Distribution Agreement: Key Terms To Include And Considerations

The key terms in a distribution agreement govern the relationship between the supplier and distributor. Here’s an overview of the key terms in a distribution agreement:

Territorial Scope and Exclusivity

One critical aspect to consider in every Distribution Agreement is the territorial scope assigned to the distributor and whether exclusivity applies.

The agreement typically addresses whether the distributor holds exclusive rights within a specific country, state, or region. When granted exclusive distribution rights in a designated territory, the distributor gains a unique advantage. This exclusivity allows them to focus on understanding the market, efficiently manage orders, and operate without competition from other distributors in that region.

The appeal of exclusivity lies in the distributor’s ability to fully exploit the market, secure in the knowledge that no other entity can conduct similar activities in the specified area. This arrangement serves as a powerful incentive for the distributor to maximize their efforts and establish a strong presence in the market.

On the other hand, a non-exclusive arrangement permits multiple distributors to operate within the same area concurrently. While this fosters cooperation among distributors, it introduces the potential for competition within the shared territory.

Balancing the advantages and disadvantages of exclusive and non-exclusive arrangements is crucial, as it directly influences the dynamics of sales and market penetration.

Duration and Termination

It’s essential to clearly define the timeframe for which a distribution agreement is intended to be effective.

The agreement should explicitly state the initial period during which the distributor will be engaged. In some cases, a supplier might opt for an initial trial period, during which the distributor’s performance is evaluated against predefined sales targets or Key Performance Indicators (KPIs). If these criteria are met, both parties may mutually agree to extend the duration of the agreement.

Alternatively, the agreement may establish an ongoing arrangement from the outset. In such cases, there should be clarity regarding the conditions under which the agreement can be terminated by either party. Common termination grounds include situations where a party becomes insolvent or bankrupt or if there is a persistent breach of the agreement by one of the parties.

Having these terms in writing not only provides a clear roadmap for the duration of the partnership but also ensures that both the supplier and the distributor have a solid understanding of the circumstances under which the agreement can be terminated. This clarity helps to mitigate potential disputes and fosters a more transparent and stable business relationship.

Delegation of Roles and Responsibilities

In a distribution agreement, both the Supplier and Distributor bear specific duties.

The supplier typically commits to:

• Ensuring timely product delivery to the distributor
• Providing necessary training and ongoing support
• Safeguarding intellectual property and addressing infringements
• Establishing procedures and solutions for handling defective products

Conversely, the Distributor’s responsibilities include:

• Cultivating positive customer relationships, serving as the primary contact for complaints
• Managing product storage and delivery to customers
• Adhering to the supplier’s packaging requirements
• Promptly reporting recall notices to the supplier

Marketing and promotional activities may be a shared responsibility, and the agreement should explicitly outline the intended approach. This includes clarifying the extent of control the supplier wishes to maintain over the brand and determining the party best suited to engage with customers.

A comprehensive distribution agreement ensures a clear understanding of each party’s role, fostering a collaborative and effective business relationship.

Performance Targets or KPI’s

Clearly defined key performance indicators (KPIs) or targets are crucial for a transparent and successful distributor relationship.

These targets may involve:

• Establishing a minimum monthly product purchase from the supplier
• Defining a minimum annual revenue generation goal for the distributor
• Setting a minimum number of units the distributor should sell annually
• Incorporating any other feasible target that incentivises the distributor to maintain a baseline standard of performance

It is imperative that these targets are both motivating and attainable. If the distributor falls short of the agreed-upon targets, avenues for resolution may include a performance review, reconsideration of the targets, or, in more severe cases, the possibility of terminating the contract or revoking exclusivity granted to the distributor.

Clearly outlining and mutually understanding these performance expectations from the outset ensures a fair and productive collaboration between both parties.

Orders and Payment

Often the supplier will specify how they want orders to be made, what the payment terms will be and whether there will be a minimum order amount. 

Usually the ordering procedure will require the distributor to submit a purchase order. The supplier will need to decide if it will accept order cancellations and the procedures in this event. 

The parties will also need to determine who will pay the costs associated with the delivery of the products and the insurance over the products. 

If the distributor fails to pay the supplier for whatever reason, the supplier should also ensure the Agreement provides it with options and remedies to recover outstanding payments. 

Delivery

For both parties, delivery is a risk because it relies on the provision of services by a third party. Therefore, the parties need to decide who will be responsible for booking the delivery, who will pay the costs of delivery (including any taxes, freight handling charges and insurance), and whether any specific procedures will apply to the delivery process. 

Passing of title and risk

The parties should consider when title to the goods will pass and who will be liable for the risk to the goods. For instance, who will be liable of the product is damaged during delivery? Who will be liable if the product causes injury to a customer?  

Usually title will pass to the distributor once payment for the goods has been made and risk will pass on delivery. 

Intellectual Property

The goods which are being distributed will bear the intellectual property of the developer of the product. So, it’s usually the supplier’s responsibility to ensure it enforces its rights to the copyright, patents, trade marks, designs and any other intellectual property which it owns over the products. 

The Agreement should also stipulate who will own any new IP developed by the distributor. 

To learn more about protecting your Intellectual Property, click here.

Liability & Indemnities

The Agreement should clearly set out who is liable in what circumstance.  

For example, if the distributor is negligent or commits an act which results in a claim being brought against the supplier, it’s likely the supplier would attempt to pass this liability on to the distributor. 

Similarly, the supplier of the products should limit their liability to the extent permissible by Law in the event the distributor suffers any loss, damage, injury, delay or inconvenience from matters such as non-delivery of the products.