A distribution agreement is a contract between two parties pursuant to which one party (the “manufacturer”) agrees to allow the other party (the “distributor”) to distribute the goods manufactured by the manufacturer. It may be used for many different types of goods.
A distribution agreement sets out the terms and conditions upon which the distributor agrees to distribute the goods. There are a number of important terms to keep an eye out for when reviewing or drafting a distribution agreement; 6 of these are set out below.
1. Distribution Area in Distribution Agreement
Most distribution agreements only allow the distributor to distribute the goods in a set area or territory. The agreement should clearly describe this territory, and if necessary the customer category and market segment that the distributor is allowed to distribute too. Without this clarity the manufacturer’s distributors can find themselves in commercial competition.
It’s important that the distribution agreement set out whether the parties have agreed on the distributor being granted the exclusive right to distribute the product within a set territory or market segment. As a general rule, commoditised products (such as potatoes) are rarely distributed through an exclusive distribution agreement. One-off products, such as films, usually are.
3. Distributor Obligations
It’s important that the obligations of the distributor are set out in the agreement. If agreed by the parties, it can be appropriate for the distributor to agreed to distribute the goods using “its best efforts”.
4. Price of the Goods
Obviously it’s important that the distribution agreement sets out exactly what price the distributor will pay to the manufacturer for the product. It’s important to be flexible on the price at which the distributor can purchase the goods, and the agreement will generally set out a mechanism for amending the price paid from time to time.
5. Payment Terms
The distribution agreement should set out the payment terms agreed between the parties. Obviously the distributor will want to push for longer payment terms, and the manufacturer for shorter payment terms. The amount of time give to the distributor to pay will be a reflection of the relative bargaining positions of the two parties.
6. Term and Termination
Finally, one of the more important terms in a distribution agreement is the term of the agreement and the termination provisions. Many distribution agreement won’t have a fixed term, and can be terminated by either party after a set notice period. This is the most flexible type of agreement, but its suitability will depend on the individual circumstances of the parties as well as the type of goods being distributed.
The LegalVision Distribution Agreement covers the above mentioned terms, but there are many additional issues that the parties to such an agreement may wish to negotiate. If you’re involved in a more complex distribution agreement, the LegalVision network of lawyers can help insert bespoke clauses into your document as necessary.