Chapter Four: Contracts with Manufacturers
After you have found a product maker who is ready to give you the solitary rights to his goods, you have to begin discussions with them and sign a formal contract. An important observation that I have seen is that even one of the manufacturers I have done business with has not had a standard contract for me to sign. They all appear to be quite satisfied with the fact that since I have a contract ready means that I know my job, and are thus entirely content dealing with me. This is not to suggest that you may never come across a manufacturer who has his own contract, but it does seem that the majority never have one.
Things to include in the contract:
The appendix carries a sample contract, which you can modify as per your needs; or you could hire an advocate do draw one up. Whichever way you choose to go, certain things that need to be included in the contract are:
- The manufacturers name and the registered address of the company.
- The name of your company and its registered address.
- A ‘recital’, which is a declaration that the manufacturer (also called the ‘principal’) makes the products that you are interested in, and also includes the statement that you wish to sell these products.
- Detailed meanings of all the terms used in the contract. This prevents any misunderstanding which could later lead to arguments about the meanings of things. The important terms to watch out for are addressed later.
- Something known as ‘Grants and Reservations’. Grant is a declaration that the maker gives you the right to distribute his product, and also concurs that he will neither choose any other person to distribute or sell the goods, nor will he appoint an agent to do so. These conditions provide you with exclusiveness in the region. The Reservations part enables the maker to change the price of the goods, or modify its design or styling. The manufacturer thus ‘reserves the right’ to carry out all this if desired.
- Responsibilities of the manufacturer: This indicates all the things that the manufacturer needs to do, such as, supplying the samples and catalogues, and offering you protection in case any claim arises from a faulty item. Payment details are generally included here as the maker needs to offer you terms of credit.
- Responsibilities of the Distributor: All the duties that you need to fulfil are listed here. These typically comprise – not distributing competitive goods, not transferring the contract without consent, ensuring that the goods are stored suitably, they are never tampered with, and also consenting to clear invoices in a timely fashion. (More about this later)
- Any causes which can result in the automatic cancellation of the contract, like liquidation or insolvency.
- ‘Termination Details’: This indicates what will happen when the contract period is completed. What happens to the remaining stocks of goods; to the brochures; with any un-cleared invoices etc; all that is included here.
- Sundry Items: This is where you list all the other little details that do not fit elsewhere. These include – who has to insure the goods, how changes in address will be notified, and of the utmost importance, how will disagreements and disputes (if any) be settled. Disputes can be sorted in one of two methods – either through arbitration, or you can include a stipulation that says that the contract and any dispute is to be judged as per the laws of a certain nation (preferably UK). Here I’d like to offer some personal advice: you should always choose the arbitration method (which is what I do) as it is much more cost effective than court battles. This crisis will perhaps never arise (it hasn’t with me), but as they say – always be prepared.
Now we come back to the Schedules, where all the important meanings related to the products should be listed:
1) What will be the legal tender: Here you specify which currency you’re going to work with. Although it can be any that you want, I generally deal in US dollars or UK pound only. Since most of the manufacturers I deal with are in the States, it is convenient for them to deposit payments in my US bank account, whereas it is also convenient for me when I need to pay for any items in the US. (For instance, there are times when my suppliers need me to pay for trial products, etc.) If you routinely visit a certain place for trips and holidays, you can choose the currency of that nation and have your own bank account there. Just make sure that you do not end up paying personal income taxes in both the countries. Consult with your CA and the international trade unit of your bank prior to making your final choice in this matter.
2) The contract ‘term’: Here you specify what duration the contract will be for. This is typically mentioned as being for a specific amount of time (I generally opt for 6 years), and also for an unending period after that, till such time as decided by either of the parties to terminate the contract, after providing the required notice. I generally put in a notice period of one year.
3) Your exclusive territory: You must exercise utmost caution when outlining your territory. Don’t say England if you have exclusive rights for UK, or you may just have to contend with someone in Wales or Scotland, distributing to companies there which have a presence in England as well. Specifically state United Kingdom in the contract, or mention all regions including England, Wales, Northern Ireland, and Scotland. Keep in mind that Ireland (Eire) is a country in its own right and should be treated as such. Defining ‘Europe’ is the critical part. You may take the term ‘Europe’ to mean the geographical region called Europe (which comprises Iceland, a little of the USSR, Bulgaria, and Romania). However, others could think of it as the European Economic Community, which incidentally does not comprise all the nations that are in the geographical region. Since the definition of Europe is subject to change, you are advised to mention every country that is included in your territory.
4) ‘Purchasing’ the goods: The final contract is worded such to indicate that you will be purchasing the goods yourself and distributing (selling) those to wholesale merchants and other clientele. You need not stress over this point as it is the accepted procedure and does not indicate that you will have to hold large stocks of goods. Instead, what is going to happen is that whenever you find a taker for your products, you will allocate your rights in the goods to them, from where on it is their duty to import the product and sell it. This even serves as a solution to what could have been perceived as a hitch in the contract, where it mentions that you need to establish your capability to sell the products in your region.
The actuality that you will be allocating the contract to a third party is implied from the start. I have seen that manufacturers tend to take my word more at face value when I tell them that this is my plan all along rather than when I act as if I am going to sell the goods on my own. My standing as a single person is much less than that of a large organisation that is currently selling in the market. So I tell them that I will be finding someone to assign the rights to; someone with an annual turnover of at least XXX million pounds and a sales team of at least XXX number of people at their disposal. I don’t give any indication as to who that might be, regardless of whether I know or not. As I have to bear all the costs of locating this third party, the manufacturers are quite content to let me do my thing. I propose to them that if within three months I do not find the right company to sell the goods, then the contract will be treated as cancelled. Till date, I have not seen any manufacturer who wasn’t satisfied by this approach.
Here’s a summary of your plan of action:
- Ask your attorney to draft a standard contract for you to use with the suppliers. You could use my sample as a starting point.
- Make sure you comprehend all the inclusions in the contract. If you’re not entirely sure what a certain clause means, ask your attorney to clarify it for you.