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Distributor Agreements

Distributor Agreements

Distributor Agreements

Distributor Agreements

As a small business operator in Australia, entering into a distribution agreement can be a beneficial way to expand your reach and increase sales. Distribution agreements are contracts between two parties where one party agrees to distribute the products or services of the other party in a particular territory or market. They are contracts that define the terms and conditions under which a manufacturer or wholesale supplier allows a distributor to sell or distribute its products. These agreements provide a framework for the relationship between the parties involved, including the roles, responsibilities, and obligations of each party.

For small business operators such as software providers or trade supply wholesalers, distribution agreements are particularly critical, as they provide a means of expanding their reach and increasing their customer base. They outline the terms and conditions under which the distributor is authorised to sell or distribute the manufacturer’s products. These agreements typically cover a wide range of issues, including pricing, payment terms, delivery schedules, marketing and advertising, and territory restrictions.

 

Key Terms in Distribution Agreements

Before we delve into the specifics of distribution agreements, it’s essential to understand the key terms that are commonly used in these agreements. The following terms are some of the most important ones:

  1. Territory: This refers to the geographic area in which the distributor is authorised to sell the products or services. This will be particularly important to define when distributors use online marketing channels. 
  2. Products: This refers to the products or services that are being distributed.
  3. Term: This is the length of time that the distribution agreement will be in effect.
  4. Minimum purchase requirements: This is the minimum amount of products that the distributor is required to purchase during a specified period. 
  5. Exclusivity: This refers to the exclusive rights granted to the distributor to sell the products or services in the specified territory. Not all distribution agreements are exclusive. 
  6. Termination: This refers to the circumstances under which the distribution agreement can be ended.
  7. Intellectual property: This refers to the ownership and use of any intellectual property, such as trademarks and copyright, associated with the products or services.

    Why are Distribution Agreements Important?

    Distribution agreements are essential for several reasons. Firstly, they provide a legal framework for the relationship between the parties involved, including the roles and responsibilities of each party. This helps to ensure that both parties are clear on what is expected of them and what they can expect in return.

    Secondly, distribution agreements can help to protect the interests of small business operators. By defining the terms and conditions of the relationship, they can help to prevent misunderstandings, disputes, and legal issues down the track. This is particularly important for small business operators who may not have the resources to fight protracted legal battles.

    Finally, distribution agreements can help small business operators to expand their reach and increase their revenue. By partnering with distributors, they can reach new markets and customers, without having to invest significant resources in marketing and advertising.

     

    Important Considerations for Small Business Operators

    As a small business operator, there are some critical considerations you should take into account when negotiating a distribution agreement. These include:

    Territory 

    It’s important to define the territory clearly in the agreement to avoid any ambiguity. This will ensure that the distributor understands their specific rights and obligations within the designated area and there is no overlap with other distributors. 

    Where distribution can be promoted online, particularly through platforms like Facebook, it is important to be clear about what distributors can and cannot do, and what happens if a purchaser falls within a different territory. 

    Minimum Purchase Requirements

    Be careful when setting minimum purchase requirements. The requirements should be reasonable and take into account the distributor’s ability to sell the products or services in the designated territory. A failure to meet a minimum can be a trigger for ending the contract. 

    We’ve had a client in the past who was responsible for maintaining a minimum order on a product imported from overseas. Once COVID hit, the demand for their product decreased and they were in breach of their agreement. The manufacturer provided leeway in the circumstances but has declined to provide an exclusive distribution agreement going forward, which means our client’s business is now of little value for future sale, as a competitor can now import the same thing. 

    Pricing and Payment Terms

    Another important consideration is pricing and payment terms. This may be affected by which party holds stock pending sale. A manufacturer will usually want their production costs covered before allowing product to leave the warehouse, but a distributor may not be required to pay the full wholesale cost until the point of sale. The timing and method of payment, as well as any penalties for late payments or failing to meet minimum order requirements, need to be sufficiently clear that an independent third party (not necessarily an accountant) can work out what needs to be paid, and when just from reading the contract.

    Marketing and Advertising

    Marketing and advertising are critical to the success of any distribution agreement, and distributors are usually selected on the basis that they have an existing market that will purchase the product. Small business operators need to ensure that the distributor has a clear understanding of their products and target market and that they have the resources to market and advertise the products effectively. 

    For online retailers, influencers are like distributors. They have an existing market, and that market likes specific products and expects to hear about them from the influencer. 

    Exclusivity

    Small business operators should carefully consider whether or not to grant exclusivity to the distributor. While exclusivity can provide the distributor with a competitive advantage, it can also limit the wholesaler’s ability to enter into agreements with other distributors in the same territory. If a distributor has exclusivity but is failing to meet minimum orders, then it may be possible to renegotiate terms to reduce their territory to open an area up to another distributor.  

