NEWS // Distribution Agreements
The success of a business will often depend on how well it can distribute its products. It is therefore essential that a distribution agreement is prepared which regulates the relationship between the distributor and the supplier.
1. Types of Distribution Agreements:
Exclusive: a supplier sells the products to the distributor and agrees not to appoint other distributors or sell products to other customers within a defined territory. The exclusive arrangement will generally favour the distributor.
Non-exclusive: a supplier has the freedom to sell directly to end-users and to appoint other distributors within a defined territory. The non-exclusive arrangement will give the maximum level of flexibility to the supplier.
Sole: this is similar to the exclusive arrangement except that the supplier will reserve the right to supply the products directly to end-users.
Selective: this is similar to non-exclusive except that the supplier can only appoint additional distributors where they meet certain criteria.
2. Common Clauses in Distribution Agreements:
Exclusive/Non-exclusive: where there is an exclusive relationship the supplier must consider whether there is sufficient flexibility if the distributor does not perform because the supplier will want to avoid being tied to an exclusive arrangement where little or no product is being sold. In giving exclusivity, the supplier will often set a minimum quantity of product to be purchased by the distributor. Where there is a non-exclusive arrangement, the distributor must consider whether there is sufficient incentive for it to invest resources in distribution if the supplier has the ability to appoint additional distributors.
Territory: the distributor will look for as large a territory as possible to increase its potential to exploit the distribution of the product. The supplier will need to ensure that there are restrictions on the distributor seeking customers from outwith the agreed territory and the definition of “the territory” should be carefully drafted to avoid dispute. A possible solution is to annex a map of the area to the agreement with “the territory” highlighted.
Product: the parties will need to decide whether new or improved products will also be offered by the supplier to the distributor on an exclusive/non-exclusive basis and the definition of “the product” in the agreement will need to be carefully drafted.
Pricing: the supplier will want some flexibility in amending the price should its manufacturing costs increase or if there are currency fluctuations. The distributor will wish to restrict the ability of the supplier to unilaterally change the pricing.
Passing of Risk/Title: the parties will need to agree at what point risk and title passes from the supplier to the distributor. The supplier will want to pass risk as early as possible but retain title until payment is made by the distributor.