Wednesday, January 18, 2012

Distributors and Dealers

Here is a good work lesson. It's pretty specific, but definitely isn't obvious -- sometimes it's a good idea to have contractual agreements with your dealers or distributors, and other times it isn't. And where you do have contracts, it is important that they conform to local laws.

Within the United States, commercial contractual arrangements are regulated by state laws -- either the general commercial code for that state, or specific regulations that have been passed. In many states, it seems like the laws were set up to favor local car dealerships in their "struggles" with automotive manufacturers. They cover things like notice periods on cancellation, cure periods, and the buyback of inventory. Because these laws vary considerably from state to state, it is important to know what you can and can't do before you start to do anything that impacts territory, length of the agreement, renewals, inventory requirements, and similar things.

But what's a supplier to do? Learn the details of fifty different laws -- laws that can change, by the way? Can't you write a contract with your dealer/distributor that is universally valid in the U.S.?

If you try going that route, it's likely the agreement will be so weak, that you'll be completely hamstrung. One advantage of a universal agreement, however, is it does set expectations for you and your distribution partners. And you only have one agreement to learn. If you make the contract too restrictive, however, it is likely some paragraphs won't stand up if there's a dispute that ends up in court. That's probably about as good as you can do.

If there's no contract, then general commercial law in the state prevails -- which is probably even more disadvantageous to a supplier.

So what's the best strategy?

In the United States, I suggest having a very knowledgeable attorney write a universal contract -- one restrictive enough to give you some options when your distributor doesn't perform -- but also checking state laws before you make an major changes in the relationship.

Outside of the United States it is a different ball game altogether. Laws in the U.S. vary a lot. Internationally, they vary even more.

In one instance, I was sued by an international dealer for hundreds of thousands of dollars for "brand development" he had supposedly done on my behalf. Of course, we were cancelling him for non-performance, but the way this particular country's laws worked, since we had a contractual commercial relationship, he could come after us. And he did. And it cost big bucks.

I later learned that if we hadn't reduced the relationship to a contract, we would have only been subject to normal commercial law, and the "brand development" stuff would have been excluded.

Outside of the U.S., you will, unfortunately need to ask a local attorney what is the best policy. It is a slow, tedious and expensive process, but done correctly, it can save you bundles later. Absolutely don't just take your U.S. agreement and have your distributor sign it -- you could be setting yourself up for some huge problems down the line.

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