Startup specialist firm Beauchamps Solicitors join us to answer startup legal queries.
This months legal query comes from Air quality IoT contender Nuwave Sensors:
What are the key mistakes to avoid when negotiating and agreeing on a contract with a distributor?
Mistakes when setting up the relationship with distributors can be costly in terms of time and money to a startup.
We identify three common mistakes and suggest tips on how to create airtight contracts with a distributor.
THREE COMMON MISTAKES
- You haven’t chosen the right arrangement
You need to consider whether appointing a distributor is the right way to get your product to market. In a distribution arrangement, you sell your product to a distributor who then sells the product at a markup. You do not sign a contract with the final customer, so you have limited control how your product is marketed or sold.
The alternative option is to appoint an agent. That person arranges a legal relationship between your business and the customer and takes a commission from sales. This leaves you with more control over how your product is marketed and sold. However, you should be mindful that a commercial agent has more protection under the law.
- You do not have sufficient legal protection
It is vital to ensure that you have an agreement in writing that reflects your arrangement (see tips below). You should have the right to terminate it if the distributor is not meeting their obligations under the agreement.
- You haven’t consulted a lawyer
A distribution agreement needs to be tailored to your situation. A lawyer will work with you to minimise risks and recommend the best solution for your business. If appointing a distributor abroad, its important to seek local legal advice, as distribution laws vary from territory to territory. For example, there may be registration requirements. Ask the local legal advisor to advise on the validity and legality of the proposed arrangement.
11 TIPS ON HOW TO AVOID THESE MISTAKES
- Research the territory where you plan to distribute your product and identify distributors who have a good knowledge of the area.
2. Check the credit score of distributors before you appoint them. They are carrying a risk and should have an established business.
3. Consider their existing products and whether there are any competing ones.
4. Draft the fundamental terms:
- the territory
- the term
- the basis on appointing the distributor
- the product range to be distributed.
- Consider the duties of the distributor:
- would they be restricted from selling competing products
- would they have to buy a minimum amount of goods from you
- would they have to insure the product
- would they need product training or have to maintain quality standards?
- Make sure that the agreement is clear, and it reflects the supplier-distributor relationship.
- Do not set the prices and terms upon which the distributor sells the products, as this could be a breach of competition law.
- Protect your intellectual property including your trademarks. A distributor should not be permitted to remove your trademarks.
- Consider product liability, and the levels of product liability insurance, carefully. A distributor will want a product liability indemnity (reimbursement).
- Clarify when to do the title and the risk pass in the products. For example, the risk could pass on delivery, but the title should be retained until the distributor pays you.
11. Ensure the final agreement is properly executed and dated.
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NB: While all reasonable care has been taken in the preparation and completion of this article, no responsibility is accepted for any errors or omissions. This article has been prepared for information purposes only and does not constitute legal or other advice.