What to check in an international distribution agreement before you sign

Start with the draft in front of you

The email from the overseas manufacturer arrives with a draft distribution agreement attached and a request to sign within the week. The document runs to thirty pages of terms drafted in another country's legal style, and your business is being asked to commit to territory, pricing and purchase volumes before the goods have ever reached your warehouse.

A distribution agreement is the contract under which a manufacturer or supplier appoints a business to buy and on-sell its goods in a defined market. It is not a one-off sale. It sets the ongoing framework for a series of individual sales, covering territory, pricing, delivery, brand use and what happens when the relationship ends. Because the parties sit in different legal systems, an international distribution agreement carries risks that a domestic supply contract does not. The clauses below are where those risks live.

The essential clauses and what to look for in each

Territory and exclusivity

Most distribution agreements begin with territory. The clause should state precisely where you may sell, the countries and often the customer channels in which you are appointed. The drafting choice that matters most is exclusivity. An exclusive appointment gives you the only right to sell the manufacturer's goods in the territory. A non-exclusive one lets the manufacturer appoint other distributors, or sell direct, in the same market.

The variants you will see:

Exclusive appointment: You are the only distributor, which usually justifies your investment in stock, marketing and local certification. Expect the manufacturer to trade exclusivity against performance targets.
Sole appointment: You and the manufacturer may both sell in the territory, but no other distributor may.
Non-exclusive appointment: Anyone may sell, and your margin usually reflects that.
Channel carve-outs: The manufacturer keeps certain customers, often key accounts or government buyers, outside your exclusive rights.

The trap: exclusivity is often defined by geography but not by channel. A clause that looks exclusive on its face may allow the manufacturer to supply online retailers or large accounts inside your territory. Check what territory covers, including online sales and fulfilment from overseas warehouses.

Risk and the Incoterms

Risk describes who carries the cost if goods are lost or damaged in transit. In an international arrangement the parties usually deal with risk through Incoterms, the standard trade terms published by the International Chamber of Commerce. The current edition is Incoterms 2020, which sets out eleven three-letter terms such as EXW, FOB and DAP that allocate responsibility for delivery, insurance, freight and customs between buyer and seller.

The drafting choice that matters is which term the contract names and where it says risk passes:

Ex Works (EXW): Risk passes to you at the manufacturer's factory door, and you arrange and pay for everything after that.
Free On Board (FOB): Risk passes when the goods are loaded on board the vessel at the named port.
Delivered at Place (DAP): The manufacturer carries risk and cost until the goods are made available at your named destination.

The trap: an Incoterm only does its job if the agreement names the right term for the actual route and the insurance matches it. If risk passes at dispatch, you are paying for goods that may be lost before they arrive, so your insurance should attach from the moment risk passes, not from delivery.

Title and retention of title

Title is ownership. In a simple sale, title passes when you pay in full. Many manufacturers instead include a retention of title clause, keeping ownership with the manufacturer until payment even though the goods sit in your warehouse and you may already have on-sold them.

In Australia, retention of title has a statutory layer that many overseas manufacturers do not anticipate. Under s 12 of the Personal Property Securities Act 2009 (Cth), an agreement to sell subject to retention of title creates a security interest in the goods. If the manufacturer has not perfected that interest by registering it on the Personal Property Securities Register (the PPSR), the interest vests in you if your business is wound up or goes into administration, and the manufacturer is left as an unsecured creditor for the value of the stock. That is the effect of s 267 of the Act.

What this means in practice:

PPSR registration: Expect the manufacturer to register its interest over the goods it supplies to you. Check that the registration does not extend to assets beyond those goods, such as your receivables.
Your own exposure: A retention of title clause is not a reason to skip credit checks on your own customers, because the manufacturer's rights over the goods do not protect you if your customer does not pay.
Insolvency: If either business becomes insolvent, the clause decides who ranks where. That is worth understanding before you sign, not after.

The point of the clause is not ownership paperwork. It decides who bears the loss when a business fails.

