Before Signing an Overseas Exclusive Distribution Agreement: 7 Points to Check
Many Thai businesses enter overseas markets by appointing a local distributor. It is a quick route that avoids the need to establish their own company. When a prospective partner asks to become the exclusive distributor, businesses may welcome the proposal as a sign that the market is opening up.
Exclusivity places an entire national market in the hands of a single partner. If the agreement is poorly drafted, problems in the relationship can bring business to a standstill. The business may remain tied to a partner who fails to deliver sales, while the contract prevents it from appointing a replacement.
Here are seven points to check before signing.
1. How long are you barred from appointing another distributor?
An exclusive distribution agreement prevents the product owner from appointing another distributor in the same territory until the agreement is lawfully terminated or the distributor gives written consent.
This is the central issue. State clearly when exclusivity ends. Include a mechanism that allows exclusivity to become non-exclusive as soon as the distributor misses its sales targets, without having to terminate the entire agreement.
2. Minimum sales targets need contractual consequences
A minimum purchase target without any enforceable consequence does not create a meaningful commitment. Specify what happens if the target is missed, such as the product owner’s right to terminate the agreement, withdraw exclusivity, or reduce the sales territory.
All parties should sign the sales targets set out in an appendix. An appendix that has not been signed by every party may be challenged as having never become binding.
3. Termination grounds and procedures must work in practice
Most agreements require notice giving the other party an opportunity to remedy a breach within a specified period before termination. This is consistent with Section 387 of Thailand’s Civil and Commercial Code, which allows the creditor to set a reasonable period for the debtor to perform before terminating the contract.
Check whether the grounds for termination cover situations that may actually arise and whether the notice periods are reasonable. As a final exit route, consider a right to terminate without cause by giving the agreed period of advance notice.
4. Think carefully before sending a termination notice
Under Section 386, paragraph two, of Thailand’s Civil and Commercial Code, a declaration of termination cannot be revoked. Similar principles exist in the laws of several countries.
A termination notice that does not follow the contractual procedure may therefore create two problems. It may fail to terminate the agreement lawfully, while the other party may argue that a remedy has already been elected and that another route is no longer available. Have a lawyer check the full contractual procedure before sending any termination notice.
5. Specify the governing law and dispute resolution process
An agreement with an overseas partner should clearly identify the governing law and how disputes will be resolved. Without these provisions, you may have to litigate in the partner’s country under unfamiliar law, with lengthy proceedings and substantial costs.
Arbitration in a third country or through an international arbitration institution often offers a more neutral option. Awards can be enforced in contracting states under the New York Convention.
6. Register the trademark in the product owner’s name
A common problem arises when a distributor registers the trademark in its own name in its home country. After the agreement ends, the product owner may find that it cannot use its own trademark there.
Register the trademark in the destination country in your company’s name before appointing the distributor. State in the agreement that the distributor has no rights in the trademark and must transfer any registration it has made back to the owner.
7. Define what happens when the agreement ends
A well-drafted agreement should explain how remaining stock will be handled, how customer data and import licences or product registrations in the distributor’s name will be transferred, how outstanding amounts will be set off, and how the outgoing distributor must cooperate with the handover to a replacement.
Agree on these points when signing the contract. Leaving them until later creates problems.
Conclusion
An exclusive distribution agreement needs detailed provisions that also plan for the day the relationship ends. A business that builds in an exit route from the outset may be able to replace its partner within a few months. One that has not planned ahead may have to leave an entire national market unattended for years.
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