    Termination

    Termination provisions in the agreement must be clear and reasonable. This will help to avoid any disputes or legal issues if the agreement is terminated. An area that is often overlooked is the right of the manufacturer or wholesaler to revoke the distribution rights in circumstances with the distributor could bring the manufacturer into disrepute. For example, if a business decides to publicly support a particular viewpoint – eg. Margaret Court opposed the Australian same sex marriage bill and Qantas publicly supported it – and the wholesaler does not agree with that viewpoint and believes it will cast them in a poor light, then the wholesaler should have the right to end the distribution agreement. 

    Intellectual Property

    Small business operators should be clear about their intellectual property rights and how they will be protected in the distribution agreement. The most common thing to be protected is usually a brand. There should be rules around how it can be used and displayed. It should also ensure that only legitimate products are sold and not counterfeits. 

     

    Tips for Negotiating Distribution Agreements

    Negotiating distribution agreements can be challenging, whether you represent the wholesaler or manufacturer, or represent the distributor. Here are some tips to help you negotiate a fair and beneficial agreement:

    Understand Your Market

    Before negotiating a distribution agreement, it’s essential to understand your market and the potential demand for your products or services. This will help you to determine the appropriate territory and minimum purchase requirements.

    Be Clear About Your Expectations

    Be clear about your expectations regarding sales targets and marketing efforts. This will help the distributor to understand what is required of them and ensure that both parties are working towards the same goals.

    Seek Legal Advice

    It’s important to seek legal advice before entering into a distribution agreement. A lawyer can help you to understand the terms of the agreement and ensure that your intellectual property rights are protected, as well as making sure that any termination provisions are balanced and realistic. 

    Negotiate The Terms

    Don’t be afraid to negotiate the terms of the agreement. Small business operators should be willing to compromise, but they should also ensure that the agreement is fair and beneficial to both parties.

    Review The Agreement

    Once the agreement has been negotiated, it’s essential to do some worked examples of what the terms provide so that all parties are happy the agreement meets their expectations. It is also important to ensure there are no unfair contract terms which could affect the enforceability and profitability of the agreement. 

     

     

    Distribution agreements are useful for small business operators and work well for businesses such as software providers or trade supply wholesalers. These agreements provide a legal framework for the relationship between a manufacturer or wholesale supplier and a distributor, defining the terms and conditions under which the distributor is authorised to sell or distribute the products. You need to carefully consider the distribution territory, pricing and payment terms, marketing and advertising, exclusivity, and term and termination when entering into a distribution agreement. By doing so, the manufacturer or wholesale supplier can protect their interests and expand their reach, increasing their revenue and success in the market.

     

     

     

    How Can Onyx Legal Help You?

    Considering becoming a distributor, or finding distributors for your products or services? Make an appointment with a member of the Onyx Legal Team to review your strategy and help create a clear, easy to use contract to support your growing business. 

     

    What the Changes to Unfair Contract Terms Mean for Small Businesses

    What the Changes to Unfair Contract Terms Mean for Small Businesses

    Unfair Contract Terms: What Online Businesses Need to Know

     

    Have you ever signed an online contract without fully reading or understanding its terms and conditions? 

    If so, you’re not alone. 

    Many people, from those running small businesses to vulnerable individuals, lack the knowledge, ability, time, resources, bargaining power, and patience to effectively review and negotiate terms of standard form contracts.

    Some companies flatly refuse to consider changes and respond along the lines of “those are our standard terms, take it or leave it”. That approach is becoming risky.

    In an attempt to try and level the playing field a little, the Federal Government recently passed a law  (Treasury Laws Amendment (More Competition, Better Prices) Act 2022), which updates the Australian Consumer Law (ACL) to enable the Courts to levy penalties on businesses for including unfair contract terms in standard form and small business contracts. 

    If you have previously paid very little attention to your standard form contracts, or ‘adopted’ them from someone else, or had them given to you by a well-meaning colleague, now is the time to review. If you don’t review your established business practices you face potentially being held liable for quite severe penalties for seeking to impose, or enforce, any unfair contract terms. 

    Previously, the Courts could only declare specific terms of a contract unfair and void, but because unfair terms were not prohibited by law, the Court could not impose any penalties. Now they can. 

    It is expected that individuals and small businesses will have stronger bargaining powers as a result of these changes. A small business is one that employs fewer than 100 people or has an annual turnover of less than $10 million – so the majority of Australian businesses.  

    This still means you either have to go to court, or be taken to court, for these new penalties to be imposed. 

