The success of a business will often depend on how well it can distribute its products. It’s therefore essential that a distribution agreement is prepared which regulates the relationship between the distributor and the supplier.
The most common types of distribution agreement:
- Exclusive: a supplier sells the products to the distributor and agrees not to appoint other distributors or sell products to other customers within a defined territory. The exclusive arrangement will generally favour the distributor.
- Non-exclusive: a supplier has the freedom to sell directly to end-users and to appoint other distributors within a defined territory. The non-exclusive arrangement will give the maximum level of flexibility to the supplier.
Common clauses in distribution agreements:
- Exclusive/Non-exclusive: where there is an exclusive relationship the supplier will want to avoid being tied to an exclusive arrangement where little or no product is being sold. As such, the supplier will often set a minimum quantity of product to be purchased by the distributor. Where the arrangement is non-exclusive, the distributor must consider whether there is sufficient incentive for it to invest resources in distribution if the supplier has the ability to appoint additional distributors.
- Territory: the distributor will look for as large a territory as possible to increase its potential to exploit the distribution of the product. The supplier will need to ensure that there are restrictions on the distributor seeking customers from outwith the agreed territory and the definition of “the territory” should be carefully drafted to avoid dispute.
- Product: the parties will need to decide whether new or improved products will also be offered by the supplier to the distributor on an exclusive/non-exclusive basis and the definition of “the product” in the agreement needs to be carefully drafted.
- Pricing: the supplier will want flexibility in amending the price should its manufacturing costs increase or if there are currency fluctuations. The distributor will wish to restrict the ability of the supplier to unilaterally change the pricing.
- Passing of Risk/Title: at what point does risk and title pass from the supplier to the distributor? The supplier will want to pass risk as early as possible but retain title until payment is made by the distributor.
- Sub-distributors: the distributor may want the ability to appoint sub-distributors. If the supplier is agreeable to that then it should review the terms of any sub-distribution agreement.
- Warranties: the distributor will look for the supplier to warrant the condition of the product being supplied and that no third party intellectual property rights are being infringed.
- Liabilities: both parties will look to restrict their respective liabilities to the fullest extent possible and possibly cap liability at an agreed amount.
- Length of the Contract: where there is an exclusive arrangement then the supplier will want to terminate the contract if the distributor is not performing. The distributor will want as long a contract as possible with no requirement for it to purchase a minimum amount of the products
- Trade marks: will the distributor be able to re-brand the products as its own or must the original marks of the supplier/manufacturer be maintained?
- Support: will the supplier be expected to provide support services for the products? This may be particularly important to maintain the reputation of the product in the territory. In addition, the supplier may look for the distributor to supply regular lists of the end-users and sub-distributors so that if the distribution agreement terminates the supplier is still able to provide its products to the end-users. If training is required then the parties will need to agree who pays for that.
- Marketing: the supplier should set out the obligations of the distributor to promote the products and possibly set a minimum amount which should be spent on marketing. From the supplier’s perspective, it would be prudent for it to approve promotional material.
- Confidentiality: given that the parties will likely be passing confidential information to each other then there should be a restriction on public disclosure
A well-written distribution agreement will clearly set out the agreement of the parties from the outset and should, therefore, reduce the risk of a future dispute. For further assistance in the preparation or review of a distribution agreement then please contact one of our commercial contracts team:
Alan D Stalker WS firstname.lastname@example.org
Angus McGuire email@example.com
Steven Wicks firstname.lastname@example.org