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In most cases, termination projects are far more contentious and frequently lead to disputes. The best time to plan for termination is before signing the distribution agreement. Distribution arrangements rarely last forever - especially in China's fast-changing consumer market. Over time, a brand may wish to take back certain sales channels or appoint new distributors that better align with its strategy. When negotiating a distribution agreement, consider the following key terms:
Expiration date
Chinese law does not recognize the concept of goodwill indemnity. Setting a fixed term allows the brand to restart the relationship cleanly upon expiry - provided there is a proper handover and that intellectual property ownership remains secure (see below).
Commercial targets
If the distributor fails to meet agreed targets, the brand should have the option to terminate or open the market to others. Targets may be based on purchase volumes or sales results, can be set quarterly or annually, and may include a remedy or notice period. Clear and measurable targets define expectations and protect the brand's right to seek alternatives when performance falls short.
Procedural obligations
Sales may be the distributor's top priority, but other obligations - such as marketing plans, advertisement spending, financial reporting, timely payments, and sharing customer data - are also important. The contract should specify the consequences of failing to meet these requirements for a defined period.
Handover
If termination conditions are triggered, the distributor should be required to cooperate fully with the handover. Financial incentives are often the most effective motivator - for example, withholding payments or imposing liquidated damages if the distributor fails to comply.
Intellectual property
A common and costly mistake is allowing the distributor to register the brand's trademarks in China, or failing to register them at all (in which case the distributor may jump in). This can lead to protracted disputes. In one case, we spent several years helping a client recover trademarks that a distributor had registered and transferred to a so-called "bona fide" third party, preventing the brand from selling its own products in China.
Market segmentation
While many distributors insist on being the exclusive or master distributorfor the Chinese market, this is not the only option. China is enormous - geographically, but also in terms of its online and offline platforms and sales channels. Although distributors prefer exclusivity, it is often reasonable to begin with a more limited territorial or channel scope.
Jurisdiction and applicable law
Foreign companies often prefer their home courts for dispute resolution. However, Chinese courts rarely enforce foreign judgments, and enforcement of foreign arbitral awards can be slow. In our experience, Chinese courts or domestic arbitration under PRC law are more practical options for Western brands. They allow for interim measures such as asset preservation, and direct enforcement of judgments or awards.
Recommendations for Western Brands Entering Distribution Arrangements
The above list is not exhaustive but provides a starting point. Poorly drafted terms can quickly become sources of lengthy and distracting disputes.
When negotiating with a Chinese distributor, it can be uncomfortable to discuss "what happens if things go wrong." Yet after handling so many disputes around distribution agreements, our strongest advice to Western brands is simple: invest the time up front to ensure clear exit strategies are in place. Doing so not only protects your brand but can also preserve valuable business relationships when circumstances change.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
