Currently, most distribution contracts signed between manufacturers and distributors are standard form contracts developed by manufacturers' legal and business experts, so many distributors have no right to speak, and even the choice of contract terms is usurped by manufacturers. Worse, daily operational matters often contradict the distribution contract. Objectively speaking, this situation is caused by both manufacturers and distributors: manufacturers hold significant say in regional markets, while distributors only care about direct benefits such as price differences and rebates, paying little attention to so-called price protection and market order. Of course, this is also closely related to the current legal market environment. I believe that as the legal system gradually improves, manufacturers and distributors should attach great importance to their distribution contracts.

Three Misunderstandings about Distribution Contracts Following the principle of this experimental column to benefit readers directly, the author interviewed many distributors in Chongqing and manufacturer sales branches about their views on distribution contracts. Overall, there are three common misunderstandings.

Misunderstanding 1: Whether to sign a distribution contract is not very important. This view is held by most small and medium-sized distributors. During interviews, some distributors could not find their 2004 distribution contract and were not worried. Why does this situation exist? A regional distributor of a certain FMCG product explained:

  1. The distribution contract has not changed much; it is almost the same as last year's.
  2. The only important things in the distribution contract are the annual task and year-end rebate, which we have long remembered.
  3. Other clauses in the distribution contract are nothing more than promotional policies and price protection, which are just talk; it depends on the actual situation in the end, haha.
  4. After all, the market is dynamic, and sales change daily. It is unrealistic and unnecessary to determine many things in advance.
  5. We have cooperated for nearly three years without major problems. I trust the manufacturer; after all, it is a big brand and will not deceive small distributors like us. After hearing this explanation, I asked the distributor:
  6. What if the manufacturer asks you to show the contract when giving year-end rebates, otherwise they won't honor it? What would you do?
  7. If the manufacturer does not implement daily promotional activities for you, what can you do? The distributor was at a loss for words and after a long pause said, "It shouldn't happen..." The manufacturer's branch explained this issue:
  8. Our distribution contracts are mostly signed by salespeople with distributors. Generally, as long as they are signed and brought back, we don't review them carefully.
  9. Generally, no distributor has objections to the distribution contract, so signing is smooth.
  10. There is nothing important in the distribution contract; only the annual sales task and rebate might be important, but at year-end settlement, we don't need distributors to produce the contract for verification; finance has records. After hearing this sales manager's explanation, I asked, "Will distributors suffer losses if manufacturers do this?" He smiled without answering.

Misunderstanding 2: It is normal for distribution contracts not to include all direct benefit clauses. This is reasonable to a certain extent because many sales policies are indeed closely related to dynamic market changes, so it is difficult to determine them in advance. On the other hand, manufacturers and distributors like to keep sensitive matters such as annual sales tasks, rebates, and promotional expenses secret, so they cannot coexist with the distribution contract. Distributors also keep written records of these matters and often communicate and apply with the manufacturer. In daily sales work, temporary promotional policies are usually communicated orally by the manufacturer's sales staff, and distributors choose whether to participate. As for who should enjoy these sales policies, it is determined by the manufacturer. Of course, the end date of sales policies is also determined by the manufacturer. For example, being told that popular or promotional products are out of stock is a clear example. As for any violations or personal inventory, both manufacturers and distributors know.

Misunderstanding 3: Multiple distribution contracts can be signed continuously as long as daily promotional policies are ensured. It is common for distribution contracts to be renewed multiple times during cooperation, mostly when the manufacturer launches temporary promotional policies to incentivize distributors at a specific stage, with the core being price adjustments and benefit compensation. However, these promotional policies are subjectively introduced by the manufacturer after weighing considerations and based on serving its own brand. Distributors have no say and can only passively enjoy them. Moreover, many operations in these policies are behind closed doors without uniform rules. Therefore, compared to the distribution contract, promotional policies are not supplementary content because there is no negotiation between the two parties. Thus, the so-called multiple distribution contracts can only be a luxury for many distributors.

Several Traps in Distribution Contracts Regarding this issue, the author consulted relevant legal professionals on some common problems, which was very enlightening. I hope distributors can pay attention to the legal basis in distribution contracts to identify traps and protect their interests.

