Constructing a Balanced Distributor Agreement


Distributor agreements founded on the principle of equality between the distributor and the supplier survive longer than those where one partner is favored over another due to clever clauses, terms and conditions. Long living agreements are characterized as plain and balanced, while short living agreements are more likely to be classified as too clever and imbalanced. A sound distributor agreement need not be clever, but it must demonstrate a fairness that can be achieved only if it is balanced.

How Does Imbalance Enter an Agreement?

All relationships and agreements between distributors and manufacturers ultimately expire. Expiration is sometimes amicable, as when both parties move ahead in different directions. Upon such disengagement, the distributor aligns with an established and enthusiastic supplier; the manufacturer creates a relationship with a new promising distributor. However, parting company with a former partner in a distributor agreement sometimes becomes acrimonious and demands help from legal professionals. In most cases where a partnership between a manufacturer and a distributor ends in a legal dispute, the distributor agreement was crafted in a way that did not treat both parties equally. How does imbalance enter an agreement? Most imbalances are crafted by the wordsmith of a partner that is relatively inexperienced with drafting distributor agreements. An attempt is sometimes made to stack advantages toward one side of the partnership in an attempt to make it a better deal for one partner than for the other. One partner becomes too clever in attempting to its make life better by exploiting the inexperience of the other partner regarding the negotiation of distributor agreements.

Seasoned partners in distributor agreements routinely understand through experience that unbalanced wording does not serve the purpose of long-lasting partnerships. The objective of drafting imbalance into an agreement is generally to increase the advantages of one partner over the other. Unfortunately, imbalance leads to legal skirmishes and not to an improved relationship. It must be remembered that the real objective of a partnership between a distributor and a supplier is greater sales, improved market share, better profit margins, or some other metric. The objective of a distributor or manufacturer should never be a list of advantages in an agreement of one partner over another. Resolution of imbalanced agreements regrettably quite often involves attorneys and courts or arbitration.

Perceived Value v. Terms and Conditions

Cleverly crafted words and phrases in a distributor agreement rarely extend the life of a partnership between a distributor and a manufacturer. A partnership lives only so long as both partners believe that there is a benefit to a continuing relationship. Once perceived value erodes, the partnership is finished, followed closely by the expiration of the agreement.

Original signatories of a distribution agreement are generally optimistic about the partnership that is being launched. No one involved with the creation of an agreement looks forward to its demise. However, it’s important to remember that although the premature expiration of a relationship between a distributor and a supplier might be disappointing, a legal dispute arising from the disengagement of the partners should be avoided. It’s equally important to understand that the breakup of a partnership is not necessarily the incorrect course of action. When a distribution partnership unwinds, both parties have a choice of focusing on their own respective business and attendant customers, or spending management time and company resources on a legal dispute that will still result in the dissolution of the distribution agreement anyway. Executive time, management attention and financial resources allocated to a legal dispute represent a shift of focus away from the business; away from customers. Since unbalanced agreements more frequently result in a legal scuffle, striving to craft a well-balanced distributor agreement is worth the effort. An ounce of preventive energy striving to draft a balanced agreement is worth a pound of legal energy struggling to avoid a costly award of damages in either court or arbitration.

Examples of Balance and Imbalance

Agreements containing clever phrases and clauses that afford greater power to one partner over another are asymmetric. Agreements that are crafted in an unbalanced fashion tend to expire more quickly than those that are written with an objective of balancing the relative power of both parties. Partners in an unbalanced distribution agreement might be satisfied during periods when the metrics are favorable: rising sales, increasing market share and climbing profit margins. However, all metrics rise and fall over time. A time-tested partnership might weather declining metrics from time to time. But, if metrics are poor for an extended period of time, one or both parties may seek an exit from the agreement. Problems with an imbalanced agreement only surface when one or both parties wish to terminate the agreement.

An agreement that allows for price adjustments to occur only once per year is unbalanced. A manufacturer must confront changing costs throughout the year. To expect the manufacturer to endure rising costs for an extended period of time without the short-term ability to pass along those added costs is not reasonable. A balanced approach to changing costs would allow for price changes to be made throughout the year, perhaps on a 30-day or 60-day notice. An agreement that allows for termination by only one party is unbalanced. An agreement that allows one party to terminate the agreement for a number of alternative causes while allowing the other party to terminate for a single draconian cause is equally unbalanced. Care should be exercised when drafting the agreement to ensure reasonable balance in the ability of both parties to terminate the agreement. If one party can terminate the agreement for convenience, (absence of cause) balance dictates that the other party has the same ability. Writers of the agreement must remember that the perceived value of continuing the relationship by both parties; not the cleverness and intelligence of the wordsmith, is the factor that determines the endurance of the distributor agreement.

Conclusion

Distributors and manufacturers need to ensure that a distributor agreement into which they enter is void of lopsided language. A relationship founded on a symmetrical agreement stands a much better chance of growing and developing for a long time. On the other hand, a relationship founded on the inequality of the relative power between two partners is doomed to a premature death. Seeking a balanced agreement is merely a single step that a partner can take to promote the longevity of a distributor agreement.

Copyright © 2003 Glen Balzer, All rights reserved. No portion of this article may be reproduced without the express written permission of the copyright holder. If you use a quotation, excerpt or paraphrase of this article, except as otherwise authorized in writing by the author of the article you must cite this article as a source for your work and include a link back to the original article from any online materials that incorporate or are derived from the content of this article.

This article was last reviewed or amended on Jun 15, 2017.