U.S. companies that see a strong export potential for their products may nevertheless lack sufficient resources to set up their own international sales network of employees and will therefore look to other distribution arrangements to grow overseas sales.
Perhaps the most effective of such arrangements are “exclusive” distribution agreements in which the U.S. exporter sells certain defined products to a foreign distributor under grant of exclusive rights for the distributor to resell the products in a defined “Territory,” which can be one or more countries or a particular region. While this “exclusive” model affords many benefits to the U.S. exporter, it is essential to get the basics right to reap the benefits and avoid pitfalls along the way. The discussion here is intended as a general guide to achieving that objective.
The grant of “exclusivity” for the sale of defined products in the Territory means, in essence, that the U.S. exporter cannot sell those products in the Territory except through the exclusive distributor, nor can it sell them into the Territory indirectly through a third party.
In exchange for exclusivity, the distributor should be expected to make a substantial investment in developing the market to achieve maximum sales. The U.S. exporter may therefore fairly request a prospective distributor to submit a business plan that lays out in some detail the distributor’s analysis of the market and its sales potential, and the means the distributor proposes to employ to realize that potential.
The business plan submitted by a distributor can then be used as a starting point in negotiating certain key contractual provisions governing distributor responsibilities in a formal agreement. A “short list” of such provisions would include, for example, the distributor’s obligations to:
The U.S. exporter may wish to include provisions in a distribution agreement that impose competitive restrictions on the distributor, such as resale price restrictions, or provisions that prohibit the distributor from selling competing products in the exclusive Territory or from selling the exporter’s products to customers outside the Territory.
However, legislation in the distributor’s home country intended to protect local distributors and preserve open markets may make these and other competitive restrictions unenforceable. The European Union, for example, has adopted regulations applicable in its 27 member states that ban a range of competitive restrictions in exclusive distribution agreements. The U.S. exporter should therefore consider carefully, well before entering into a formal agreement, how foreign law is likely to affect any of the competitive restrictions it wishes to place on the distributor.
Compensation on termination
In negotiating a distribution agreement, the U.S. exporter will naturally seek to avoid any contractual obligation to make compensation payments to the distributor for goodwill or loss of business upon termination of the agreement. Just as naturally, the distributor will claim it has a right to such payments, especially if the agreement is for an extended period or requires the distributor to make a substantial investment in developing a market for the exporter’s products.
Here again, local law may be on the side of the distributor, as in Belgium, where exclusive distributors benefit from protective legislation, which in certain circumstances, requires the exporter to make termination payments to the distributor for goodwill, unrecovered costs and investments, and lost profits. The U.S. exporter must therefore be aware of any costly compensation payments mandated by local law, and will need to determine whether it can opt out from or limit such payments through choice of law clauses or other contractual provisions in a distribution agreement.
Resolution of disputes
Because the business relationship between the U.S. exporter and a foreign distributor can always go wrong for any number of reasons, disputes that the parties would otherwise be able to settle by negotiation may need to be litigated. A distribution agreement should therefore stipulate the governing law that will apply to the resolution of all disputes arising under the agreement, as well as the courts that will have “exclusive jurisdiction” over adjudication of disputes.
Failure to include these stipulations in a distribution agreement can make a bad situation much worse, for then the parties may have no alternative but to seek resolution of their differences by conducting a running legal battle in the courts and legal systems of two different countries.
But if the parties can’t agree on governing law or exclusive jurisdiction provisions in a distribution agreement, an acceptable compromise may be to stipulate the resolution of disputes through arbitration under the auspices of an established and internationally recognized “neutral” arbitration tribunal, such as the Court of Arbitration of the International Chamber of Commerce, or the London Court of International Arbitration.
Among other advantages of arbitration, awards made by an arbitration panel are generally easier to enforce than court judgments in the international context because of the widespread acceptance of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, an international treaty that requires the courts of contracting states to recognize and enforce arbitration awards made in other contracting states. As of this writing, the U.S. and more than 140 other countries have adopted the convention, making it the international standard for the cross-border enforcement of arbitration awards.
Summing up, if your company has products with strong export potential, the use of exclusive distribution agreements may be the right strategy for increasing exports and growing your business. With due care paid to getting the basics right, a well-constructed agreement will go a long way toward achieving your business objectives while protecting your interests.
Gordon Kaplan is an international corporate and business law attorney in San Diego. Send comments to firstname.lastname@example.org. All comments are forwarded to the author and may be used as Letters to the Editor.