A distribution agreement governs the relationship between suppliers or manufacturers and distributors. Suppliers or manufacturers engage these distributors to sell their products at a retail or wholesale level. Therefore, it is crucial for both parties to consider and understand the key terms of a distribution agreement. Such terms may vary, depending on the specific arrangement between parties.
Purpose of the Distribution Agreement
Businesses may use distribution agreements for a variety of purposes. Some appoint a distributor as a vehicle to get their products to the market. Others appoint a distributor to benefit from their expertise, or to share customer lists and market contacts. The key terms of a distribution agreement also vary, reflecting the requirements and intent of each arrangement.
Length of the Distribution Agreement
The length of the distribution arrangement is often referred to as the ‘term’ of the contract. Distribution agreements may:
- be for a set period of time;
- be an ongoing arrangement; or
- extend for a further period (which may also be subject to certain criteria).
The length of the arrangement is particularly important if the distribution arrangement has minimum order requirements or an element of exclusivity.
Exclusive or Non-Exclusive Appointment
An exclusive appointment often means that a distributor is the sole distributor of the product. The distributor can also be exclusively confined to a specific area (such as a state, country or region). Such appointments are useful for businesses that wish to have a distributor representing them where that distributor has particular familiarity or market presence. For example, a distributor within a specific area can respond to all enquiries and satisfy all orders in that area.
A non-exclusive appointment is opposite to an exclusive appointment. It allows distributors to operate alongside other distributors (potentially including the supplier or wholesaler under the agreement). However, a non-exclusive appointment for a distributor may lead to competition within the distribution network.
Minimum Standards or Performance
For many exclusive arrangements, suppliers or wholesalers may require the distributor to maintain a level of performance. Their performance may be on the basis of revenue targets or minimum purchase orders. Such clauses help to ensure the justification of exclusive arrangements. A minimum standard or minimum performance clause also codifies the possibility of appointing additional distributors to a specific area if a distributor is not performing in line with the standard. Minimum standards should, ideally, be determined before both parties enter the distribution agreement. Determining the standards beforehand ensures that both parties are aware of the obligations and requirements they must fulfil.
Marketing and Promotion
Marketing and promotion may be the responsibility of the distributor, the supplier/ wholesaler or both parties. The supplier or wholesaler may require that the distributor only use specific assets to market or sell the products for distribution. They may require the distributor to follow particular guidelines relating to branding. Distributors may also have an obligation to undertake additional marketing or promotional activities. For example, other activities may include:
- attending trade shows;
- creating their marketing or promotional materials; or
- attending to customer visits or training events.
The obligation of each party, again, depends on whether the distribution agreement is an exclusive or non-exclusive arrangement. You should note that exclusive arrangements are likely to have more obligations regarding marketing and promotion. It will also depend on the nature of products being sold, and the level of control that the supplier or wholesaler would like to retain over its brand and reputation in the market.
Training and Support
Often, the supplier or wholesaler needs to outline the level of training and support they will provide to the distributor and whether they will be available to train any end-customers as to the use of the product. Therefore, training is often one of the key terms of a distribution agreement for more technical products. Distributors should also be looking out for the support they will receive from a supplier or wholesaler. For example, distributors should consider whether the supplier or wholesaler will be:
- listing the distributor on their website;
- transferring enquiries to the distributor; or
- including the distributor in their promotional materials.
For some distribution arrangements, competition is an important factor. Common clauses in a distribution contract place restrictions on the distributor from purchasing similar products from the supplier or wholesaler. Further, there may be a restriction on a distributor from competing with the supplier or wholesaler during the distribution or arrangement and even after it expires. However, competition restrictions may not apply to all products. They typically apply where the product is unique (and cannot be purchased from other suppliers or wholesalers) or if the distributor has stronger bargaining power.
The supply of products may depend on seasonal factors, and the distribution agreement may be subject to forecasts as to the availability of the products. Some distribution agreements will require a distributor to purchase all of the forecasted quantities of the products or may be subject to orders. Additionally, the distributor may require that the supplier or wholesaler meet certain minimum supply requirements as set out in periodical forecasts issued by the distributor. However, this usually depends on the distributor’s bargaining power.
Orders, Delivery and Payment
The ordering, delivery and payment process largely depends on the supplier or wholesaler’s procedures and processes. For example, there may be a requirement to make orders via:
- an online software platform; or
- sending an order form to the supplier or wholesaler.
In any event, the key terms of a distribution agreement should make it clear when and how both parties accept and pay for an order.
Further, both parties should consider when the legal ownership and risk in the product will pass on to the other party. For example, the distribution agreement should state which party is liable if something happens to the product during delivery. Depending on when the risk passes, the relevant party should ensure that they have relevant insurance in place to be able to cover their possible liability.
To ensure that a distribution agreement is in line with your best interests, it is important to be aware of, and understand, its key terms. The key terms of a distribution agreement can vary on multiple factors including the:
- product to be distributed;
- appointment of the distributor; and
- obligations that each party have relating to the marketing, sale and distribution of the product.
If you have any questions or need assistance with drafting or reviewing the key terms of a distribution agreement, get in touch with LegalVision’s contract lawyers on 1300 544 755 or fill in the form on this page.
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