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 obvious 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 sales.
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 them.
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 or
- 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 always re-fence.
This article was written by Owen Culliney, Associate, James & Wells Intellectual Property. Based in our Hamilton office Owen has extensive experience in the preparation and negotiation of a wide variety of commercial agreements including joint venture agreements, franchise and licensing agreements, agreements between shareholders and partners and terms and conditions of trade. For more information and for expert IP advice contact Owen on Email: owenc@jaws.co.nz or Phone: +64 7 957 5660 or 0800 INNOV8.
