Get It In Writing – Crucial Business Contracts (Autumn 2012)

As a business owner, director, or manager you enter almost daily into legally binding contracts. With contracts being such an integral part of any winery business operation,it is therefore important to ensure these are considered and provide best practice protection. This is even more important in today’s current economic environment.

Distribution Agreements

For many businesses, the key to success depends on how well you can distribute your product. It is naturally important that your distributor is a wine specialist and that they market wines that are not in competition to each other. Despite the size of the country you intend on distributing your wine to, you may find that there are only a few good representatives in these countries.

The key to your relationship with the distributor is the Distribution Agreement. Although the distributor will likely prefer to use their own form of Distribution Agreement (which is likely to be one-sided in the distributor’s favour), consider the following key items in the negotiations: territory and markets, exclusive versus non-exclusive, obligations of the distributor, product issues, service, price, payment terms, contract term, and termination.

A well drafted Distributor Agreement specifying clear terms and conditions will help avoid misunderstandings and prevent disputes over alleged breaches of obligations between parties.

It is important to support and encourage distributors to do their best. A few examples on how you may aid them in this are regular visits to the market to meet with them, ensuring up-to-date reports on progress are discussed, performance agreements, and having a marketing plan in place that also has tight control over the marketing expenditure.

Once a distributor is found and an agreement is presented, it is a good idea to get independent due diligence done before signing any agreements. This will help to avoid anything that you may have missed and the possibility of scams.

Terms of Trade

These are the terms of the contract between a seller of goods or services and the buyer. Having your debts paid on time is a key aspect to good cash flow management and having security terms in place should help to avoid bad debts.

Many businesses supply goods and services on the basis of informal arrangements, and this often results in disputes that could have been avoided if there had been clear, understandable Terms of Trade from the start of the transaction.

If you have written Terms of Trade, it is important that the other party be made aware of them and agrees to them. The best way to do this is by getting the other party to sign the Terms of Trade before the goods or services are provided. A website is a great place to have a copy of your Terms of Trade. The document should clearly set out when payment is required and any consequences for late payment. As these terms are the parties’ contractual obligations to each other, you cannot vary the terms without the other party’s agreement.

Review your Terms of Trade regularly with your suppliers and distributors to ensure they are up-to-date with current business and legal practice.

Some standard Terms of Trade will not be suitable in all cases. For example, if you have a complex arrangement that will include matters not covered by your Terms of Trade, you will need to draw up a specific contract for that arrangement.

Consider whether a personal guarantee is appropriate. This may be necessary if you are dealing with a company, rather than individuals. For example doing business with a limited liability company or limited liability partnership is only worth what the company / partnership is worth. If the company you are dealing with is going through financial difficulties or perhaps has closed down, you may be left with money owing and you may be not able to do anything about it.

A personal guarantee is a secured promise from an individual or individuals to make payments when the business is not able to do so. This promise or guarantee is usually backed up by an asset, for example a personal residence.

Contractual arrangements are an important aspect to business so it is recommended that you seek independent advice.

Published in WINE Hawke’s Bay Autumn 2012.

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