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. Accordingly, it may be used for many different types of goods. On the whole, a distribution agreement sets out the terms and conditions upon which the distributor agrees to distribute the goods. There are several important terms to keep an eye out for when reviewing or drafting a distribution agreement. Accordingly, this article will explore seven key sections.
1. Distribution Area in Distribution Agreement
Most distribution agreements allow the distributor to distribute the goods in a set area or territory. Therefore, the agreement should clearly describe this territory, and, if necessary, the distributor is allowed to distribute to the customer category and market segment. Without this clarity, the manufacturer’s distributors can find themselves in commercial competition.
2. Exclusivity
The distribution agreement must determine whether the parties agree to grant the distributor an exclusive right to distribute the product within a territory or market segment.
Continue reading this article below the form3. Distributor Obligations
It is important to set out the distribution obligations in the agreement. If the parties agree, it can be appropriate for the distributor to agree to distribute the goods using “its best efforts”.
4. Price of the Goods
The distribution agreement must specify the price the distributor will pay the manufacturer for the product. It is important to be flexible on the price at which the distributor can purchase the goods. The agreement will generally set out a mechanism for amending the price paid from time to time.
5. Delivery
The distribution should outline when ownership and risk in the goods will pass from the manufacturer to the distributor. For example, the agreement should outline who is liable if the goods are damaged during delivery to the distributor. If the parties are based in different countries, you may consider using Incoterms to clarify who bears the risks and costs at different delivery stages.
6. Payment Terms
The distribution agreement should set out the payment terms the parties agree to. Naturally, the distributor will seek longer payment terms, while the manufacturer will seek shorter payment terms. Accordingly, the payment terms will reflect the relative bargaining positions of the two parties.
7. Term and Termination
Finally, one of the more important terms in a distribution agreement is the term of the agreement and the termination provisions.
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Key Takeaways
In summary, your distribution agreement is a very important document. Accordingly,a weak agreement may be commercially detrimental to your business and open you to liability. Therefore, you must draft this document well. The important terms to include are the distribution area, exclusivity clauses, distributor obligations, pricing, delivery, payment terms and termination clauses.
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Frequently Asked Questions
A distribution agreement outlines the terms a distributor can market, sell and profit from the manufacturer’s goods. If drafted well, a distribution agreement can avoid misunderstandings about each party’s obligations in the arrangement.
The term of a distribution agreement will vary depending on what the parties negotiate. In some cases, the agreement will operate for a fixed period that might be subject to a renewal period. This renewal period often depends on the distributor meeting certain criteria (such as performance standards or sales targets). In other cases, the agreement can be terminated at any time subject to a specified notice period. Regardless of what the term is, it must be properly reflected in the distribution agreement.
An exclusive right to distribute means the distributor is the sole distributor of the manufacturer’s goods. Exclusivity will often be confined to a specific area (a country, or a state). The manufacturer may have the right to revoke exclusivity if the distributor is not meeting the performance standards outlined in the agreement. These standards may include meeting sales targets or making a certain number of orders during the term of the arrangement.
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