How Long Should A Minimum Term Be?

Our clients wanted to sell their products through a partner organisation but were finding it difficult to determine the most appropriate ‘term’ of the contract – i.e. the minimum time they would be contracted to work together for.

The Distributor of the products would be expected to invest a considerable amount of time effort, and expense into marketing them, and was worried that our clients could ‘arbitrarily’ terminate the agreement at the end of the proposed 3 year minimum term.  This would mean that they would have created a market for the products which could then be handed over to a third party to benefit from.

In contrast, our clients needed to be protected from being tied into an unnecessarily long agreement with a Distributor who, whilst not actually being in breach of his obligations, turned out not to perform in quite the way they had hoped.  They were also concerned that the market was volatile and that there may come a point where they were no longer able to manufacture and sell the products profitably.

Contract Clarity suggested a compromise solution:

  • An initial trial period to ascertain that a good working relationship could be formed.  At the end of this period, our clients would be able terminate without having to give a reason.  However, certain expenses would have to be refunded to the Distributor if he had complied with his obligations;
  • A 5 year minimum term – much longer term than would otherwise have been acceptable to either party;
  • A right for our clients to terminate if annual sales targets were not met or if they decided to completely withdraw the products from the market for at least the remainder of the minimum term.

Both parties were very happy with this proposal, which was designed to protect them both:

  • Neither party was risking significant sums in the initial ‘trial phase’, but the Distributor was being provided with the opportunity to prove his worth.
  • If the trial phase was completed satisfactorily, our clients would be confident that they had a Distributor who could deliver real profitability for them, and who would be around to provide them with a reliable service for some years to come – but who could be removed if the agreed sales targets were not met.
  • Our clients also had the reassurance that they could withdraw the products from the market if they needed to – whilst the Distributor was protected from those products then being handed straight to another Distributor.

Of course, at the end of the agreed 5 year period, either party will still be able to terminate without having to give a reason – neither party would want to be tied to the other indefinitely.  However, if the arrangement is working well, they’ll both be making substantial profits from it and be equally keen for it to continue!