Overview of a Distribution Agreement

Distribution Agreement

Distribution Agreement is a legally binding agreement between a supplying entity with products to sell and another entity that markets and sells the products, which set out the obligations and responsibilities of both entities to sell products/provide services to clients within certain geographical areas.

What is the Distribution Agreement?

Distribution agreements, also referred to as the distributor contract, is a legally binding contract between a supplier of products or services, and an entity that sells or provides services to clients, referred to as a distributor. The distribution agreement gives a distributor the right and duty to sell and market the supplier’s products for a fee or a commission, the distributor markets the product so the supplier doesn’t have to worry how to get its products into the right hands. These agreements are also known as product distribution agreements and distribution rights agreements.

Distribution agreements are usually between an entity that supplies goods and one that distributes goods where the supplier in this case can be either a manufacturer or another distributor that is reselling another supplier’s goods. The distributor is a company that plans to market and sell the products, whether to the public or to other companies.

The distribution contract defines the terms of the agreement, including the cost of the goods or the commission rate, the length of the contract, where the distributor may operate and other important details.

Guidance

By creating and negotiating a contract that spells out all the specific terms of the deal, the companies are able to ensure that they are both clear on all aspects of the arrangement so they both complete their end of the deal. When one party fails to comply with the agreement terms, the distribution agreement also provides legal protections and remedies for the wronged party.

It’s also important to ensure that the agreement is personalized for the desired deal. not only because every deal will be subject to different terms, but also because the purpose of distribution agreements can vary drastically. Some suppliers seek out distributors to help get their products to a desired market, while others are focused more on the distributor’s marketing expertise. The details of these deals will vary drastically based on the intent of these deals as well as the specifically negotiated terms.

There are several key elements that should be taken into consideration when drafting a distribution agreement, which are the following:

  •       Appointment of the Distributor

The appointment of a distributor may be exclusive or non-exclusive depending of the intent of the supplier as previously mentioned, as it should mentioned along with their personal information

  •       Defining the Territory

The geographic limitations of the Distribution of products or services must be set out. Additional questions to consider are whether the distributor is permitted to take orders from outside the defined territory.

  •       Products

The supplier should specify the products or services that the appointed distributor can sell or market, and if there are any products or services that the distributor is not allowed to market or sell (including competing products or services).

  •       Term of the Agreement

This section deals with the length of time for the appointment of the distributor. It also includes any terms related to renewal of the appointment.

  •       The Distributor’s Sales Efforts

This section deals with the advertising or marketing the distributor is expected to conduct in order to sell and market the products and/or services of the supplier. This section also set out any limitation on the expenses of the advertising materials and any possible resales and any other terms related to the conducts of the distribution process, including shipments, used facilities, and employees’ training

  •       The Distributor’s Performance

Since the distribution agreement set the limitations or restrictions of the distributor’s conduct, this section can be beneficial in setting out the reporting structure of the distributor to the supplier, and if the supplier may permit the distributor to sign contracts for sub-distribution.

  •       Acceptance of Orders and Shipment

This section sets out if the distributor’s conduct regarding orders and shipment, where it specifies which orders should be accepted, and the methods that should be followed in shipping these orders, and the conditions and terms of refunding and compensating clients or customers.

  •       Confidential Information

The distribution agreement must protect the intellectual property (trademarks, patents, copyrights, etc.) of the supplier, as well as confidential information and trade secrets. If the distributor’s territory is a foreign country, registration of trademarks and patents of the supplier in that country should be applied for before entering into a distribution agreement.

  •       Damages for Breach

This section set out the obligations and rights of both parties regarding any damages that may occur due to a breach of contract. This section can be ruled by jurisdictions or statutes in most countries, and it can be set out by both parties.

  •       Rights and Obligations upon Termination

After termination of the agreement, there are several obligations that may remain effective after the termination, which can be a non-competition clause, or returning or repurchasing products that are in the distributor’s possession.

  •       Dispute Resolution

Identify the state having jurisdiction over the agreement. Set up methods and standard operating procedures for resolving potential disputes and decide on events or actions that could result in contract termination. Final matters such as choice of law, dispute resolution, no assignment, etc. must be considered and added.

In conclusion, essential key elements are summarized in the length of time the contract will be valid, details regarding the supply of the product and the sales territories covered by the agreement. Specifying all details about the supply of the product is particularly important, and these need to be discussed in detail either in the contract or in an annex. This section should cover order placement, payment, delivery, returns, inspection requirements, transfer of risk, transfer of title and all other relevant details.

Key points:

   Appointment of the Distributor

  •       Defining the Territory
  •       Products
  •       Term of the Agreement
  •       The Distributor’s Sales Efforts
  •       The Distributor’s Performance
  •       Acceptance of Orders and Shipment
  •       Confidential Information
  •       Damages for Breach
  •       Rights and Obligations upon Termination
  •       Dispute Resolution 

 

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