Most products are not directly sold by the manufacturer. The manufacturer can make use of a distributor to sell his goods. A distribution agreement regards the distribution of the products and contains the rights and responsibilities of the parties involved. This agreement is usually made between a manufacturer (sometimes by a vendor) and a distributor. Distribution agreements often involve parties in different countries. Even more so in Aruba, since many products have to be imported from abroad. This article will point out three important parts of a distribution agreement and discuss what to pay attention to.
When entering into a contract for distribution or otherwise it is always important to check if the written contract contains all the arrangements that the parties agreed upon. In many countries, including Aruba, agreements do not have to be in writing but can be made verbally. However, when you arrive at a moment that you and your contracting party disagree about the terms of the contract, it is much easier to prove a certain arrangement if it has been written down. Particular sections to pay attention to in a distribution agreement are the duration of the contract, the terms and conditions of the supply of the product by the manufacturer, the terms and conditions of the distribution by the distributor, the payment obligations from the distributor to the manufacturer, and the circumstances under which either party can terminate the distribution agreement. A distribution agreement may of course include many other provisions depending on the product sold and on the preference of the parties. There are three parts that deserve your particular attention.
A distribution agreement should specify the territory where the distributor can sell the product in accordance with the distribution agreement. The territory can be a region or a country or multiple countries depending on what the parties have agreed upon. Once the parties have identified the territory, they should agree whether the distribution agreement is exclusive or non-exclusive. Under an exclusive distribution agreement the manufacturer is not allowed to enter into a distribution agreement for the same territory with another party. This means that in principle the distributor is the only one who has the right to sell the product in that territory. Often it will be advantageous for the distributor to have an exclusive distribution agreement but for the manufacturer less so.
- Tip 1: Check carefully whether the draft distribution agreement is exclusive or non-exclusive and to which territories it applies to assess which consequences this has for your business.
Even if a distribution agreement is exclusive, it is still possible, that a third party (let’s call them party B) who obtained the product from someone else without permission of the manufacturer sells the product in the territory. This is called parallel import. Party B will, however, not have the same rights to market the product through use of the trademarks and other intellectual property rights of the manufacturer. It is therefore very important to make clear arrangements between the manufacturer and distributor about the rights of the distributor to market the product and to use intellectual property rights (for example trademarks and tradenames) of the manufacturer.
- Tip 2: Make sure that an exclusive distributor, has the right to register or use the trademarks connected to the product in his territory.
Jurisdiction and governing Law
Since distribution agreements often have an international character it is important to check the clause on jurisdiction and governing law. A clause on jurisdiction is also called a ‘forum’ clause (forum means place in Latin). This clause is usually situated near the end of the agreement. The forum clause states which courts will have the right to settle disputes under the distribution agreement. It can also be exclusive. In that case only the courts indicated in the forum clause can hear a dispute on the distribution agreement. If the forum clause states that the courts in Aruba have exclusive jurisdiction, a court in another country is in principle unauthorized to hear the case.
It is also important to check which law governs the distribution agreement. This clause is referred to as the ‘governing law clause’ or ‘choice of law clause’. And just like the forum clause, it is usually situated near the end of the agreement. The chosen law will govern the interpretation and enforcement of the terms of the distribution agreement. Since the laws of different countries can be very divergent, the governing law can have an impact on the outcome of a dispute about the interpretation or enforcement of the distribution agreement. It is important to note that the governing law and the chosen forum do not need to correspond. You can choose the law of Aruba to govern the agreement and the courts of Germany to have jurisdiction. Take into account that a legal procedure will take longer if the designated court is not familiar with the governing law.
- Tip 3: If your contracting party wants to choose foreign law to govern the distribution agreement or grant a foreign court exclusive jurisdiction, check with a local expert which consequences this might have for your rights and obligations and the enforcement of the distribution agreement.