Price, currency and payment terms

International agreements commonly price goods in the manufacturer's currency or in US dollars. The clause should state the currency, whether the price is fixed or adjustable, and who absorbs exchange rate movements between order and payment.

Currency: If you pay in a foreign currency, the rate on payment day sets your real cost. Consider whether you can price your on-sales in the same currency to match.
Payment terms: A letter of credit, cash against documents and open account each shift risk between you and the manufacturer. A letter of credit protects the manufacturer against your non-payment but costs you bank fees.
Adjustment clauses: Some agreements let the manufacturer raise prices on notice or when input costs rise. Check how much notice is required and whether increases can apply to orders already placed.

The trap: payment terms and delivery terms interact. If you must pay against documents before the goods arrive, you carry both the freight risk and the financing cost.

Minimum purchase commitments and performance targets

An exclusive distributor is usually asked to commit to minimum purchase volumes, quarterly targets or marketing spend. The clause is the manufacturer's protection against a distributor that holds the territory without selling.

What to check:

Volume basis: Whether the minimum is measured in units ordered, units sold or dollars. If it is units ordered, you carry the risk of unsold stock.
Consequences of missing a target: Whether missing a target converts the appointment to non-exclusive, triggers a cure period, or gives the manufacturer the right to terminate.
Force majeure cover: Whether the target is suspended when shipping routes, customs delays or currency controls make performance impossible.

The trap: an aggressive minimum combined with a short cure period can turn a workable deal into a breach notice within a quarter. Negotiate targets against realistic market data and a ramp-up period.

Governing law and dispute resolution

The governing law clause chooses which country's laws interpret the contract. The dispute resolution clause chooses where and how disputes are heard. They are separate clauses doing different jobs: a choice of law does not submit either party to a court, and a choice of court does not by itself select a law. The High Court drew that distinction in Akai Pty Ltd v People's Insurance Co Ltd [1996] HCA 39.

Governing law: The manufacturer will usually insist on its own law. Australian courts generally give effect to the parties' express choice, so you should be confident you can obtain advice on that law and enforce your rights under it.
Jurisdiction: An exclusive jurisdiction clause names the courts that will hear disputes, and Australian courts respect it. The practical question is whether you can realistically sue there.
Arbitration: International agreements often substitute arbitration for litigation, commonly under ICC rules. Arbitration is confidential and awards are enforceable across borders, but it is not cheap to run.

The trap is mandatory local law. A clause choosing a foreign governing law does not necessarily displace Australian statutes that apply regardless, as the analysis of the Insurance Contracts Act in Akai showed. For goods supplied to Australian consumers, the consumer guarantees in the Australian Consumer Law cannot be excluded by contract no matter what the agreement says. If your agreement says the manufacturer's law governs and is silent on consumer liability, the gap lands on you.

Consumer guarantees and warranties

Goods sold through your business to Australian consumers carry the statutory consumer guarantees in the Australian Consumer Law (the ACL), which is Schedule 2 of the Competition and Consumer Act 2010 (Cth). The guarantees cover acceptable quality, fitness for purpose and remedies such as repair, replacement and refund. They cannot be contracted out of: s 64 of the ACL makes void any term that purports to exclude, restrict or modify them.

For a distributor the issue is allocation. The party that supplies goods to the consumer is usually the one the consumer can pursue, and that party is often you. The distribution agreement should say who bears the cost of a consumer claim:

Warranty pass-through: Whether the manufacturer's warranty transfers to your customers and how claims are processed.
Indemnity: Whether the manufacturer indemnifies you for defective goods claims.
Liability caps: A clause capping the manufacturer's liability at the invoice price may leave you holding the balance of a larger consumer claim.

The trap: the manufacturer's "no warranties, goods as supplied" clause is void to the extent it cuts out consumer guarantees, and it does nothing to protect you if you were the supplier to the consumer.

