Key elements of a distribution agreement

Many manufacturers and suppliers expand their business by using distributors for their products. Using distributors, especially for international markets, has many advantages. Suppliers can rely on distributors’ facilities and infrastructure (for example, warehouses and supply networks) instead of investing significant resources in establishing their own facilities and warehouses. Furthermore, distributors often have the advantage of having the local knowledge and contacts that would take many years for the suppliers to build.

It is critical, however, to put in place a robust distribution agreement. This agreement is a foundation of the relationship between the supplier and distributor and, like in any (hopefully) long term relationship, it needs to have the flexibility to withstand fluctuations in fortune. The following four key matters need to be considered for any distribution agreement:

1. Exclusivity

A key question is whether the appointment of a distributor should be exclusive or non-exclusive. If it is exclusive (for a particular country or territory), then the supplier cannot appoint other distributors or sell the products itself. Of course, there can be exceptions. For example, if the supplier already has some customers in the particular territory, it would normally reserve its right to continue to supply them. The exclusivity is usually accompanied by an obligation on the distributor not to distribute any competing products. Sometimes, the parties may want to start with a non-exclusive relationship and if it proves to be successful (for example, certain targets are met), it can be converted into an exclusive appointment.

2. Term

It is important to specify the term of the agreement and any rights to extend or renew it. Whilst usually the parties contemplate a long term relationship, it may be a good idea to start with a relatively short term, say 2 years, and then extend it for a longer term if things are going well.

3. Targets

The usual reason for a supplier to appoint a distributor is to grow its business. The supplier wants to ensure that the distributor can do this. It is, therefore, important to include some measures of growth in the agreement. The parties often will agree the sales targets. Also, the parties need to consider what will happen if the targets are not met. In that case, for example, one option may be to change from the exclusive appointment to a non-exclusive one so that the supplier can explore other channels to market. If targets are repeatedly not met, the distributor may want to have the right to terminate the agreement.

4. Pricing

The parties will usually agree on the prices for the supplier’s products. Sometimes, the price list is included in the contract. The distributor would typically expect a discount on retail prices. Again such discounts can be tied to targets in order to incentivise the distributor to increase sales.

If you have any questions regarding this article, please contact Source Legal Online at always@sourcelegalonline.com.au or 1300 609 450. 

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