Allan J Gold

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Allan J Gold
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Dealership-Distributorship Agreement – The case of the dueling dealer-distributor debacle

Vol. 10, #5 – May 14, 2018                                                     ALLAN GOLD’S BLOG

Gold's Legal Minue


Next blog post of weekly series over 3 months on contracts for company executives & owners of family-small businesses


TODAY’S TOPIC: “Dealership-Distributorship Agreement- The case of the dueling dealer-distributor debacle*”

SPECIAL ANNOUNCEMENT TO READERS

√ Hello Readers. Please be informed that I write a blog for my professional community – it’s titled “Gold’s Legal Minute*GLM*” . Because you do not have a lot of time and since time is money, I aim for a quick and easy read. Since I practice primarily in such fields as corporate and commercial law, civil litigation, etc., the subject matter is more or less in such areas. In addition, seeing that I am passionate about the well-being of older people, and as I also practice in the field of civil law relative to elder law, I write about this area as well. Furthermore, I write about topics in the news in order to highlight what’s then legally at issue.

√ In each blog post, I shall deal with a legal notion or raise a legal issue and deliver, strictly for informational purposes, some commentary respecting the same. As per the format, I shall first answer the question, “Why you should read this?” Next, in the facts section, to illustrate some of the things in play, I will recount a fictional story of imaginary characters or companies, not based upon any person or enterprise in real life. For fun, it will be titled “The Case Of The …”, this in the style of the vintage “Perry Mason” TV show (1957–66). And then, through the sections, “Judgment”, “Analysis” and “Lesson Learned Or Take-A-Way”, I shall provide my take on the facts and some thoughts thereon. At the finish, I will offer a “Closing Thought Of The Day” plus a preview of the next in the series.

√We have re-launched the blog, such with a series over 3 months on contracts, especially geared for company executives & owners of family-small businesses. Kindly note that as per our schedule, we will usually make new blog uploads each Monday. Some weeks, usually on Wednesdays, there will be one or more bonus uploads.  

A. WHY YOU SHOULD READ THIS BLOG POST (next of weekly series over)

First, this blog post series is written especially for business people, ranging from proprietors of small-family enterprises through to executives of mid-to-large corporations. The assumption is that they routinely make contracts. The proposition is that it’s good business to make each contract sound and profitable. The premise is that a good contract can mean money and profit. And if you’re a member of this group, this is for you.
Second, you want to know about another type of contract, notably the dealer-distributor agreement. This is where a grantor, typically a national (or international) manufacturer-wholesaler, grants to a grantee, typically a local enterprise, a dealership-distributorship, i.e., the right to be an authorized dealer-distributor regarding certain product(s) and/or service(s). There is a designated locality or territory; and it usually contains a pre-set term. In addition, the manufacturer- wholesaler recites its rights, obligations and recourses, while the dealer-distributor therein makes its undertakings.  

B. FACTS OF THE CASE

Note to Readers: In this space, I will recount a fictional story of imaginary characters or companies, not based upon any person or enterprise in real life.

Scenario #1: The “MOTO-CAMEL” story

Scene #1: Jake “Hold Your Horses” Crankshaft was interested in the idea of a go cart, equipped with pontoons and a motorcycle engine, able to travel on roads, sand and water. He had a workshop in his home. He was wrestling with many problems – one was the sandy environment. Of course, this was unfriendly territory for average ball bearings. For his craft to come together, he knew that he required ‘better balls’ and he set out to fabricate them. For a joke, he started calling them “Ballistic Balls”; and the name stuck! He tried a variety of materials. He read the literature. One day, Crankshaft saw an article published in “Mechanical People” about sand propulsion and the work being done around the world. It was a turning point. It lit the proverbial light bulb for him. He switched gears and now set his sights on a jet-like engine, entirely sand blowing. He went from design-to-design; and then he built a prototype. It was not a mere gadget or a new-fangled gizmo. Instead, lo and behold, his “thingamajig” was a solo-transportation platform, sucking sand from below, blowing it out at the rear to gain thrust, achieving a reasonable speed, thusly able to traverse the sand dunes. Being the first of its kind, it was touted as the number one personal sand vehicle. The word quickly spread throughout the world desert areas. It also held huge attraction amongst beach lovers everywhere.

