Key differences between agents and distributors
Agents
Agents usually represent your company in the local market. You pay them either a sales commission, salary, retainer, or a combination of all three. You retain ownership of the goods, and are responsible for the costs incurred by your agent. Many well-established agents have their own customer base, and some wholesalers may only buy through a certain agent.
Distributors
In most cases a distributor buys product from you and on-sells to their customers, adding a margin or setting their own price. They may import and hold stock of your product and may also help promote it and provide after sales service for customers.
Distributors tend to concentrate on products that are the easiest to sell and/or have the highest margins. Therefore if your distributor handles a large range of products, yours may not get much attention.
Choosing an agent or distributor
Take the time to select the right representative. A poor choice can be costly in terms of time and money.
Word of mouth referrals are often the best way to choose a distributor as trust and a good rapport are essential. It is also vital that they have experience and a good network of representatives.
Carry out thorough due diligence to ensure they are financially sound, with good references and market knowledge.
Remember that you will also need to persuade the distributor to carry your product. This requires a pitch that inspires confidence in your company and product.
Choosing between sole or multiple agencies
Most agents will want exclusive rights to your products in a particular country or region. Before giving exclusivity, consider a trial period with sales performance targets.
Supply agreements
Expanding into a new overseas market is a challenging task for most businesses. A suppply agreement outlining how you (the exporter) will get your products to your customer (the purchaser or supplier/distributor) can ease the process.
Supply agreements may be simple or complex. If you plan to export your products directly to the customer, your supply agreement may simply be a product warranty with instructions on using the product. These need to be followed for the warranty to be effective. If you appoint a distributor or reseller, your supply agreement will need to be more complex.
However all supply agreements share the same contractual foundation – the supply of products on agreed commercial terms.
Why enter a supply agreement?
A supply agreement is appropriate when your business transaction involves the ongoing supply of products instead of a one-off supply. Supplies may take place by instalment, perhaps over a number of weeks, or extend to multiple consignments over many years. To avoid renegotiating terms for each new supply transaction agree a set of terms (general terms) that will apply to all ongoing supply orders.
Terms common to all supply agreements include:
- the scope of the supply arrangements
- a description of the products available for supply
- the intended duration of the agreement, any applicable renewal term, and the process for renewal
- a framework for the commercial and operational relationship between you and your customer, including the way you engage with each other, resolve disputes, and manage hiccups in the supply chain; and
- how the products will be paid for and who will be liable for any taxes, import/export duties and tariffs. Consider including a price adjustment mechanism to protect against changes in input costs, exchange rates and inflation.
Purchase orders
A purchase order (PO) is commonly used by a purchaser to request products from a supplier. You can simplify your transaction process by ensuring your PO is consistent with your general terms. The PO should set out the operational aspects of your supply arrangement, including:
- a description of the products
- the price
- the specific payment terms
- the quantity of products to be supplied
- the packing and delivery details
- the address of each party for legal notices and other communications
- the warranty period to apply.
This means that once you’ve negotiated the general terms with your purchaser, further supplies can be quickly and efficiently agreed – leaving you to get on with growing your exports with other purchasers.
What export-specific issues should you consider?
Quality
Your export business will be built on its reputation for quality and service. Contracts and statutory warranties can help protect you as the supplier, and comfort the purchaser, that your products meet certain quality.
Standards
As the supplier you will want to limit your warranty obligations, while your purchaser will want you to provide as many as possible. Together you will need to find a happy medium.
Warranties can relate to your own business, your conduct and your products. For example, warranties relating to your business establish your right to sign the supply agreement and your ability to perform the obligations under it. Warranties relating to products include:
- a warranty of fitness for purpose
- a warranty that products meet a certain standard of quality – a standard set out in the contract, or a published international design or manufacturing standard.
Warranties that products will not contain defects (or, at least, no “material” defects) are common and many countries impose such a warranty by law (see below). This type of warranty requires you to remedy the defect at your own cost. You might have to repair or replace the item or refund the purchase price. You should limit the period during which you will remedy product defects (or, at least, limit the period during which you will do so at your own cost). And carefully consider the definition of “defect”, for example fair wear and tear should be excluded. The “warranty period” is a commercial call that should depend on the nature and value of the products.
