Contracts Part V: 7 Unique Features of Distribution Contracts
.
4. Delivery Terms and Returns
In addition to specifying the precise terms of delivery, including the volume of product to be distributed over a specific time frame, and the manner in which it would be delivered to the distributor, the parties should also consider what will happen if customers return product and how such returns would be processed.
5. Distributor should Have the Requisite Insurance to Cover the Risks of Transport
The producer needs to clarify with the distributor at what point the risk of loss of the product is passed to the distributor and to ensure that the distributor has the requisite insurance to address damage to the product, and such insurance coverage as:
Workers Compensation, General Liability, Products Recall Insurance, Commercial Automobile Liability Insurance, and All Risk Property Insurance.
As part of its due diligence inquiry into the bonafides of the distributor, producers should review the distributor’s insurance policies to confirm the status of coverage. Producers should also consider the level of their own coverage.
6. Trademark Usage
In the case of an emerging enterprise, a distributor is likely to have the more potent reputation and may insist that the product is promoted under its trademark in order to maximize market reach.
A producer should consider this very carefully, because such an arrangement will necessarily retard its opportunities to promote its own reputation.
As in all things, the considerations yield advantages and disadvantages: allowing a distributor to employ its trademark to promote a product may yield quicker market access, but will make the producer more dependent on the distributor, which could result in the producer’s losing long-term leverage.
7. Force Majeure
As in the case with Supply and Service contracts, Force Majeure provisions address Acts of God that can potentially disable a distributor from fulfilling its obligations under the distribution arrangement, but are unlikely to cover insolvency or bankruptcy.
Over-dependence on a distributor that could end up becoming insolvent is a risk that should prompt producers to make inquiries concerning the financial health of their distributors and to obtain the ability to monitor a distributor’s financial wherewithal over the course of the relationship.
Related articles:
Contracts Part III: The Role of Legalese in Contract Drafting