International Distribution – How can you substantially reduce your risks?

20 January 2022

Swiss companies have different options when expanding their business abroad. Some companies take a systematic approach: They carry out market studies and follow carefully calculated international expansion strategies. However, in particular for SMEs, internationalization is often driven by opportunities, for example, solicited by a local distributor willing to sell their products in a specific country or random purchase orders from interested customers in the same country.

In cases driven by opportunities, companies are often reluctant to spend money drafting and negotiating a well thought through distribution agreement. Instead, often a very simple agreement covering some key commercial terms forms the starting point of the collaboration with a new distributor (in particular in a territory that has not been identified as a key market). Different sales managers within the same company may develop multiple versions of distribution agreements, which may greatly differ. Sometimes a collaboration with a local distributor develops over time without even a formal distribution agreement.

Purchasing power differs from country to country. The same may be true as regards the regulatory framework, customer preferences, and the educational level (relevant for after-sales service). Hence, the primary interest for a manufacturer is to differentiate markets as well as pricing and to limit cross-border sales to the extent legally possible. This in turn means that it would be wise to develop, very early on, a clear and consistent distribution strategy (selective distribution, exclusive distribution, mixed forms, or deliberately: informal distribution).

Having a too simple distribution agreement, different versions of distribution agreements within the same group, or no written distribution agreement, at all, each entails risks for every undertaking. As long as business is good, these risks remain below the surface. However, if problems arise that cannot be solved amicably, deficiencies become apparent, and may cause significant costs, which could have been avoided with a well thought through distribution strategy/agreement. Such a distribution agreement, in particular, would govern in clear language the collaboration between the parties and, very importantly, also the phase when the collaboration comes to an end.

Whether you are about to prepare a distribution agreement for a new distributor or want to improve your existing distribution agreements, we have identified 7 recommendations for substantially reducing your risks:

• Have a clear and consistent distribution strategy before venturing abroad.
• Have a clear and comprehensive distribution agreement in place: A clear and comprehensive distribution agreement provides the parties with guidelines during their collaboration and, very importantly, during the critical termination phase.
• Do not give unconditional exclusivity: Many distributors want to obtain exclusivity rights for distributing your products in their territory. If you agree on exclusivity rights, they should be subject to conditions, such as meeting minimum purchase or sales targets during a certain period; once you intend to give exclusivity to one distributor, you should have a clear "exclusivity distribution"-strategy in place to be applied to all future negotiations.
• Protect your intellectual property: You should register the relevant trademarks in the territory of distribution before you start promoting your products there; the distributor may use your intellectual property rights only for the purpose of performing under the distribution agreement.
• Limit your liability: Liability for loss of profit and any other consequential or indirect damages should be excluded.
• Consider and manage antitrust risk: Clauses related to pricing, sourcing and resale restrictions, internet sales, and dual distribution, in particular, need careful consideration.
• Choose the appropriate dispute resolution mechanism: If you cannot solve a dispute with your distributor amicably, either of the parties will have to start a legal action in order to solve it. Swiss courts and arbitration institutions are well known for their impartiality and high quality standards. Many other countries do not have such high standards and their courts may tend to protect the interest of the local party or be vulnerable to corruption. You do not want a potentially biased foreign court ruling on your dispute with your local distributor.

If you wish to discuss your international distribution strategy, update your distribution agreement, or have any other question in respect to your international business, please reach out to us.

Authors: Lukas Züst, Klaus Neff