Trap 1: Beware of vague sales policies We often see phrases in distribution contracts such as "ship within 3 days after payment", "return goods if sales are not smooth", "if the distributor's distribution rate is above 45%, advertising and promotion are the responsibility of Party A", etc. Most distributors are delighted when signing the contract, believing these policies fully protect their interests, but in fact, the opposite is true, and manufacturers are most prone to disputes in these areas. If a distributor requests returns due to poor sales, the manufacturer will investigate the reasons for poor sales and easily attribute them to the distributor, resulting in no returns or fewer returns. The concept of "distribution rate above 45%" is also vague, with the problem lying in the definition of distribution scope. The contract does not specify which types of stores the distribution rate is based on. Since the above two points are not clearly defined, they can be interpreted according to one's own understanding. Once problems arise, it is easy for both parties to become entangled. Also, does "ship within 3 days after payment" start from the date the distributor transfers money or from the date the manufacturer receives or verifies the payment? Therefore, these contents should be clarified and specified when signing the contract. For example, define "poor sales" specifically, and whether returns are full or a percentage. Of course, most well-known brands operate in accordance with the distributor's understanding, but distributors should still pay attention to clarifying these points.

Trap 2: Pay attention to oral promises In the cooperation between manufacturers and distributors, the most fundamental thing is mutual trust, so casual promises are a big taboo in sales. Many distributors often encounter situations where manufacturers fail to honor oral promises, such as promotional fees, publicity fees, advertising fees, store entry fees, year-end rebates, etc. They were agreed upon at the time but later "shrink", either not given or given less. According to legal professionals: Article 10 of the Contract Law of the People's Republic of China states that "a contract may be in written form, oral form, or other forms". Article 13 states that "a contract is concluded by offer and acceptance". An offer is an expression of intention to conclude a contract with another party, and acceptance is an expression of intention by the offeree to accept the offer. Article 22 states: "Acceptance shall be made by notice, except where, according to trade practices or the terms of the offer, acceptance may be made by conduct." Thus, oral promises are also a form of acceptance, but because there are too many variable factors, it is difficult for the law to support them. So it is best to "put it in writing". Whenever the manufacturer makes an oral promise, the distributor should seize the opportunity to make a written record on the spot, with signatures and seals. Handling oral promises in writing is one way, but some oral promises can be fulfilled immediately. For example, if the manufacturer orally promises a promotional fee of 2,000 yuan for purchasing 50,000 yuan of goods, the distributor can deduct the promotional fee from the payment when paying.

Trap 3: Beware of fraud and deception Distribution contract fraud methods are diverse. Many inferior manufacturers "play with contracts" because many distributors lack legal knowledge, so some distribution contracts themselves involve many violations and are difficult to protect by law, resulting in losses for distributors. The most common aspects are the following:

  1. Some non-standard manufacturers, after gaining the trust of distributors, use the distribution contract to collect advance payments or market deposits, then ship only a small amount of goods, deliberately defrauding the full payment.
  2. Manufacturers use unclear contract terms, such as vague specifications, models, and standards, often only orally agreed, and deliberately pass off small as large, inferior as superior, cheap as expensive, and old as new to achieve fraud.
  3. Some manufacturers, after obtaining the distributor's payment, use the payment as shares to register a new company, immediately change the company address, affiliation, and enterprise name, transforming into a new company, while leaving a shabby storefront at the original location to deal with distributors, engaging in guerrilla warfare, avoiding them no matter how hard they try, dragging them down to achieve their goal.
  4. Taking advantage of distributors' low legal literacy, they deceive through the legal form of signing contracts, defrauding payments and deposits. For example, some manufacturers sign a distribution contract with a distributor, who pays 50,000 yuan deposit and 200,000 yuan initial payment, and agrees to arbitration at the manufacturer's location. Due to local protectionism, the distributor loses 250,000 yuan to the manufacturer. To avoid being deceived in distribution contracts, distributors must understand the manufacturer's basic situation before signing, such as the purpose of signing, business qualifications, credit status, and performance capability, and should not blindly sign or perform.

