Territories and geographical restrictions are vital
constraints in a distribution arrangement. However, they can create
real growth limitations depending on the caliber of the distributor
and the relative size of the territory.
Distributors and suppliers will barter over two significant
aspects of a distribution contract; the price to be paid for the
product (or royalty rate in some cases), and the geographical area
within which the distributor will legally be able to operate.
For obvious1 reason, distributors wish to expand the
area of operation so they can make the most revenue. For perhaps
less obvious reasons, suppliers aim to break up the geography into
smaller territories in order to share the area between numerous
distributors. However, there is a risk with this approach by
suppliers; a risk that suppliers limit their potential revenue,
while at the same time sending their distributors stir crazy by
fencing them in.
Suppliers, be aware, not all distributors are alike. If you have
the good fortune to find a distributor who wants to sell into a
large area and you are satisfied that they may have what it takes,
let them have a go. Distributors, if you have done your homework
and you are satisfied that you can cover a larger area than the
supplier is offering, push for more.
Fencing in a motivated distributor will demotivate them and
serve only to reduce sales. Giving free range will serve to
motivate a good distributor, which will more than likely increase
Those eagle eyed readers will have no doubt spotted the
significant failing in the above reasoning; "But what if the
distributor can't cover the larger area after all?" Well,
the answer is simple and should be covered by a well drafted
distribution agreement at any rate.
It is essential that any distribution contract contains a
minimum sales obligation and has consequences for failure to reach
If such an obligation exists, and the distributor fails to live
up to the expectations, the supplier should be able to:
Reduce the breadth of the territory;
Put another distributor in the territory to boost sales; and
End the agreement altogether.If the contract includes these
terms, then the supplier should feel confident that if the
distributor is biting off more than they can chew, then they can
1For a New Zealand patent to be valid, it must
not be obvious, and must involve an inventive step, over
known technologies. See novelty, anticipation and
inventive step for further details
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
James & Wells Intellectual Property, three time winner
of the New Zealand Intellectual Property Laws Award and first IP
firm in the world to achieve CEMARS® certification.
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Anyone with standard form contracts who deals with small business must review the contracts for potential unfair terms.
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