Checkpoints for Reviewing Distribution and Sales Agency Agreements: Practical Issues for Manufacturers and Distributors

Hello, I'm Noriaki Asato, Representative Attorney at LegalAgent.

In corporate legal practice, I review distribution and sales agency agreements across a wide range of industries, including SaaS, medical devices and the domestic rollout of overseas products. These arrangements have the advantage of allowing quick access to markets and regions that are difficult for a company to develop on its own, but if it is unclear in what legal capacity the distributor is involved, who concludes contracts with customers, and who sets selling prices, serious disputes may arise later.

In practice, terms such as "agent," "distributor," "authorized dealer," "reseller" and "intermediary" tend to be used without strict distinction. In contract law, however, the legal responsibilities to be borne and where the risks lie differ fundamentally depending on whether the distributor concludes contracts as the manufacturer's agent, acts as an intermediary for contracts, buys products and resells them, or merely refers prospective customers.

Commercial Flow Patterns and Identifying the Distributor's Legal Position

In reviewing a distribution or sales agency agreement, first clarify the commercial flow and legal nature of the transaction. These arrangements mainly fall into the following four forms.

In the agency type, the distributor concludes contracts directly with customers as the manufacturer's agent. Because the contracting party with the customer is the manufacturer itself, the main issues are the scope of the authority of agency, meaning how much authority to give the distributor, and the duty to explain.

In the intermediary type, the distributor acts as an intermediary in concluding contracts, and the contract itself is concluded between the manufacturer and the customer. Because an intermediary does not automatically have authority of agency, it is essential to clarify in the agreement whether the distributor has authority to conclude contracts.

In the resale type (reseller), the distributor buys products from the manufacturer and resells them to customers in its own name and for its own account. The distributor bears inventory risk and collection risk, and earns revenue from the difference between the purchase and sale prices (margin). Because a reseller is not automatically paid a commission, the arrangement must be designed so as not to confuse the structure of consideration.

In the referral type (referral of prospective customers), the distributor refers prospective customers to the manufacturer, and the manufacturer itself handles the subsequent negotiations and contract conclusion. In this form, the focus is on the requirements for a referred deal to be counted as closed and when remuneration arises.

There are many cases in which the agreement is titled "Agency Agreement" but the substance is referral or resale. Proceed with the review starting from who sells products to whom, who bears contractual liability to the customer, and who bears the risk of non-collection of the price.

Conditions for Remuneration and the Scope of Sales Rights and Target Customers

What distributors care most about are the conditions under which remuneration arises and the scope of their sales rights. Disputes are seen in which, despite the distributor's sales activities, remuneration is excluded where the manufacturer contracts directly with the customer, or payment is refused on the ground that the customer is treated as an existing customer. By setting in advance rules for pre-registration of referred prospects, a protection period and a definition of existing customers, the risk of sales investment going to waste can be reduced. Also agree on whether remuneration applies to renewal contracts, additional orders and transactions with group companies.

As for the scope of sales rights, define the target products, assigned territory and target customers concretely. When entrusting a particular territory or market to a distributor, it is also important to provide safeguards preventing the manufacturer from switching customers that the distributor worked hard to develop over to direct sales.

Designing Exclusivity, Resale Price Maintenance and Control of Advertising

Whether to grant exclusive sales rights has a major impact on both parties' businesses. For the distributor, exclusivity makes it easier to invest in sales efforts, while the manufacturer bears the risk of losing sales opportunities if the distributor does not carry out sufficient sales activities. The scope of exclusivity, minimum sales targets, and the conditions for switching to non-exclusive status or termination when targets are not met need to be set out. However, since the cause of a shortfall may be a sudden change in market conditions, supply delays on the manufacturer's side, product defects or price revisions, a practical safeguard is to leave room for prior consultation rather than immediately imposing penalties or inventory buyback obligations.

Advertising and brand management also need to be checked. If promotional materials independently created by the distributor contain exaggerated or unlawful representations, the manufacturer's credibility may be damaged. Provide for compliance with advertising guidelines, a procedure for prior approval of materials, and the authority to request corrections or suspend sales.

As for pricing in the resale type, under the Antimonopoly Act, a manufacturer restricting the distributor's resale price is, as a rule, illegal, except in exceptional cases where there is a legitimate reason. Even where the manufacturer indicates a suggested retail price for reference, it must ensure that the price has no binding force and that each dealer determines its selling price independently.

Management of Customer Information and Risks for Each Party

The main risk for the manufacturer is the distributor exceeding its authority. If it appears that the distributor can promise discounts or special warranties on behalf of the manufacturer, the manufacturer may face unexpected liability claims from customers. The authority granted and the authority not granted should be stated expressly in the agreement and also communicated in sales materials for external use.

The risk for the distributor is being subjected to excessive minimum sales targets or excessive inventory purchase obligations. Securing remedies and consultation clauses for cases where achievement becomes difficult helps protect the distributor.

An issue common to both parties is the handling of customer information. It is important to define clearly, from the perspectives of the Act on the Protection of Personal Information (APPI) and the protection of trade secrets, to what extent the manufacturer may use customer information developed by the distributor and to what extent the manufacturer's customer data may be disclosed to the distributor.

In contract review using generative AI, there is a tendency to be swayed by the title "agency" and interpret the contract structure uniformly. In practice, it is essential for a human to sort out whether the commercial flow is agency, resale or referral, and which party bears responsibility for collecting the price, and to input that into the AI. For exclusivity clauses too, there is a risk of lost sales opportunities for the manufacturer and a meaning of protecting sales investment for the distributor, so it is important to use AI after making clear which side your company is on.