Expert Article Library

Making Distribution Agreements More Convenient

by Glen Balzer

By: Glen Balzer.  Copyright 2003. E Mail: Mr. Balzer is a marketing and sales consultant and expert witness involved with domestic and international marketing and sales. He advises parties involved with contracts between electronics suppliers, manufacturers' representatives, global customers and industrial distributors. He promotes conflict resolution between parties involved in representative and distributor agreements. He has significant experience with integration and rationalization of merged and acquired companies. During the past 28 years, he has been involved in all aspects of establishing and managing marketing and sales organizations throughout North America, Europe and Asia.

Any distributor or manufacturer that has been involved in a legal dispute at the end of a distributor agreement usually regrets the absence of at least one clause in the agreement. Termination for Convenience is often one of those missing clauses. Distributor Agreements may be terminated for cause or for no cause. An agreement should spell out termination under both conditions. The opportunity for termination should be bilateral. Both the supplier and the distributor must have the opportunity to terminate for cause and for convenience: 1) the distributor may terminate the agreement for cause; 2) the distributor may terminate the agreement for convenience, (lack of cause); 3) the supplier may terminate the agreement for cause; and 4) the supplier may terminate the agreement for convenience.

The real world is full of examples where one of the parties to a distributor agreement thought that by excluding one or more of the four conditions for termination in the agreement, the too clever party could gain advantage over its partner. In far too many cases, termination evolves into a legal dispute that could have been prevented easily with attention given to all four possibilities for termination.

Would a distributor want to terminate a supplier for cause? The reasons are many. The revenue opportunity produced by the suppler might be too small to warrant the labor required to act as a viable agent for the supplier. Perhaps the supplier made a strategic decision to deemphasize the distribution channel. Perhaps the supplier chooses to avoid pricing its commodities at market levels, forcing the distributor to loose too large a share of business based upon price. If a supplier's revenue is declining due to a meager ability to manufacture the volume of product for its customers, a distributor might feel uncomfortable distributing an inadequate supplier. When a supplier's level of customer service, quality, reliability, or on-time delivery declines for a long period of time, a distributor may choose to terminate the agreement for fear that a poor supplier damages the integrity of its organization.

Would a supplier consider termination of a distributor for cause? There could be several reasons here too. A supplier might choose to terminate a distributor that is chronically slow to pay for product. A habitually slow-paying distributor hurts a manufacturer's cash flow. Over an extended period, a slow-paying distributor can represent a financial risk. A supplier might prefer an alternate distributor willing to provide a greater share-of-mind. A manufacturer might perceive a need for distributors to possess a technical background while the distributor might not have a staff that meets that requirement.

Termination for cause proceeds smoothly so long as both parties agree to the source and responsibility of the cause and so long as both parties agree to dissolve the agreement and the relationship. Unfortunately, agreeing to cause is seldom reached in the real world without protracted discussion, sometimes involving attorneys. Extended discussion consumes management time. Involvement of attorneys consumes both management time and money.

The simple method of avoiding controversy regarding which party is responsible for cause is to include a clause in the distributor agreement allowing for termination for convenience. Termination for convenience is actually termination for no cause at all. When this clause is in the agreement, neither party is forced to prove cause.

Sometimes when a supplier or distributor is inexperienced with respect to distribution agreements, the more experienced partner will attempt to disallow the other partner to terminate the agreement for cause, for convenience, or both. Such phrases from a clever wordsmith rarely extend the relationship. The most prudent distributor agreements allow both parties to terminate for cause and for convenience. By integrating a Termination for Convenience clause in the agreement, aggravation and legal involvement upon termination can be avoided. The relationship will truly be more convenient.