A distillery's ultimate success lives and dies by distribution. The best spirit in the world served in the swankiest tasting room ever made won't mean much if the beverage doesn't get to the bars and store shelves. The distributor's role in ensuring that the distiller's brand is delivered is the essential piece of reaching the distiller's consumer base. In an ideal world, the mutual desire to make a profit would push both parties to see that the other is as successful as possible. But we don't live in an ideal world. Mismanagement and outright dishonesty are a reality. For distillers, this begs the question, do they need to enter a legally binding contract with a distributor?
Contract or Verbal Agreement
Reputation plays an integral part in a distiller's decision to sign a contract with a distributor. Many distributors, especially the smaller ones, have operated for decades with only handshakes and verbal agreements between them and distillers. Doing business this way offers flexibility. Temporary hiccups on either side of the equation can be easier to deal with when both sides have the flexibility of a verbal agreement. Both parties want to make money and will work through any problems in the best possible way to make sure that happens.
Sometimes a distillery needs more than a handshake and good intentions. The three-tier system has left many distillers with few to no options when it comes to distributors. The only way to hit the desired market might be through a distributor that isn't a first choice. When the only option in distributors doesn't have the best reputation, signing a contract is the smart move. This way, a distiller has legal recourse if their spirit isn't being moved to market as it should be.
Keep in mind, distributors also want assurances. The craft distilling industry is still booming - but even in a boom, someone is going to go bust. A distributor may have been burned before by a craft distiller making promises they couldn’t keep. It only makes sense that they ask for a contract with new and unproven distillers before taking on their product line.
What Should be in a Contract?
There is a fair amount of nuance and degree of importance to the different elements that go into a contract. Not all aspects will share the same level of priority for every distiller. Regardless of the degree of importance, some pieces should be universal.
Payment Terms
New and smaller distilleries often find it easier to operate when payments are made every 30 to 45 days. The standard is around 60 to 90 days. Smaller distilleries may not have the capital to work effectively during those long stretches.
Dispute Resolution
Disagreements can arise. If they do, a contractual clause where a mutually agreed upon neutral arbiter or another way to have the issue resolved can save time and money.
Marketing Responsibilities
The contract should state which marketing responsibilities fall on the distiller and which ones fall on the distributor.
Exit Trigger
Situations may arise for a distillery when doing business with a distributor is no longer beneficial. Contracts should contain provisions that allow for the agreement between the distiller and distributor to be dissolved if specific conditions are met.
Termination & Renewal
A contract should hold provisions that make renewing it or allow it to expire an easy a process as possible.
The ultimate purpose of a contract is to protect the entities involved in the matter it covers. At any point in the distiller/distributor relationship, when a distiller believes that they need legal protection or a legal option to enforce agreements, they should insist on a contract. Keep in mind that not all contracts are created equal. A poorly worded or ambiguous legal document can be worse than not having one at all. Always consult a professional when creating or signing a contract.
Written by Shawn Patrick