Int'l Distribution Agreement Pitfalls

Are you about to sign an international distribution agreement?

You should avoid five common mistakes that will take severe consequences in the event of a dispute.

We recently dealt with reviewing a long-term distribution agreement submitted by a foreign party that lacked the most basic requirements of the technical drafting practice for these types of agreements.

The foreign counterparty, as purchaser, submitted a draft utterly unbalanced in its favour, which left little or no margin for negotiation and protection of the selling party.

In addition to the abundant doctrine on the subject, in drafting the opinion and the revised draft, we also made use of the valuable institutional contribution provided by the International Chamber of Commerce‘s guidelines and materials.

So, what are the 5 mistakes to avoid in the international distribution agreement?

1) Underwriting a text with little detail.

It is known that make haste, no waste! We know that most of the time, commercial transactions require speed and haste in the interest of trade itself and profit.
Nevertheless, the consequences of hasty or careless behaviour can often, be severe.
It is good to pay attention to the contractual text and the regulation of all the relationships that will ensue.

Specifically, in the distribution agreement, every detail should be minutely detailed, from the type and characteristics of the product distributed to the terms and conditions of payment.
The technological product, for example, may change over time and it is therefore necessary to include a clause on changes and updates of the same or on price variations.

2) Lack of choice of the competent court and applicable law.

It may be counterproductive not to choose a place of jurisdiction and applicable law or even to suffer what is proposed by the other party.
The parties to the agreement may in fact choose to regulate the agreement according to the law of one of their countries, an international convention or the Lex Mercatoria.
In a dispute, the lack of a precise and well-considered choice will take a whole series of analyses of the contractual relationship that will have to be carried out by a judge or an arbitrator.
However, the choice of applicable law is not so simple and presupposes a thorough study of the rules and the contractual relationship.
Careful consideration must also be given to which instrument should be preferred for dispute resolution, whether the court or an alternative method such as arbitration.

3) The lack of an exit strategy in case of extraordinary events.

We have many times been faced with the lack of contractual termination clauses and conditions in the presence of extraordinary situations affecting one of the parties.
For example, the lack of an express termination clause in the event of insolvency or even the total absence of a force majeure clause, e.g. to be triggered in the event of a pandemic.
The lack of fundamental clauses for the parties makes the relationship weak, and the risk of losing in the event of a dispute higher.

4) Loss of control over the product.

Not uncommon is the almost total absence or unbalanced presence of clauses concerning the transfer of ownership of the products.
This matter is of no minor importance, especially when dealing with ‘high-risk’ jurisdictions.
The transfer of ownership of the product is usually linked to its physical transfer and not to the payment of the price, but care must be taken to regulate the matter in detail, which will depend to a large extent on the choice of applicable law.
We had encountered, not infrequently, agreements in which ownership of the product was transferred in full to the buyer before the price was paid, without the seller being able to do anything about it.
In these cases, in addition to reviewing the Incoterms 2020 (R) shipping and carriage clauses, action must be taken on the regulation of payments while also relying on the use of secure payment instruments widely used in international practice.

5) Ineffective Technical warranty clauses.

Among the 5 mistakes to be avoided in international distribution agreements is the poor regulation of product conformity situations.
A distribution agreement, especially one of significant value, should meticulously regulate the manufacturer’s liability for product non-conformity and faults and their remedies.
The same detailed rules should apply to how the buyer checks and disputes defects.
These are just a few (the most important) mistakes not to be made, but an international distribution agreement must be fully analysed in order to prevent any possible risk for which there is no remedy other than dispute.