Resale pricing and competition law

If the agreement tells you at what price you must on-sell the goods, stop and check the Competition and Consumer Act 2010 (Cth). Section 48 makes it unlawful for a corporation to engage in resale price maintenance, and s 96 spells out what that covers: making it known that supply will be withheld unless you agree not to sell below a specified price, inducing you not to discount below that price, and withholding supply because you have sold cheaply.

The agreement may still include:

Recommended retail prices: A suggested price is generally acceptable if it is genuinely recommended and not enforced.
Pricing pressure: Any attempt to enforce a floor, whether through a contract term, a threat to stop supply or a penalty, risks breaching s 48.
Territory restrictions: Stopping you from selling outside your territory raises separate competition questions and should be reviewed carefully.

The trap: a manufacturer that is aggressive about minimum prices at home often tries to carry the same approach into an Australian agreement. A clause that does not fix prices on its face but is used to pressure you into holding prices up can still amount to resale price maintenance.

Termination and leftover stock

Distribution agreements usually run for a fixed term with automatic renewal. The termination clause decides what happens to the stock you hold when the relationship ends.

What to look for:

Notice and cause: How much notice either party must give, and which breaches justify immediate termination.
Sell-off period: Whether you may keep selling existing stock after termination, and for how long.
Buy-back: Whether the manufacturer must repurchase unsold stock, and at what price.

The trap: an agreement that lets the manufacturer terminate for any breach on short notice, with no sell-off period and no buy-back, leaves you holding paid-for stock you can no longer lawfully sell. That is the most common commercial loss in a failed distribution relationship.

Optional clauses worth adding

Some clauses only earn their place when the situation calls for them:

Insurance requirements: Worth including where goods are high value or risk passes early, so each party insures the leg of the journey it carries.
Reporting and audit rights: Worth including where exclusivity is tied to performance, so you can demonstrate your sales and the manufacturer can verify them.
Non-compete and restraint: Worth including where you invest in building the manufacturer's brand locally, so you are not undercut by the manufacturer or a departing manager.
Data protection: Worth including where you collect customer data for the manufacturer's systems, given the Privacy Act 1988 (Cth) obligations that apply to handling personal information.
Regulatory approvals: Worth including where your market requires import licences, product registration or exchange control approval that neither party can guarantee.

How an Artificer Legal practitioner would review your agreement

An Artificer Legal practitioner would not read the agreement clause by clause in isolation. We would start with the commercial deal, your territory, margins, stock exposure and customer base, because those decide which clauses are worth fighting for.

We would then work through the agreement in the order the risks bite:

Governing law and dispute resolution first: They determine where and under what law every other clause will be tested. If the manufacturer insists on its own courts and its own law, we would push for a neutral seat, for arbitration, or at least for a jurisdiction you can realistically use.
Title, risk and payment together: The combination decides who is out of pocket when goods are lost and who ranks where if a business becomes insolvent. We would check the PPSR position and make sure any security interest the manufacturer holds is properly perfected.
Consumer and competition exposure: The ACL guarantees and the resale price maintenance rules apply regardless of what the agreement says. We would make sure the manufacturer carries the cost of consumer claims and that no pricing clause breaches s 48.
Termination and stock: The end of the relationship is where the biggest losses sit. We would insist on a sell-off period and a buy-back of unsold stock.

We would also flag the clauses that look routine but carry hidden cost, such as currency exposure, and put the negotiated position in writing before you sign.

Why the governing law and dispute resolution clauses decide the outcome

If a dispute ever reaches a courtroom, the governing law and dispute resolution clauses decide which court hears it, which country's law applies, and therefore whether the rest of the agreement works the way you thought it would. They are the clauses where an agreement that looks fair on paper comes undone, and the ones most worth negotiating before you sign. Every other clause can be fixed by negotiation. A jurisdiction you cannot enforce in cannot.

An international distribution agreement is built on a handful of decisions: where you may sell, who carries risk and title at each stage, how you are paid, which law governs, and what happens to your stock at the end. Reading those clauses against your own commercial position, and taking advice on the Australian law that applies regardless of the contract, is what separates a distribution arrangement that works from one that becomes a dispute.