Distributor Agreement

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Distributor Agreement

A Brief Introduction About Distributor Agreement

A distributor agreement is drafted between the supplier of the goods and another person who markets or sells the goods. In this case, the supplier may be the manufacturer of goods or another distribution reselling another manufacturer’s goods. Therefore, in this agreement, the contracts between sub-distributors of the same product may also be included. The distributing part in the contract may be an individual or a company. Sometimes, this distribution agreement may also involve two or more distributors within the same contract.

There are two types of distributor agreements that the parties of the contract sign — an exclusive distributor agreement and a non-exclusive distributor agreement. In an exclusive distributor agreement, the distributor will have the sole authority to sell or market the products within a geographical region. However, drafting these agreements should be done with caution because they could breach fair use clauses of the competition laws in the country. In a non-exclusive distributor agreement, a supplier may engage one or more distributors for the same region.

Who Takes the Distributor Agreement?

This agreement is signed between a supplier who wants to sell the products but does not have the expertise or resources to sell or market directly to the customer and a distributor who is an individual or a company that markets and sells the products on behalf of the supplier. This distributor or a network of distributors are also called channel partners. As part of this agreement, the distributor buys the products and sells them to the clients within a specific geographical area.

What Is the Purpose of a Distributor Agreement?

Distributor agreements give the channel partners the right to sell and market the products within a specific geographical area. In return for buying the products from the supplier and taking on the risk by selling it in a new market, the distributor is paid a commission. It is a great arrangement for the seller as well because he sells his products across a wider market. So from the supplier’s point of view, the purpose of the agreement is to increase his customers and get more revenue. From a distributor’s point of view, the purpose of the agreement is to earn commission and become a brand image for the supplier in the given geographical area.

Contents of a Distributor Agreement

A standard distribution agreement sample contains the following terms.

  • The appointment of the distributor including limitations on the area that the distributor is allowed to sell his products in
  • The description of the products that the distributor will market and sell on behalf of the supplier
  • The rights of the distributor in appointing any sub-agents
  • The relationship of the distributor with the supplier — an acknowledgment that the distributor works in an independent capacity and not as an employee of a related party to the supplier
  • The nature and method of communication that the distributor is required to make for ordering the products from the supplier company
  • A schedule of the prices and discounts on which the seller shall sell the goods to the distributors along with a cap on the maximum retail price that the distributor is allowed to resell the products to the customers
  • An acknowledgment that all costs incurred by way of shipping, freight, and other costs should be born by the distributor
  • The rights of the distributor to inspect the goods upon receipt from the supplier, and the deadline within which the distributor is expected to communicate any shortfalls or defects in the products
  • Details of any advance payments that the distributor is required to make upon placing an order with the supplier company and the mode and time of payment of the balance upon receipt of the goods
  • Representations by both the supplier company and the distributor channel partner
  • A statement of responsibilities of the distributor and the company in the performance of duties
  • An NDA clause that highlights the confidential information that a distributor is allowed possession of, and his right thereto of maintaining that information confidential
  • The duration of the agreement including specific dates and times
  • Details of the supplier and the distributor including the names, addresses, contact details
  • Grounds and method of termination of contract and the rights of each party upon termination
  • Indemnification clauses including limitation of liability for both the distributor and the seller
  • The right of the seller to enforce trademarks and an acknowledgment of the distributor that he shall not contest the trademarks
  • Miscellaneous provisions including governing laws, the possibility of amendment, jurisdiction for dispute resolution, assignments and sub-assignments of duties and responsibilities, and any other notices that must be given to the parties.

How to Draft a Distributor Agreement?

Whether you’re drafting an exclusive distributor agreement document or a general distributor agreement, there are some points that you need to keep in mind.

  • Identifying the parties to the contract and stating that the contract is for selling only, and for reselling the supplier’s products only
  • Whether the distributor shall be the sole distributor for the supplier’s products or not
  • Whether the supplier shall be the sole customer for the distributor or not
  • A description of the territory within which the distributor shall act
  • Details of what shall constitute as a termination of the agreement and when clauses of force majeure should be invoked
  • Description of the relationship between the supplier and the contractor
  • Details of any quota for selling the supplier’s products in a particular period
  • The rights of the parties in setting the prices and the responsibilities of the distributor in marketing the products
  • The reporting strategies that shall be employed by the distributor for selling the products
  • The responsibilities of the supplier in training the distributor for any technical aspects and the obligations of the distributor to attend those training sessions

Negotiation Strategy

This agreement is generally a straightforward contract. The parties shall negotiate on the geographical area of operation and the costs and discounts that the distributor shall incur from the supplier. They may also negotiate in terms of the exclusivity that the supplier may provide the distributor for selling the products. Another aspect of negotiation shall be about the quota that shall be sold by the distributor in a particular period.

Benefits and Drawbacks of the Distributor Agreement:

Some of the advantages to the supplier and the distributor as part of the agreement are

  • The supplier gets a minimum purchase amount as remuneration from the distributor for the quota he is supposed to fulfill
  • The supplier can expand to a wider market where he can establish his product to a large customer base
  • The risk of loss as a supplier is minimum because the obligation of marketing, selling, freight, and other costs is on the distributor.
  • As a distributor, he gets the authority to sell the products at a price of his choosing in the market
  • In an exclusive agreement, he gets to be the sole provider of the goods, and hence can control the supply and therefore the price
  • The distributor gets all the benefits and improvements in the products passed on to the distributor first to pass it on to the customer

Some of the disadvantages of this agreement are:

  • The distributor has to incur high costs to market a product that might not become successful
  • There is always an uncertainty that the distributor would not be able to meet the quota
  • The supplier is entirely reliant on the distributor which means that the supplier does not have any on-ground knowledge of the market except for the reports provided by the distributor
  • The supplier gets a lower amount as revenue than if the supplier had chosen to sell the products on his own.

What Happens in the Case of a Violation?

In case of a breach of contract(1), the defaulting party shall indemnify the injured party for any losses suffered. In the absence of that, the contract may be terminated after giving due notice to the defaulting party, as mentioned in the contract. If the parties don’t want to terminate the contract, they may choose to approach arbitration as agreed upon in the contract. The parties may also choose to extend or modify the contract. If neither of those options is feasible, then the parties may approach a court of law for specific injunction or specific performance.

A distributor agreement is useful when the supplier and the distributor are located in different places, and the supplier wants to penetrate that market. This contract helps the parties in mutually benefitting each other by the sale of the products. If drafted carefully, a contract may continue for a long term association, which would help in building the brand of the product and the image of the distributor.