Distribution Agreements

Term and Termination

If the Distribution Agreement is supposed to operate for a given period, this should be set out in writing.  

Often a supplier may want to start using a distributor for an initial period and subject to that distributor meeting sales targets or Key Performance Indicators (KPI’s)would agree to extend the term of the agreement.  

Alternatively, the supplier may be open to having an ongoing arrangement. 

In either event, both the supplier and the distributor should have clear grounds on which they can terminate the arrangement, such as where the other party becomes insolvent or bankrupt or where one of the parties continues to breach the agreement. 

Delegation of responsibilities between the Supplier and Distributor

Both parties to the Distribution Agreement have set duties and responsibilities. 

Generally the supplier is obliged to: 

  • ensure that any products are delivered to the distributor 
  • provide training and support to the distributor 
  • maintain the intellectual property of the products and look out for infringements 
  • provide procedures and remedies for dealing with defective products. 

The distributor will have other duties such as: 

  •  maintaining a good relationship with customers (including being the first point of call for customer complaints) 
  • storing and delivering products to customers 
  • complying with the supplier’s requirements for the packaging of the products 
  • reporting recall notices to the supplier. 

Marketing and undertaking promotional activities may be the responsibility of either party so its important the Distribution Agreement captures the intention of how marketing will be conducted and by whom, how much control the supplier wants to retain over the brand and who is best placed to engage with customers. 

KPI’s or targets to be met

Its important for both parties to understand the distributor’s performance targets from the beginning of the relationship.  

Those targets may include: 

  • Setting a minimum number of products to be purchased from the supplier each month; 
  • Setting a minimum amount of revenue that the distributor must generate each year; 
  • Setting a minimum number of units that the distributor must sell each year; 
  • Or any other target which motivates the distributor to work to a minimum standard but is also achievable. 

If the distributor doesn’t meet the set targets, there may be avenues for redress such as a performance review, consideration of the targets, termination of the contract, or termination of the exclusivity which was granted to the distributor. 

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 exampleif the distributor is negligent or commits an act which results in a claim being brought against the supplier, its 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. 

Tips to making sure Distribution Agreements are right for you:

Just because you’ve engaged a lawyer to prepare a Distribution Agreement for you and have called it that on paper, you should ensure that you’re not actually operating your business under some other arrangements which would expose you to liability under other laws. 

1. Ensure your model isn’t actually a franchise. If you’re operating a franchise model and don’t have the required documents and systems of legal compliance in place, you could be exposed to a large fine from the ACCC and subjected to court proceedings. 

Generally, a business model is likely to be a franchise if it satisfies the below criteria:

  • a person (the franchisor) grants to another person (the franchisee) the right to carry on the business of offering, supplying or distributing goods or services in Australia;
  • the supply/distribution is to be in accordance with a system or marketing plan substantially determined or controlled by the franchisor;
  • the operation of the business by the franchisee will be materially associated with the trade mark or advertising of the franchisor
  • before commencing or continuing the business, the franchisee must pay for the rights to operate under the franchisor’s brand (by way of royalties, initial capital investment, training fee or payment for the goods/services). 

Recent Case: Workplace Safety Australia v Simple OHS Solutions Pty Ltd [2015] NSWCA 84 

2. Ensure your model isn’t actually an agency. An agency model would arise where the seller contracts with an agent to sell their products on behalf of the seller and using the seller’s name (i.e. the seller retains title to the goods). The seller would then pay the agent a commission on finding buyers and making sales. 

The risk of using an agency model is that the seller would be liable for the conduct/actions and negligence of its agents.