He called his pet project, the “MOTO-CAMEL.” Crankshaft applied for and secured a patent in the United States, Canada and Europe, etc. He also applied for a trade mark, both as to the word and design. He then partnered with a fellow with the odd family name of “Fountainpen”.

Scene #4.1: Finding Moto-Camel impossible to resist, and without checking any of the negatives, Horrible bought the dream. Desperate to get onto the bandwagon and be in on this big wave, Horrible was moved to action. He sent an e-mail, asking for the dealer-distributor package. On receipt, after looking at the pictures, but without reading the dealership- distributorship application and schedules, he signed the form and sent it back along with his check for $100,000. When writing up the envelope, he thought the headquarters name was very cute. He didn’t think about the fact that he lived in a tiny village situated in a mountain region, without a single beach in driving distance. And he disregarded the fact that for eight months of the year, it was cold in his county. You see, he really wanted to be a dealer-distributor, no matter what. Unfortunately, he got his wish.

Scene #7: One day, a customer at the dealership, balked at the price quoted by Quix, the salesman serving him. The client said that he could get a Moto-Camel at half the price. Knowing his cost was much more, Quix couldn’t understand how this was possible. The customer showed him the advertisement of a firm called “Moto-Camella,” featuring a guy named Camella, shouting: “I can beat the competition any place, any time.” Quix reported this to Dumb-Kid, his superior, who alerted Horrible. Horrible then made some inquiries and discovered that a foreign Moto-Camel dealership, called Camella, was selling wholesale, and due to its county’s very strong currency, it was able to offer the vehicle at 1/2 the going rate than that quoted by Horrible. And buyers were then reselling the vehicle to consumers in Horrible’s locality. But as per the scheme, the client was required to take possession of the unit outside the international border in a neutral country. Right off, Horrible sent a complaint letter to Fountainpen. Horrible expected that once he broached the subject, Fountainpen would deal with it and solve the problem without delay. But he was so wrong. Fountainpen first ignored him, then said that he would look into the dispute, but just never got around to it.

In the interim, Horrible decided to have Camella checked out. The investigation revealed that Camella was a bad guy, with many stories about his landing a big fish. He routinely called customers a bunch of jerks, “one “stupider” than the next, ready to bite down hard, ‘hook, line and sinker.’ He would often brag: “I’ll hook the next loser that walks in the door.” But rivals saw right through him, finding him very fishy. Knowing that fish stories only go so far, they say that the fish are smarter than he thinks, able to get cleanly away. That’s why Camella was suspected of resorting to illegal means in order to get the catch into his net.

Horrible first tried to resolve the problem in the usual way, this by taking it up to the manufacturer- wholesaler. But due to the inaction of Fountainpen, Horrible recognized that he was on his own. That’s why, he addressed a formal letter to Mr. Camella, but he didn’t get a response.

Still trying to play nice, Horrible picked up the phone and called Mr. Camella, the owner of the offending dealership-distributorship. But Mr. Camella hung up. On calling back, Horrible started yelling and screaming, calling Camella every name in the book; but there was another hang-up. And that’s when Horrible lost it and mounted verbal attacks after hours and on weekends, leaving long voice mail messages for Mr. Camella.

Soon after, Dumb-Kid reported that another customer came in asking about the discount offered by Mr. Camella. Realizing that if he was continually being undercut at a price point below cost, he could not compete and bankruptcy loomed large on the horizon. It was a sickening feeling to see his investment about to go down the drain. Conscious that he would be shattered by the defeat, he figured that he needed, so to speak, to prod Camella with the end of a stick, in order to get him to stop selling into Horrible’s home town. Horrible then wrote another letter, this one quite nasty, even threatening a lawsuit to take him out, but this too, didn’t prompt any answer.