Correct Signing of Distribution Contracts A distribution contract is established to ensure the realization of product distribution, defining the rights and obligations between manufacturers and distributors. Generally, a contract needs to be based on the agreement of both parties and is the result of free choice. So how should distributors correctly sign distribution contracts with manufacturers?

Clarify the contents that should be included in a distribution contract Generally, a distribution contract should include the following ten aspects:

  1. Authorization and recognition: including distribution method (agency, distribution, or dealership), product categories, sales area, and other regulations.
  2. Sales tasks: including sales dates, annual and monthly sales tasks during the period, distributor evaluation, and rewards.
  3. Ordering and payment: including ordering and delivery methods, cost bearing, payment methods and dates, interest subsidies, exchange and return of goods.
  4. Price and market protection: price setting rights, price adjustment and inventory compensation, cross-regional sales and management measures, market price deposits.
  5. Advertising and promotion: design and manufacturing costs for storefronts and display stands (special counters, displays), advertising expenses, distribution and costs of promotional materials.
  6. Intellectual property: ownership of registered trademarks and trademark agreement management measures.
  7. Technical services: warranty period and responsible party for warranty.
  8. Agreement term: effective date, conditions for renewal, and violations leading to termination.
  9. Dispute resolution: time limit for dispute resolution and location for arbitration or legal appeal.
  10. Other matters: number of copies and holders of the agreement, recognition of supplementary agreements, and matters not covered.

Standard Form Contracts Developed by Manufacturers Currently, most contracts signed between manufacturers and distributors are standard form contracts developed by manufacturers. A standard form contract is one proposed by the manufacturer to all distributors, stipulating the rights and obligations of both parties, and must be accepted or rejected without modification. It has complete and fixed specific content. Its特殊性 lies in that it is not negotiated between the parties but unilaterally formulated by the manufacturer, then offered to distributors. According to the principle of "take it or leave it", the manufacturer attempts to impose its terms on distributors, who can only accept or reject the entire contract, with no room for modification or change. The problem is that the standard form contract is unilaterally formulated by the manufacturer, reflecting only the manufacturer's intentions, with the goal of protecting its own interests, making it difficult to achieve a fair and reasonable balance between the interests of both parties. Manufacturers have strong financial resources, the best legal services, and advantages in drafting contract terms, while distributors are weak, lacking necessary knowledge and experience, and are the weaker party. An ordinary distributor can hardly understand the true intentions of the manufacturer in a carefully crafted standard form contract. Even if they believe the contract harms their interests and sue in court, they can hardly compete with the manufacturer. As for what measures can effectively protect the interests of distributors in standard form contracts, distributors can choose to make their own statements in the "unfinished matters" or supplementary agreements.

Principles to Adhere to When Signing Distribution Contracts When signing distribution contracts, distributors should pay attention to the following five principles to fully protect their interests: Principle 1: Before signing, treat all contract terms with suspicion, then analyze each one until there are no doubts. Overall, distributors should cooperate with reputable large enterprises as much as possible and avoid weak brands. Principle 2: The law stipulates: "A contract concluded by an actor without agency power, beyond agency power, or after agency power has terminated, in the name of the principal, is ineffective against the principal unless ratified by the principal." This means that when dealing with the manufacturer's sales staff, temporary contracts must be stamped with the legal person's seal to be legally protected. Principle 3: Break down large tasks to spread risk. Distribution contracts with large sales tasks can be performed in several installments. For example, for new product markets where sales volume is unpredictable, distributors can choose to sign semi-annual contracts, which is absolutely different from the risk probability of one-time full performance. Principle 4: Principle of simultaneous performance: divide the rights and obligations of the contract, such as delivery methods and payment deadlines, into several equal "sub-contracts", and perform them step by step and in a planned manner. Once the other party fails to perform within the agreed time, the contract can be terminated or changed in time. Principle 5: Principle of same-direction sending and receiving: when performing payment obligations, if using bill settlement, the remitter and payee should correspond consistently, rather than remitting funds to the other party's account to avoid them withdrawing and fleeing.

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