Kaplan Law Office
International Business Attorney

Tools of international trade: using exclusive distribution agreements for export sales

Gordon G. Kaplan

International Business Attorney
San Diego, Calfiornia

International Business Transactions Attorney

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 whereby the U.S. exporter sells certain defined products to a foreign distributor under grant of exclusive rights for the distributor to re-sell 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 in order to reap the benefits and avoid pitfalls along the way. The discussion here is intended as a general guide to achieving that objective.

Exclusivity

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 though 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 which 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 of the 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 :

- maintain a competent and trained sales force

- maintain warehousing facilities and an inventory of products sufficient to meet anticipated customer demand

- establish a promotional budget – often set as a percentage of gross sales -- to be spent on advertising and sales promotion

- use its best efforts to meet or exceed agreed “sales targets”

- make an agreed level of “minimum purchases” of products from the U.S. exporter

Restrictions on competition

The U.S. exporter may wish to include provisions in a distribution agreement which impose competitive restrictions on the distributor such as resale price restrictions, or provisions which 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 which 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 due to the widespread acceptance of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, an international treaty which 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.

Let me help your business forward. Schedule an appointment by calling 858-259-8835 or by contacting me on-line.

Kaplan Law Office
765 S. Nardo Avenue #L-3
Solana Beach, CA 92075
Phone: 858-259-8835
E-mail

San Diego Business Attorney


Gordon G. Kaplan represents entrepreneurs, business owners and corporations in U.S. and international business and financial transactions. Based in San Diego, he serves the entire San Diego County and Orange County areas. He also advises foreign clients on transactions with U.S. counterparties and on setting up and conducting business operations in the United States.