Distribution agreements - benefits and risks

Published: 23rd February 2011
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A distribution agreement is an agreement between two parties whereby one party (the supplier) agrees to supply products to the other (the distributor), which the distributor will distribute. It is very common for distribution rights to be granted in relation to a particular territory or market.





Agents, Representatives and Distributor Agreements



An agent is a company or individual who represents another company (the 'principal') and who usually receives commission on sales that the agent arranges. An agent for a manufacturer, for example, will find customers for the manufacturer's goods, the manufacturer will sell directly to the customer and the agent will be paid a commission by the manufacturer.


Sometimes a company will enter into an agreement with a "representative" whose role may be that of an agent or it may be confined to a particular task e.g. informing the company of opportunities for tendering in a particular country. In this situation, a representation agreement may be required.


A distributor, on the other hand, is someone who buys goods from a manufacturer or supplier and then sells the goods on to its customers, either retailers or end-users. For this situation, a distributor agreement would be required.




Purpose of Distribution Agreement





A company usually enters into a Distribution Agreement to outsource the distribution process and concentrate on the manufacture of the item. There are advantages and disadvantages of outsourcing your distribution





Advantages and Disadvantages of Outsourcing Distribution



If you outsource your distribution the distributor is responsible for warehousing and transporting your goods. They may know more about the local customs and legal issues if you are distributing your product overseas. They will be responsible for any overseas currency risk, for marketing the product, and for carrying the credit risk of the products purchasers.





The disadvantages are that the distributor will want discounts and preferential terms. It is possible to lose control of the marketing and pricing of your product, and distributors might want long terms of exclusivity. However, the benefits discussed in the previous paragraph do show why you might want to enter into a Distribution Agreement with another company.





They will bear the brunt of the issues for expanding into foreign markets as well as promoting your products. With the Distribution Agreement you can set forth terms that both parties agree to covering yourself for product control and pricing. The agreement should cover specific information regarding the contract you have with the distributor


Categories of Distribution Agreement



Distribution agreements may be categorised as either exclusive or non-exclusive. In an exclusive distribution agreement, the supplier will grant to the distributor exclusivity over a particular territory and/or product line and/or sales channel. The usual quid pro quo for exclusivity will be some kind of performance obligations.


Geographical limits of Distribution



Any Distribution Agreement should cover the geographical limits, where you are allowed to sell your product direct, if there will be other distributors, and what the distributor will be paying for your product. If there are any bonuses they should also be mentioned. The agreement should clearly state how long the Distribution Agreement will be in effect and whether it can be terminated early by either party.





Terms and Conditions and Common Issues



Distribution agreements often incorporate terms and conditions of supply and sell, sometimes in the body of the agreement and sometimes as a schedule or annex to the agreement. These should cover all the nitty-gritty concerning supplies and sells, including the delivery of goods, the transfer of risk in and title to the goods, inspection requirements, returns, and so on.


Distribution agreements can fall foul of competition law, and some care should therefore be taken with their drafting.


Common issues to consider when drafting a distribution agreement are:





  • the territorial or other scope of the agreement;


  • non-exclusivity or exclusivity (taking into account competition law);


  • non-compete obligations (taking into account competition law);


  • minimum performance obligations;


  • reporting obligations;


  • marketing rights;


  • trade mark licensing;


  • the applicable terms and conditions of sale;


  • the circumstances in which the agreement may be terminated; and


  • the consequences of termination.




Informal understandings often lead to misunderstanding. The process of creating and negotiating a contract helps to ensure that the parties really do agree upon the terms of the deal. Equally important, where something does go wrong, a written agreement will usually help.




Minimum Target Obligations



The manufacturer will impose some form of minimum target obligation on the distributor to ensure that the relevant market is fully exploited. The minimum target obligation can be either for a minimum level of sales by the distributor to its customers, or for a minimum level of purchases by the distributor from the manufacturer. It has to be provided in the agreement as to what is to happen if the distributor fails to comply with the minimum targets.




Can a Distributor pay after Selling Product?



Usually the distributor is required to purchase the products from the supplier before selling them on. However, arrangements can be made in an agreement whereby the parties agree that the distributor will pay for the products after it has resold them




Binding Effect of Distribution Agreement



Once the agreement has been signed by both parties it is a legally binding contract. Changes, unless agreed upon by both parties, cannot be made and will usually require a new Distribution Agreement to be created and signed. The agreement is based on the laws of England and Wales, but for distribution overseas you may need to make changes regarding jurisdiction depending on where the distribution will occur.




Termination


The termination of the agreement and the consequences of termination may be handled in a number of ways. One matter that will require particular care is disposal of stock on termination.




Net Lawmans Distribution Agreements


All of our distribution agreements include optional terms and conditions. Our agreement clearly defines the responsibilities of both the Principal and the Distributor and so helps to ensure that both parties adhere to the terms of the agreement. Our template outlines the standard Distribution Agreement and can be customised to suit your needs.



Our distribution agreements are designed for use in relation to territorially-based distributorships within the EU irrespective of the location of the supplier.


We provide accurate, legal and secure forms. All of our forms have drafted by expert team of Solicitors and Barrister who are up-to-date with current legislation. Our forms can be downloaded and accessed immediately, and are backed by a 100% money back guarantee if you are dissatisfied, in any way, you get your money back.



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