You have a great business idea – an e-commerce store that sells high-end fashion at discounted prices. After conducting some preliminary market research, Australia’s fashion conscious consumers have you convinced that you could be the next Net-A-Porter. Before going live, you should understand the common pitfall new businesses encounter. All too often, we speak with clothing retailers who have failed to Execute a distribution agreement with their suppliers.
A distribution agreement is a contract between two or more parties where the manufacturer and/or supplier of the goods gives a seller (usually a retailer) the right to distribute the goods. Below, we unpack the standard terms in a distribution agreement as well as provide some practical tips for fashion e-tailers reviewing their agreement.
Product and Area
Suppliers typically take on multiple sellers, particularly when dealing with clothing retailers. If you want the exclusive right to sell a particular item or line, ask the supplier:
- Are you the only distributor in the nominated area?
- Can you obtain the same or similar products from third party suppliers during the contract’s term? If so, are there any restrictions?
- Are you limited to a particular geographical area when selling the goods?
How will you pay your suppliers? What is the price, manner and frequency? This may be on a commission basis or by way of fixed fee payments payable in advance, in arrears or both, depending on the nature of the goods and industry norms.
Term and Termination
The distribution agreement should clearly set out:
- length and time of the relationship (e.g. fixed term),
- how parties can terminate the agreement; and
- circumstances when parties can terminate the agreement.
These factors will depend on the commercial requirements of each party.
Where the distribution agreement is for a fixed term, the parties must decide whether the supplier will grant the seller a right of renewal and if so, on what terms.
Tailoring the Distribution Agreement
As your business grows and the demand for the goods increases, you may need to turn your attention to the scope and operation of the following.
- Intellectual property licensing: to what extent can you use the supplier’s intellectual property (for example, logos, trade marks and branding)?
- Marketing: Do you need to use the marketing materials the supplier provides or can you create your own collateral? If so, does the supplier need to approve any marketing materials first?
- Minimum quantity sales targets: Will the parties implement minimum quantity sales targets that you, the retailer, must meet? If so, what are the relevant sales period? Sales targets can operate during a ‘honeymoon period’, monthly, quarterly, every six months, annually or as the parties deem appropriate.
Define Your Territory
As a seller, it’s important not to take on too much too soon. Start out with a small territory and prove yourself before committing to a more expansive geographical area, especially if minimum sales quantities are involved.
A well-drafted distribution agreement should be flexible enough to accommodate for growth, an increase or decrease in purchasing habits, changes in product and price as well as certain business operations.
Effective Exit Strategies
Most distribution agreements contain either a:
- ‘termination for cause’ provision which allows a party to terminate when a particular event occurs, or
- ‘termination for convenience’ provision allows parties to terminate their arrangement for whatever reason after providing the other party with a defined notice period (e.g. 30 days).
All suppliers and retailers recognise the need to define their rights and responsibilities during the life of the agreement. However, few turn their mind to what happens after the agreement is terminated. Well-drafted distribution agreements should specify the parties’ obligations upon termination and may go so far as to implement suitable non-compete provisions.
Distribution agreements can protect the relationship between the supplier and retailer and can allow both parties to grow their respective businesses. Doing so will help you avoid the costly and messy disputes that could occur due to a poorly drafted contract. If you have any questions or need assistance drafting your distribution agreement, get in touch with our specialist contract lawyers on 1300 544 755.