Author: Ian Aldridge, Progressive Legal
Author: Ian Aldridge, Progressive Legal
In the world of business, expanding your product reach efficiently is key to sustained growth. A distribution agreement is a powerful tool that defines the rules of engagement between suppliers and distributors. These agreements can not only streamline your distribution process but also shield your business from potential pitfalls.
On this page, we’ll delve into exactly what distribution agreements are, discuss their key terms and uncover some of our tips to take on board when you’re determining whether distribution agreements are right for you or not.
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A distribution agreement serves as a crucial document outlining the terms between a product manufacturer, wholesaler, or supplier, referred to as the supplier, and a local reseller or distributor. This agreement is designed to facilitate a smooth relationship between the parties involved in bringing products to market.
Businesses often engage distributors to leverage their local connections and customer networks, aiming to expand their sales reach. For others, choosing a distributor is simply the most efficient way to deliver products to customers.
Drafting a legally sound distribution agreement is essential to avoid costly disputes and misunderstandings between suppliers and distributors. Since each business operates in unique markets with different products and requirements, relying solely on template documents rarely offers sufficient legal protection.
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:
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.
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.
In a distribution agreement, both the Supplier and Distributor bear specific duties.
The supplier typically commits to:
Conversely, the Distributor’s responsibilities include:
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.
Clearly defined key performance indicators (KPIs) or targets are crucial for a transparent and successful distributor relationship.
These targets may involve:
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.
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.
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.
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.
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.
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.
When drafting a distribution agreements for your business, it’s crucial to ensure that you’re not inadvertently exposing yourself to legal liabilities under other frameworks. Here are essential tips to help you navigate potential pitfalls:
In Workplace Safety Australia v Simple OHS Solutions Pty Ltd  NSWCA 84, these criteria were pivotal in legal proceedings.
By considering these aspects, you can safeguard your business from potential legal complications, ensuring that your distribution agreement aligns with your actual business structure. Regular evaluations and legal awareness play a key role in preventing unintended legal consequences.
As businesses continue their journey in the Australian marketplace, a nuanced understanding of distribution agreements is not just advisable but paramount. At Progressive Legal, we offer expert guidance tailored to the intricacies of Australian business law.
For businesses looking to fortify their market presence, Progressive Legal is your partner in unlocking success through comprehensive distribution agreements drafted with expertise by our commercial lawyers. Our distribution agreement packages start from $1,400 + GST. Get in touch with us today via phone on 1800 820 083 or request our expert advice below.