After trying his best in the usual fashion, but still not eliminating the problem, Horrible was getting angrier than sin and just snapped. Thinking that he had no choice, he was ready to get down in the gutter and play dirty tricks. Horrible first placed an ad in the newspaper of Camella’s home town offering a Moto-Camel at 60% off with $2,000 cash back. He said that this was available only at Camella’s location, inviting all comers to call or visit. Horrible reasoned that Camella and ultimately Fountainpen would pay the price as it was all their fault. He also sent offensive flyers through the mail picturing Camella sitting on a toilet, announcing Camella’a place of business as a new recycling depot inviting people to bring toxic wastes and leaving such on the grounds even at off hours, all of this heightening the risk of fire. Indeed, the case was now spinning out of control.

It was only a matter of time until Camella answered fire with fire. In order to make trouble for the dealership of Horrible, he started placing like ads and sending out like flyers. All of this nastiness was a sure fire way to creating a dangerous situation. Eventually, the police were called and criminal complaints were lodged and charges were laid. Journalists found out about it and the bad press embarrassed Moto-Camel and the public backlash against the products grew. And all dealer-distributor(s) were hurt.

Did Crankshaft- Fountainpen make errors? Did Horrible make errors?  

C. JUDGMENT

Yes. You bet your bottom dollar that the Crankshaft-Fountainpen duo made errors and so did our man, Horrible.  

D. ANALYSIS

Let us put this case under a microscope.

Crankshaft- Fountainpen Missteps

The “Moto-Camel” mess nowadays speaks for itself. The Crankshaft- Fountainpen team made many errors. Here are a few.

Mistake #3: Manufacturer-Wholesaler Fails To Enforce Rules. Dealers deal in a product and make deals. Distributors distribute a product and make sales. Besides having a good product, they want to be part of a strong sales network. This is typically characterized by a manufacturer-wholesaler, promoting the marquis product(s) and publicizing the dealer-distributors. But it also takes a manufacturer-wholesaler, making rules and regulations that are proper, clear and fair. And it must be vigilant, in keeping its dealer-distributor(s) in line.

On receiving news of sales network violations, Fountainpen was expected to give notice and do whatever it takes, in order to have the offending dealer-distributor, i.e., Camella, stop its improper practices. But while Fountainpen was notified of Camella over-reaching, extending himself into the backyard of Horrible (and the Kid), he did nothing. Of course, this omission will hurt the sales of Horrible’ dealership-distributorship, whose market was being invaded. In addition, the lackadaisical oversight of dealers- distributors and failure in rule enforcement indicates a weak central authority. This will likely result in bad publicity, turning off consumers. All of this does not bode well for the future success of the “Moto-Camel” sales network and even the survival of the Crankshaft- Fountainpen company.

Mistake #4: Manufacturer- Wholesaler Allowed Grey Zone Selling. Of course, it’s not good for a dealership-distributorship in country “A” to sell product to resellers at a lower price, permitting then, indirect sales to consumers in country “B”, already served by its own home dealer-distributors, thusly undercutting these dealer-distributors in country ‘B”, undermining their need for sales and viability. This is ‘grey zone’ selling and it must be arrested as soon as it starts. But the Crankshaft- Fountainpen management was oblivious and asleep at the switch.

Horrible – Pre-Opening Errors

Insofar as Horrible is concerned, his current troubles, in many instances, are self-made.
Overall, the attitude of Horrible was to charge ahead ‘willy nilly’. This is never good. It is particularly bad in the business world. As a result, there are many deficiencies, which pre-date the founding of his dealership-distributorship.

Accordingly, as presently constituted, the dealership-distributorship was deeply flawed at day one.

Horrible- Post-Opening Errors

After opening the doors of Horrible’s dealership-distributorship, there were many mistakes made, which have contributed to its un-making. I can go on and on giving each and every one, but I’ll take a shortcut to a really big one.

Mistake #5: Dealer-Distributor Goes Wrong. Typically, a dealer –distributor is legally obliged to report on another dealer-distributor, selling into the sales territory of another. Horrible should not feel bad like a school yard tattletale; he should understand that being a dealer squealer is in his personal interest. But Horrible went way over board in his reaction to the inaction on the part of Crankshaft-Fountainpen. Of course, he should have dealt with this problem in a strictly legal fashion. You see, his unorthodox remedies, if found illegal, could cost him big time.  

