An Exclusive distribution agreement is a commercial contract that comes into existence between a service provider or a manufacturer and a distributor. It mandates that the distributor exclusively distribute the products or goods of the supplier in a specified territory. For example, A is the exclusive distributor of Apple products in Rajasthan. This means that only A and no other distributor can distribute Apple products in Rajasthan. Such an agreement enables companies to expand to other territories without spending on a large sales team. The rationale behind having a sole or exclusive distributor for a particular territory is to exercise adequate supervision and effective management.
Purpose of an Exclusive Distribution Agreement?
An exclusive distribution agreement, has the effect of outsourcing a certain task of the supplier to externally engaged entity. This reduces cost, saves time and helps the company expand its business to new territories. Usually, the distributors who are engaged are specialized and expert personnel who have the desired skill to help the company sell its products and expand. Because, these distributors are externally engaged, the risk factors of expansion get offset and consequently mitigated.
Inclusion in an Exclusive Distribution Agreement?
An exclusive distribution contract needs to include the name of the parties, the commencement date, the duration or term of the agreement, registered office addresses of both the parties, their responsibilities, rights and obligations and standard boilerplate clauses such as dispute resolution, waiver, notices, remedies and severability.
Key Terms in an Exclusive Distribution Agreement?
Following are the key terms of an exclusive distribution agreement:
- Scope: The particular territory to which the distributor is assigned, the products sought to be distributed, their description and any additional services required need to be included in the contract.
- Pricing & Terms of Payment: An exclusive distributor may charge a certain percentage on the sale of a certain quantum of goods or in the alternative, he may also charge a lump-sum fee in lieu of his services.
- Rights and obligations of parties: The contract should clearly set forth outline the rights and obligations of both parties to the agreement. Deliverables and goals to be attained should be mentioned along with a completion schedule or timeline within which they need to be completed.
- Confidentiality: The exclusive distributor may have access to the confidential information of the supplier and hence this clause becomes important.
- Intellectual property: The exclusive distributor may use the trademarks of the supplier company. A robust intellectual property clause will prevent any illegal or improper usage.
Drafting of an Exclusive Distribution Agreement?
The following guidelines need to be followed while drafting an exclusive distribution contract:
- The definition of territory in the contract should not be vague or ambiguous. Typically, a broader region such as a state should be handed over to one exclusive distributor.
- The contract should always be for a fixed term duration and provisions for early termination based on fault should be provided.
- A list of permitted and non-permitted uses of trademarks of the supplier company should be given in the contract.
- Risk mitigation clauses such as indemnity including third party indemnity and limitation of liability should be included.
- A method for supervising the personnel of the exclusive distributor should be devised.
Types of an Exclusive Distribution Agreement?
An exclusive distribution agreement can be used in many industries; however, the basic template will remain the same. Commercial and operational terms may vary. For instance, commercial terms may vary in software distribution contracts from a simple consumer goods distribution contract.
Pros of an Exclusive Distribution Agreement?
- Saves hiring costs.
- Provides specialized and expert sales personnel.
- Leads to outsourcing of marketing activity and hence reduces the burden on the company.
- Leads to risk mitigation.
- Leads to territory-wise development of the product.
- Expands the company’s product into new markets.
An exclusive distribution agreement helps the supplier company to reach specific territories and market their products. It also enables them to adequately supervise the marketing activity. Any disputes which may arise should preferably be settled by mediation, arbitration and other such alternative methods of dispute resolution.
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