Make sure your products comply with the statutory warranties of the overseas market. These usually relate to fitness for purpose and quality – the equivalent of New Zealand’s Fair Trading Act 1986 and Consumer Guarantees Act 1993. Although you may be able to agree in your supply agreement that certain statutory warranties do not apply, some statutory warranties cannot be excluded. Never assume your products will comply with another country’s laws just because they comply with New Zealand law.
Risk and solving disputes
The general terms should also take account of how risk should be apportioned, where any dispute will be resolved, and which country’s law will apply.
Who carries the risk?
Consider who will be responsible for insuring the products against accidental loss or damage and when this risk should pass to the purchaser. Ensure your supply agreement identifies whether the risk of loss in transit is yours, or the purchaser’s. If the purchaser is likely to receive the products before you receive payment consider registering a security interest under the Personal Property Securities Act 1999.
In general you will be liable for any direct loss you cause to the purchaser (and vice versa). It is common to agree to limit this liability by reference to the value of the products supplied or a dollar amount. As a supplier, it would be wise to exclude the purchaser’s right to claim indirect and consequential loss. For example, if a drycleaner damages your suit, the drycleaner would typically be liable for the direct loss – the value of the damage to the suit. The cost arising from your loss of use of that suit (even if you could put a value on this cost) would generally be considered to be indirect or consequential. This kind of loss is usually subject to any limit on liability contained in the terms of trade.
Where will disputes be resolved?
Ensure your supply agreement identifies which country’s law will govern the interpretation of the contract terms. You also need to think about jurisdiction as this determines which country’s court can hear a dispute. For example, if you agree your dispute is to be heard “exclusively” in New Zealand, a dispute arising in the overseas market would then be referred to the New Zealand courts. Alternatively, a “non-exclusive” jurisdiction would allow a claim to be brought in the overseas market.
Which country's laws will apply
Sometimes international rules apply automatically to the supply of products overseas, eg the Vienna Convention on the International Sale of Goods. If you are satisfied your supply agreement is robust, you can “opt out” of the Convention by expressly agreeing it will not apply. Do not rely on the Convention to complete the gaps in your supply agreement as not all countries are signatories (this means it may not apply in your overseas market). Make sure you and the purchaser understand and write down all the terms that provide the foundation for your relationship.
Types of supply agreements
Agreement options with your international agent or distributor range from a verbal agreement to a joint venture. Verbal agreements, although quite common in New Zealand, do not provide protection if your relationship runs into difficulties.
Agency agreement
An agency agreement sets out the terms when an agent acts on your behalf. When appointing an agent clearly define the scope of the agent’s authority. Also ensure the agent provides a broad indemnity agreeing to compensate you for loss caused by the agent.
Distribution agreements and reseller agreements
A distributor distributes your products to purchasers, but doesn’t purchase them. A reseller purchases your products for resale in the overseas market.
When you enter these arrangements consider the application of competition laws in New Zealand and the target market, and the scope of rights you are prepared to grant an agent, distributor or reseller to use your name and brand when selling your products.
Before signing a distribution agreement it is a good idea to set a trial period. This will give you a much better understanding of the person and their ability to successfully on-sell your product or service.
Heads of agreement
Before creating a long-term legally binding agreement it is common to create a heads of agreement document (also known as a letter of intent). It outlines key issues to be covered when negotiating a more formal deal, helping to minimise misunderstandings.
Details in a heads of agreement may include information on the parties involved, objectives, why they want to work together, dispute resolution and how they plan to work together.
Joint venture
If you have established a successful relationship with your agent or distributor you might consider entering a joint venture. This requires a long-term commitment but sends good market signals.
Measuring performance
It's up to you to support and encourage distributors to do their best.
You could do this in a number of ways such as:
- offering incentives such as discounts or rebates off the purchase price to encourage distributors and resellers to increase the volume of sales
- taking regular trips to visit the agent or distributor in the market and bring them to visit you
- keep your website up-to-date with reliable information on products
- set up a pricing model
- encouraging regular communication
- requesting annual, quarterly and monthly reports that cover key performance indicators (KPIs) such as sales, competitor activity, new products and market trends. Not meeting sales targets can trigger performance reviews and/or the right to terminate the relationship.
Your monthly report could be just basic statistics with more in-depth reporting and analysis done for the quarterly and annual reports.
This guide is provided subject to our terms of use:
Use of the information contained in this guide is at your own risk and we are not responsible for any adverse consequences arising out of such use. This is a complex area and we recommend that you seek legal advice before taking any related action.
