A distributor contract is an arrangement between a manufacturer and a private party. While distributors purchases goods more efficiently, they are usually must comply with competition restrictions and territorial exclusivity.
A distributor contact has many benefits for the manufacturer, including limiting risks. For instance, the distributor pays for services directly. If a product does not comply, resulting in consumer dissatisfaction, the distributor is responsible for such failures. For the manufacturer, on the other hand, every transaction is nearly risk-free.
Also, the distributor is responsible for paying taxes in the foreign country. In most instances, the manufacturer is exempt from this business aspect because the company is not conducting commercial activity outside of its base country..
As previously explored, governments restrict competition in distributor contracts. In practice, both the United States and the European Union have ruled that vertical agreements are efficient, providing more benefits for consumers than potential harms. Vertical agreements are not infractions to antitrust regulations.
However, a company may find it challenging to manage a distributor and limit the representative’s range of business strategies that can compromise the manufacturer’s trademark. The distributor is employed by the manufacturer, and uses the product trademarks to facilitate sales. A distributor’s poor judgment in product advertising can negatively affect the public image of the manufacturer.
A distributor contract provides the manufacturer with potential growth because its transparency allows the business to see regions where its products are selling well. After a successful distributor contract, a manufacturer usually considers opening a factory abroad, where the distributor operates. This is a cautionary decision, and the manufacturer might only construct a factory in the new region when the demand is high.
Choosing a construction site can be a daunting task. Before a manufacturer can make an informed decision, the company should consider cost and two major legal aspects:
- Intellectual property.
- Expropriation risks.
In some overseas factories, it might be difficult for a manufacturer to avoid unauthorized goods reproduction, especially if the country in question does not have efficient copyright infringement laws.
Expropriation risks are a particular concern for technology-based companies. Some developing countries might have unstable governments, and when changes occur, either democratically or non-democratically, the investors are subject to new regulations. These new laws impose changes, and may impact a technology’s intellectual property status. A manufacturer should consider such risks before changing the economic arrangement from a distributor contract to even a simple sale in the overseas country.
Fernanda Juppet, Corporate Attorney and MBA