What is a distribution agreement?
A distribution agreement is a contract between a supplier of goods or services and a distributor of them. It is a low risk way of expanding into new markets and territories without having to make a significant capital investment.
How does it work?
The distributor buys goods or services from the supplier. It then resells them to its customers after increasing the price by adding on a margin to cover its costs and create a profit. The distributor becomes the local supplier and enters into contracts directly with its customers. It owns the products and takes the risk of having to resell them.
There are different types of distribution agreement, which are sole, exclusive, non-exclusive and selective. Sole means that the distributor can resell the supplier’s goods or services but the supplier can also do this directly. Exclusive allows only the distributor to resell. Non-exclusive allows the distributor to resell but also entitles the supplier to appoint other distributors. Selective allows the supplier to appoint additional distributors but only if they meet certain criteria.
A distribution agreement can apply to a territory. There are different types of territory, such as the United Kingdom (a country), the European Union (a regional grouping of countries) or the state of California (a state or province within a country). Alternatively it can apply to a specific market such as feature films, leather goods or computers. Another option is to select a customer group, which can be any category of customers that is capable of being defined in a precise way, for example anyone between 18 and 34 years of age.
What are the main areas it covers?
It should clearly identify the goods or services that will be distributed, at what price, for how long and in which territory, market or customer group those goods or services may be resold.
The terms and conditions of the sale by the supplier to the distributor should be set out. These can be the supplier’s standard terms and conditions, a variation of them or an entirely separate set of terms and conditions. Both parties should carefully review the terms and conditions to ensure that they are satisfied with the deal and allocation of risk.
A supplier is placing its reputation in the hands of a distributor and is appointing it in order to generate sales. To achieve this, there are usually provisions setting rules or minimum standards in relation to marketing, training of the distributor’s staff, reporting and record keeping.
What protections does it provide?
The supplier will want to ensure that the distributor does not sell any competing goods or services. It is common for a supplier to also set minimum purchase requirements and performance criteria to avoid being trapped in an unprofitable relationship.
For the distributor, the key protection will deal with product liability and recalls, because any defects or infringement of another person’s intellectual property rights are outside of its control. Failing to deal with this issue could result in significant financial and reputational harm.
Other issues
Where products are distributed internationally, the parties should check whether there are laws and regulations of any other country that might apply.
Both the supplier and the distributor should also be mindful of competition law restrictions which apply where a business has market dominance.