E. LESSONS LEARNED OR TAKE-A-WAY: Want a successful sales network?

Of course, the success of a manufacturer-wholesaler of a branded product is dependent upon having a good product. Indeed, the commodity that wins, usually is one of top quality, with high utility and functionality. But, success is typically also dependent upon an orderly supply of goods to the market place through well-established distribution channels. One way is by signing up and organizing dealer-distributor(s) into a sales network. But a well-functioning sales system doesn’t just happen.

  1. First, it’s mandatory, going in, to have a written agreement, such constituting the “Bible” for the signers and governing their relations. Here are several rules of thumb.
    1.1 It’s important to have ample provisions enumerating the respective duties and obligations of each party. This should include several crucial sections. They should succinctly deal with such topics as independence, intellectual property rights, non-competition/ non-disclosure, renewability, etc.
    1.2 Certain key articles are requisite – there should be one tersely stipulating whether or not, there is exclusivity and another setting the term. And it’s nearly always customary to restrict sales to end-users. Territory is a related subject. While there may be more than one non-exclusive dealer –distributor in one locality, it may be expedient to designate a specific territory for each unit, serving strictly consumers therein. Indeed, things will usually function better when each unit has a territory and its activities are so limited. The thinking is that this will strengthen individual units, by promoting sales and protecting its market, this from interference and improper competition, thusly contributing to better profitability.
    1.3 A list of prices is fundamental. And it’s necessary to specify the time frame when the figures will be in force. This is covered most often in a schedule.
    1.4 There are several critical clauses – they spell out circumstances and causes, in simple and clear language, permitting termination, together with notice requirements.
    1.5 Adequate paragraphs are also needed to cover party rights and obligations after termination.
    1.6 Care must be taken as completeness, precision and clarity are important goals in the drafting process. Indeed, bad drafting and omissions can cost dearly.
  2.  Second, the manufacturer- wholesaler needs to select the best people as dealer-distributor(s). (But the work of the manufacturer-wholesaler does not stop there.
  3. Third, while expecting each dealer-distributor, to do its part, respecting the rules, the manufacturer-wholesaler must enforce the rules in an aggressive, but even manner. You see, in order to make a sales network really work well, you also need stringent oversight relative to dealer-distributor activities. Indeed, a properly supervised sales system makes a level playing field for all and this in turn, usually means more sales and ultimately greater profits.

And in a few words, that’s the secret to success of a strong sales network!  

F. CLOSING THOUGHT OF THE DAY

When it comes to Dealership-Distributorship, the making of the contract is a very big deal. Indeed, doing this right will pay BIG TIME, especially at fiscal year end! Furthermore, if a business person, you know that there’ll always be someone, embracing the credo of Pablo Picasso, who said: “Learn the rules like a pro, so you can break them like an artist” (Source: www.best-quotations.com/catquotes.php?categ=1700). In the distribution business, regardless of whether a manufacturer-wholesaler or a dealer-distributor, you know that such thinking is pure poison. On finding a contractant breaking or even just bending the rules, the correct approach for a manufacturer-wholesaler and a dealer-distributor alike, is to keep your eyes wide open and be tough, dealing vigorously, but correctly, with such violators. Otherwise, the probability is that you’ll soon be facing the unraveling of the sales network and the possible demise of participant enterprises.  

G. PREVIEW OF NEXT IN THE SERIES OF ARTICLES:

“The case of the once agreeable sales agent, first, under -aggressive, now agitated, indeed in agony.*”

Next time, continuing on with the theme of entrepreneurship, and the overall subject of contract, we will look at another type, notably, that of the agency agreement. In the instance of a sales agency, this is where the engaging party, a manufacturer- wholesaler or branded service provider, engages, a sales person, being an independent sales contractor, as a sales agent, to sell its goods and/or services within a designated territory. In the case of a representation office, this is where a grantor, grants to a grantee, the right to be an authorized representative/agent of an enterprise and this, within a specified locality. In the writing, the engaging party recites its rights, obligations and recourses, while the engaged party makes its undertakings. In addition, there’s usually a pre-set term. Not familiar with this? See you next time.*  

* ©/TM 2015, 2016, 2017, 2018 Allan Gold, Practitioners’ Press Inc. – ALL RIGHTS RESERVED