Distribution Agreements

Distribution Agreements: A Comprehensive Guide (2020)

What is a Distribution Agreement?

In business transactions, you have to be able to trust the parties you are working with. A distribution agreement governs the relationship between the manufacturer or supplier, and the distributors of a product or service. The legally binding contract outlines the expectations for all parties involved. Therefore, it is crucial for both parties to understand the critical terms of the distribution agreement fully. The clauses of a typical distribution agreement vary depending on the specific type of arrangement between the involved parties.

The written contract protects all parties from risk when entering the distribution relationship. It helps in providing both parties with a proper roadmap to the respective rights and obligations in the relationship. Since distribution agreements are known for being available in all shapes and sizes, your particular distribution relationship can be catered to.

Key Terms of the Distribution Agreement

The key terms of a simple distribution agreement vary significantly to reflect the unique requirements and intent of every transaction. When you are creating your own distribution agreement, these are some of the key terms you should consider:

Purpose of the Distribution Agreement

Businesses benefit from relying on a distribution agreement. Some might depend on a distributor to transport the products and services to the target market. Other businesses might choose to work with a specific distributor to benefit from their expertise or market contacts. Whatever the supplier-distributor relationship, the distribution agreement ensures a fair deal is upheld on both ends.

Length of the Distribution Agreement

The period of the given agreement is known as the “term” of the distributor contract. The length of term is dependent on the specific arrangement but can vary depending on the pre-set conditions which can include:

  • Being set for a particular period of time
  • Might extend for some further period – might also be subject to specific criteria
  • Being set to serve as some ongoing arrangement

The distribution agreement and its set length are vital to determine, in case the distribution agreement is known to have minimum order requirements or some element of exclusivity.

Non-Exclusive vs. Exclusive Agreement

A distribution agreement can be either exclusive or non-exclusive. An exclusive agreement specifies a particular distributor to be the sole distributor of the given product. Typically, this distributor is confined to a specific area within which they can sell and market the product or service. This can be a specific region, state or country. The exclusive distribution agreement is beneficial for businesses that prefer to have a distributor represent them. Particularly when that distributor has a substantial market place presence or familiarity. For instance, a distributor might be responsible for responding to customer queries and satisfying all possible orders within a given area.

On the other hand, the non-exclusive agreement allows the distributors to operate their sales alongside other distributors of the same product or service. Other distributors can include the wholesalers and the suppliers in the agreement. In this case, there tends to develop healthy competition between distributors.

Minimum Standards of Performance

In exclusive distribution agreements, wholesalers or suppliers can set standards of performance for the distributors to uphold. Performance standards are typically regarding minimum purchase orders and revenue targets. The purpose of such clauses is to provide assurance on the justification of the exclusive agreement. Having minimum standards allows for possibility of arranging additional distributors within a particular area. This provides relief for the wholesaler or supplier if a distributor is not performing well and failing to meet the minimum standards.

The minimum standards of performance should be decided upon and plainly outlined before each of the parties enter the distribution agreement. The benefit of including minimum standards of performance is that all involved parties can clearly understand the obligations and responsibilities they are required to fulfil.

Marketing and Promotion

Marketing and promotion responsibilities can belong to the distributor, the wholesaler or suppliers, or all of the involved parties. Each of the parties can include their related conditions in the agreement. For example, the wholesaler or supplier may require that the distributors abide to branding guidelines.

However, the obligations of each party depend largely on whether they enter an exclusive or non-exclusive agreement. Exclusive agreements tend to have more obligations regarding marketing and promotional materials. For example, the distributors may also be responsible for undertaking new marketing and promotional activities such as:

  • Attending customer training events
  • Creating marketing and promotional materials
  • Attending trade shows

Each entity’s responsibility depends on the specific nature of the products being sold as well as the amount of control the wholesaler or supplier wishes to retain over branding and market reputation.

