If a manufacturer chooses a representative that has increased freedom and wants lower risks, a distributor contract is an appropriate choice.
A distributor acts almost as an independent contractor because the representative assumes expense and risk. The representative buys goods directly from the manufacturer, and resells them in the designated area governed by the distributor contract signed with the manufacturer. [Note: In this regard, incidentally, we have to consider the antitrust statute applicable to the agreement, because if the parties are considered in breach could be held liable under the respective legislation.]
Usually, the distributor pays the manufacturer in advance, multiplying the manufacturer’s profits. Distributor contracts are also beneficial for the distributor because of transactions generated in favor of the corporation.
The payment structure of this contract is usually freely determined by the distributor, not the manufacturer, during resale. A distributor generally yields more profit than an agent.
Distributor contracts differ from other sales, where the parties involved regularly work together and have a mutually-beneficial relationship. In distributor contracts, it is more likely that the distributor would have access to a manufacturer’s confidential information, which requires protection. For example, a distributor may become aware of potential deficiencies in a product through customer complains. However, the distributor is typically entitled to disclose this information to a competing brand.
Despite such freedom, distributors assume greater risks because distributors are personally responsible for any product defects that may impact consumption. Distributors also assume the costs for a potential nonpayment.
Interestingly, a distributor’s business is not limited to importing and reselling goods. A distributor, via consulting an expert manufacturer, may also implement technical services for any product damages at one’s own expense, increasing a distributor’s personal business transactions.
Because a distributor assumes the risk and cost for all transactions, the manufacturer is only accountable for obligations agreed upon in the distributor contract.
Regarding foreign transactions and laws, agents tend to protect legislation, which is unnecessary for a distributor. According to common practice, a distributor is equal to the manufacturer, matching bargaining possibilities. Under distributor contracts, local government intervention is unnecessary to protect all parties involved.
Reference: Legal > The Pros and Cons for Having a Distributor Abroad