Businesses conducting international trade bear the risk of being informed by their overseas distributors or licensees that they are unable to fulfil their performance or marketing obligations specified in their distribution or licence agreement. On the other hand, distributors and licensees may start demanding for longer credit terms in the face of liquidity issues or additional marketing support from their suppliers.
The dilemma for businesses is whether they should accept their distributor or licensee’s position or whether they should “do something” and if so, do what? Much would clearly depend on the respective bargaining power of the supplier and distributor or licensee concerned. Certainly, immediate discussions and negotiations should be conducted between both parties to resolve issues and to establish a plan for the way forward or otherwise.
Before any such negotiations are to be conducted however, it is vital for businesses to do their homework. Here are some suggestions:
Step 1: Review the distribution or licensing agreement
The first and most obvious step is for you to review your distribution or licensing agreement and determine your rights and obligations under the agreement.
If it is an exclusive agreement, will there be a loss of exclusivity or territory or some other penalty imposed on failure to meet performance targets? What are the conditions for marketing support? More realistically, can either you or your distributor or licensee afford to maintain promotional expenses at the expected level? Can you continue providing credit to your distributor or licensee?
It is surprising how many businesses do not thoroughly examine their contracts during negotiations with their distributors or licensees and are later caught unawares when differences in expectations arise with respect to the respective rights and obligations of all parties concerned.
Step 2: Conduct market intelligence and do a due diligence on the distributor or licensee
It is essential for you to do your research on what is happening in the region your distributor or licensee is operating in and what your distributor or licensee is doing to cope with falls in demand. What feedback is being given by your distributor or licensee? Are steps being taken to help capture new clients or consumers by recommending new marketing strategies or new products? Are their cost-cutting measures having an impact on their ability to market your products effectively? What are your competitors doing?
It is also important to conduct a due diligence on your distributor or licensee if there is a hint that it is at a risk of becoming insolvent, particularly if there is excess stock or if you are supplying on credit terms. Whilst Australia last year enacted the Cross-Border Insolvency Act, only a handful of other countries have adopted the Model Law on Cross-Border Insolvency conferring the same legal rights to foreign creditors and liquidators as local creditors over the assets of a debtor, irrespective of whether the debtor is an insolvent individual or company. These countries include United Kingdom, the United States, New Zealand, Poland, Romania, Serbia, South Africa, Mexico, Columbia, Montenegro, Eritrea and Japan.
Thus, unless you have a strong relationship with your distributor or licensee, you can not hope to understand the market conditions and all the issues and problems your distributor or licensee is facing. Moreover, if the sales to a particular distributor or licensee represent a fair portion of your export sales, you will not be able to afford the risk of non-payment if your distributor or licensee becomes insolvent.
Step 3: Consider alternative distribution channels
There are usually more than one channel of distributing your products and services. If you are considering terminating your current distribution or licensing agreement, the key question which you will need to ask is whether any other alternative channels exists which will enable you to market your products and services more effectively. The distribution or licensing agreement should cover all important aspects of termination such as restraint of trade covenant, excess stock or parts, consequence of termination in respect of the supply of products and services to existing clients or customers and so on. If it does not, you will need to consider all these issues before commencing any discussions with your existing distributor or licensee.
Step 4: Evaluate your options if a dispute arises
Finally, you will need to evaluate your options if negotiations fail and a dispute arises. In most cases, even if there is a legitimate cause for pursuing your rights under the distribution or licensing agreement or for seeking recovery of sums due and owing to you through a formal legal process, the practical aspect of such pursuit is that it takes time and money for little reward.
If the distributor or licensee does not hold any assets in Australia, there is really little point instigating legal proceedings in Australia. There is the issue of whether an Australian court has jurisdiction over a foreign debtor and whether the forum is an appropriate forum. Even if the foreign debtor expressly submits to the jurisdiction of the Australian court and case is not summarily dismissed and a judgement is made in your favour, the question of how the judgement may be enforced still applies. Where Australia has a reciprocal enforcement arrangement (which includes UK, Hong Kong SAR, Canada, France, Germany, Singapore, Japan and Korea), whilst the process may be more streamlined, there are a number of substantive requirements which still must be met before the Australian judgement may be enforced in the other country.
In countries where Australia does not have a reciprocal enforcement arrangement, the process of enforcing an Australian judgement will vary significantly as will the likelihood of a successful enforcement. In many cases, the process would require the Australian creditor to file a fresh law suit in respect of the debt in that country. Such countries would include Australia’s major or emerging key trading partners, including US, China and India, and all of ASEAN with the exception of Singapore.