Training and Support

Training is regarded as an essential aspect of the distribution agreement, particularly for advanced technology products. The wholesaler or supplier is responsible for outlining the specific amount of training and support they will have to provide to the distributor. Other involved entities can also state whether they will be capable of training the end customer on how to use the product or service.

The participating distributors should be looking out for areas of support they might need from the wholesaler or supplier. For instance, distributors should consider whether the wholesaler or supplier will be responsible for:

  • Exchanging inquiries to the distributors.
  • Listing the distributors in the relevant websites.
  • Including the distributors in the relevant promotional materials.
Competition

The distribution agreement can have a significant effect on the competition within the market. Some of the standard clauses in a typical distribution agreement are known to place limitations on distributors that prevent them from buying similar products from the wholesaler or supplier. Further possible limitations might prevent the distributor from competing with the individual suppliers or wholesalers during the ongoing distribution agreement and even after its expiration.

The given set of competition limitations might not be applicable to all the concerned products. They are typically applied more to products that are unique as they cannot easily be purchased from other wholesalers or suppliers. Limitations may also be applied if the particular distributor has influential bargaining power.

Predictions

The distribution agreement may be subject to the predictions made about the availability of the service or product. The supplies amount of a particular product may be dependent on external factors such as seasonal limitations. Distribution establishments are therefore likely to ask the distributor to purchase the quantity of product that is predicted to be available.

The distributor may also require the wholesaler or supplier to meet agreed upon minimum quantities, based on the periodical predictions laid out by the distributor. Ultimately, the contracted quantities depend on the bargaining power of the distributor.

Orders, Payments and Delivery

The processes put in place for ordering, making payments and delivering products are dependent on the specific procedure conduct of the wholesalers or suppliers. For instance, there may be specific requirements when making orders via:

  • An online platform or software
  • Sending the order form to the wholesaler or supplier

The terms and conditions of any distribution agreement should make the processes of submitting an order and accepting payment clear to all involved parties. Each of the participating parties should also consider when the risk of product or legal ownership is theirs, and when exactly it is passed on to the next party. For example, the distribution contract should specify which party will be liable if the product is damaged, lost or stolen during delivery. For their time of responsibility, the concerned party should ensure they have the relevant insurance set up to cover the possibility of liability.

Major Takeaways

The distributor contract form should be created to incorporate the respective interests of each party involved as well as upholding the key terms and conditions. The terms or clauses of the distribution arrangement sample could vary due to several factors such as:

  • The Distributors appointment
  • The product that is being distributed
  • The obligations of each party in relation to the sale, marketing and distribution of the product or service.

Important Distribution Agreement

Before signing up for a distributor contract, you should be aware of the different types of distribution agreements. The different agreements vary based on differing clauses and are tailored to different types of manufacturer or supplier and distributor relationships. Some common ones include:

Licensing and Distribution Agreements

This contract provides an effective way for the supplier to market or distribute the respective products or services. This advantageous agreement maintains that the supplier is not required to provide the full capital investment amount that would otherwise have been required to set up a business in the particular market.

Software Distribution Agreement

This legal agreement defines the distribution relationship contract between software providers and their distributors. In this arrangement, the software provider creates the software product and the distributor is expected to market as well as promote the final product. Software distribution agreements fall into two categories:

  • Exclusive software distribution agreements
  • Non-exclusive software distribution agreements

Some of the essential elements of a typical software distribution contract include:

  • Marketing right
  • Trademark
  • The length of term of the agreement
  • Terms & conditions with respect to the sale of the software product
  • Geographical territory as covered by the agreement
Reseller Agreement

A reseller contract refers to an arrangement between the party responsible for manufacturing or supplying the products and the party responsible for selling the products to the general public or a third party. Under the clauses of the reseller agreement, the reseller sells the products on behalf of the supplier or wholesaler.

OEM Distribution Agreement

An Original Equipment Manufacturer (OEM) agreement is known to be formed in the manufacturing sector of physical products. Please see our OEM distribution and license agreement template.

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