    A business will be found to have breached the law (s.23(2A) ACL) if:

       (a)  the person makes a contract; and

       (b)  the contract is a consumer contract or small business contract; and

       (c)  the contract is a standard form contract; and

       (d)  a term of the contract is unfair; and

       (e)  the person proposed the unfair term.

    At the same time the penalties for breaches such as false or misleading representations, coercion, unconscionable conduct, supplying products that do not comply with established standards, and harassment have attracted maximum penalties for individuals of $2,500,000 and for companies at $50,000,000. Other calculations may be applied, as set out below 

    This means that all businesses, including those businesses mainly online, will need to be more attentive in reviewing and amending their standard form contracts to avoid breaching the revised laws and inadvertently incurring severe penalties.

    As a business, you have until 10 November 2023 to review and amend your standard form contracts.

    As a business, you have until 10 November 2023 to review and amend your standard form contracts.

     

    But What Exactly Is An Unfair Contract Term?

    An unfair contract term, according to the ACL, is one that causes an unreasonable or unnecessary imbalance between the parties’ rights and obligations under the contract. An unfair contract term protects one party whilst the other party bears all or most of the risk and cannot negotiate their position. So, a ‘take it or leave it’ approach to contracts. 

    Unfair contract terms could also include clauses that are not reasonably necessary to protect one party’s legitimate interests and would cause financial or other detriment to the other party if relied upon. 

    Examples of unfair contract terms include allowing one party to terminate, amend, or renew the contract while the other cannot. Other examples include allowing one party to vary the price, goods, or services without the other party’s consent or ability to end the contract if they disagree. 

    Consider an example of an online subscription product where the company providing the product unilaterally decides to increase the monthly plan without your consent. You have a power imbalance, with little ability to negotiate a lesser plan. The increase might even apply without you realising it – even if the business provided notice via email before the change. Not everyone gets through their emails… 

    Unfair contract terms have always been prohibited and the amendments to the ACL do not change the definitions or considerations of defining unfair contractual terms; instead the amendments affect how those contract terms are dealt with and the increased penalties. 

    The situation used to be that if you felt there were unfair contract terms in an agreement, you had to go to court to get an order saying the terms were unfair and therefore void. Now, the Court also has the ability to levy penalties. 

    Contract terms which the courts have previously considered to be unfair include those which:

    • give rise to an imbalance between the parties’ rights and obligations
    • are not necessary to protect any one party’s legitimate interests in a contract or project
    • allow one party but not the other to limit the performance required under the contract
    • penalise one party but not the other for breaches of the contract
    • allow one party but not the other to renew the contract
    • allow one party to vary the contract with the other party having a right to terminate for breach
    • allow one party to vary the price or goods or services without the other parties’ consent
    • allow one party to terminate on a wide range of reasons and which may have significantly adverse consequences for the other party

    Maximum Penalties

    Does your business have the greater of $50 million, or 3x the value of the benefit obtained, or, if the value of the benefit cannot be determined, 30 per cent of your business turnover during the period you engaged in the conduct?

    Those are the maximum penalties for a company if it is found to have imposed unfair contract terms. 

    For individuals, it is $2,500,000.

    If you are a sole trader, can you afford $2,500,000?

    Fines have also been increased for breaching the Competition and Consumer Act 2010 (CCA). For example, a finding of anti-competitive behaviour can carry maximum penalties of up to $50 million or three times the value of the benefit obtained, or, if the value derived from the breach cannot be determined, 30 per cent of the company’s turnover during the period it engaged in the conduct, whichever is greater. No business can afford to take these unnecessary risks.

    In addition to these penalties, the courts have the power to void, amend, or refuse to enforce part or the whole contract to remedy the loss suffered by the wronged party. 

    If a particular clause is deemed to be unfair, the court may also stop a party from including similar unfair terms in future standard or small business contracts. 

    Online businesses of all sizes and industries are at risk of breaching the revised legislation, but those that using standard form contracts are particularly exposed. To avoid these risks, all small businesses including online businesses should review their standard form contracts, obtain legal advice if necessary, and amend any outdated or unfair terms before the 12-month respite period ends on 9 November 2023.

    These changes to the ACL seek to limit the negotiation power imbalance between parties in the standard form and small business contracts. 

    They aim to prevent companies or individuals from taking advantage of unfair contract terms and penalising those who do. As an online small business owner, it’s important to be aware of the changes and take action to ensure that your standard form contracts comply with the revised legislation. 

    Now is the time to review and revise any standard form contracts you may have!

     

     

    How Can Onyx Legal Help You?

    Send us your standard terms and conditions to advice@onyx.legal and ask for a quote to update your contracts or terms and conditions before it is too late. 

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