structuring and guiding a proper business relationship, the following considerations must be kept in mind upon finalizing the agreement: Review the final document carefully. Read through the written agreement carefully, after drafting it, just to make sure all necessary terms have been included, that the right legal authorities have been cited, and it captures exactly what you want. You also may want to have the document reviewed by an experienced lawyer, with expertise in distribution agreements or the industry you’re working in, to make sure it contains all the necessary terms and conditions. Put the final agreement into practice. Several steps are typically involved in making the agreement operational. This includes setting up a process for distributing the product covered by the agreement and putting that process into practice , possibly beginning with a pilot program. All parties involved in the agreement must understand their responsibilities and obligations under the agreement. Some of these parties may require training and education about the terms of the agreement and the distributorship methodology before a large- or small-scale rollout. After the product is successfully distributed, it is usually distributed again by the distributor(s) and so forth down through the supply chain. The parties must be clear on how the orders and etc. will be handled through each level of the chain. Will the distributor fill and ship orders directly from inventory? Will warehouse personnel fulfill orders from stock the distributor has in inventory? Will the distributor be reimbursed for filling and shipping? Clear definitions and guidelines should be included in the written agreement and verified in a quality assurance step so that disputes can be avoided now and in the future. In making the agreement operational, it is also beneficial to examine the distribution infrastructure to ascertain whether this infrastructure is sufficient to support current and future production levels. Applying a legal framework as well as a practical framework to finalizing and implementing the distribution agreement makes it clear that there are two sides to a distribution agreement-process and product distribution-that must be assessed together.