New Zealand: International distribution agreements – knot so easy?

We share our checklist to help you compare with your existing International Distribution Agreements or as guidance for any new agreement negotiated.

When tying down a load for transport, there are some knots that you should always use, some that you might use to shore things up, and a knot or two that takes a while to tie but will secure the heavier loads effectively. Clauses in an international distribution agreement (IDA) fall into the same categories.

Whether you are a supplier setting out on a new and exciting overseas venture or an exporter and old hand in international distribution, there are some essential knots you need to know to ensure your IDA is sufficient to secure your precious cargo. We share our checklist to help you compare with your existing IDA or as guidance for any new agreement negotiated.

Don't fall into the common trap of signing your partner's IDA version because they ask you to, giving them the entire market or worse still worldwide distribution rights and without any performance clauses to boot. When sales don't eventuate after six to 12 months, possibly because they are not the right partner for you, then low and behold you may find you are locked into their agreement for 10 years or longer missing out on lucrative export sales.

Do seek expert legal advice early in the process with a team like James & Wells IP¹ with proven international experience in the preparation and negotiation of a wide range of commercial contracts. These may include for example agent /distributor, franchise, licencing, manufacturing and joint venture agreements noting the following clauses:

The bowline – A basic all purpose knot; simple and indispensible

The bowline is a crucial knot to know. Like the bowline, there are key clauses in your IDA that you should never be without, especially around performance.

• Set Performance Clauses

Set specific performance targets to ensure that the distributor is meeting your expectations. These targets may be tied to sales volumes or the distributor's entry into certain areas within the distribution territory. You should also include a process to be followed if the targets are not reached.

• Record intellectual property² ownership

The agreement must confirm that you or a third party owns the associated intellectual property and you have the right to license it to the distributor.

• Grant a license

The agreement must record that you are giving the distributor the right to use associated intellectual property for a certain purpose for a certain time.

Additional clauses should cover the right to sell/distribute named products/services; intellectual property restrictions; termination rights and governing law jurisdiction for example.

The sheet knot – A durable and sturdy knot; important in some cases

As you might add a few more ropes and knots to further secure your cargo, once you have a basic IDA template to work with, you will need to look at the circumstances in place and include provisions to deal with the nuances and unique characteristics of the product, territory or distributor. You may need to include further clauses, for example:

• Insist on the use of an end user agreement

This secondary agreement is necessary for certain products, such as software, where the distributor is to sell the product to an end user.

• Set training requirements

For specialised products, it may be necessary to train the distributor. It is prudent to record this expectation.

• Vest a master distribution right

You may want your distributor to look at expansion within the territory and to pay you a portion of the revenue earned from any sub-distributors. If so, you will need to appoint that distributor as a master distributor and include certain additional rights and obligations over and above those in an IDA.

Bimini twist – A custom knot. It takes time to tie but will be worthwhile for longevity or if things go wrong.

Some loads require the addition of some strengthening knots; knots that will survive a long journey or rough seas. Likewise, some IDAs necessitate the inclusion of a few choice clauses. These clauses might future-proof the arrangement, allow you to exert pressure when issues arise, or reduce your general liability. Whether these clauses are appropriate will depend on, among other things, the territory, your experience, that of the distributor and the nature of the product. They could include:

• Allow you to distribute to third parties within the territory if sales targets are not reached
• Require the distributor to indemnify you for certain losses
• Set a limitation of liability
• Exclude or limit the scope of your warranties

Like a list of your favorite knots, the different elements of an effective agreement may be described as: simple but indispensable; important and durable; and sole purpose. To make sure you've got everything tied up in your distribution agreement in your favour, talk to a legal expert early in the process before you finalise and sign anything.

Footnotes

¹Refers to the ownership of an intangible thing - the innovative idea behind a new technology, product, process, design or plant variety, and other intangibles such as trade secrets, goodwill and reputation, and trade marks. Although intangible, the law recognises intellectual property as a form of property which can be sold, licensed, damaged or trespassed upon. Intellectual property encompasses patents, designs, trade marks and copyright.

²Refers to the ownership of an intangible thing - the innovative idea behind a new technology, product, process, design or plant variety, and other intangibles such as trade secrets, goodwill and reputation, and trade marks. Although intangible, the law recognises intellectual property as a form of property which can be sold, licensed, damaged or trespassed upon. Intellectual property encompasses patents, designs, trade marks and copyright.

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.