A Distribution Agreement is a legal agreement document. It is binding between a supplier and a distributor of specific products, services, or goods. The distributor goes into a mutual agreement with the supplier to sell the agreed goods based on the terms highlighted in the agreement. The terms of distribution are outlined clearly in the agreement and both parties would be required to strictly adhere to the terms.
To draft an exclusive distribution agreement doc, you may need to consult an attorney. However, you can also choose to use a distribution agreement template to customize your document.
Types of Distribution Agreement
There are three main types of distribution agreements. Each type highlights the terms of the relationship and transactions that will be binding on both parties going into the agreements. It is critical to understand the terms of each type and what they entail before opting for it. Below are the types of distribution agreements that are available:
- Exclusive Distribution Agreement
In this type of agreement, the supplier agrees to sell specific contract goods to the distributor only within an agreed territory. The supplier also agrees not to nominate or sell his products to other distributors or directly to customers in the territory. This means that the distributor has the exclusive right to distribute and sell the goods, products, or services within the specified territory.
- Sole Distribution Agreement
This type of exclusive distribution agreement involves a situation where the supplier nominates a distributor as their sole or only distributor in a territory. Unlike in the exclusive distribution agreement, the supplier reserves the right to sell their goods directly to customers in the territory. However, they cannot give the right to sell to other distributors in the territory.
In this type of sample distribution agreement, the supplier possesses the total freedom to appoint other distributors and also sell directly to the end-users in the territory. This means that there can be multiple distributors for a supplier within a specific territory. Most fast-moving consumer product manufacturers go into a non-exclusive distribution agreement with distributors.
How Does Distribution Agreement Work
A distribution agreement sample typically covers the term, which is the period when the contract will be in effect, sales territories included in the agreement, terms, and conditions associated with the supply. The supplier must first determine the type of exclusive distributor agreement they want to go into with the distributor. When this has been decided, the next step is to decide on the distribution strategy.
They have to choose between an intensive strategy, which aims at widespread distribution to reach as many potential customers as possible, and a selective strategy, which aims at targeting a small group of outlets to cover the target market of the supplier. When this has been agreed on, the next step is to find a distribution agreement template.
The checklist of things to consider when putting a distribution agreement together includes the following:
- Terms (period) when the contract will be in effect
- Terms and conditions of the distribution agreement and sale
- Market rights and trademark licensing
- Covered geographical territories in the agreement
- Performance and reporting
- Conditions for terminating the contracts
Basic Terms of Distribution Agreement
Just like any other legal documents, distribution agreements samples are expected to contain standard terms and clauses. Both parties must understand the basic terms used in an exclusive supplier agreement to avoid any misunderstanding. Of course, the terms may vary and it mostly depends on the arrangement between the parties.
The basic terms that are used in sample distributor agreements are as follow:
- The timeframe of the Distribution Agreement
This is often referred to simply as the ‘term’ of the agreement. It is the set period that the agreement will be in operation. It may be set for a specific period or as an ongoing arrangement. It can also be extended after some time.
- Exclusive vs. Non-Exclusive
The distribution contract must clearly state whether the agreement is exclusive or non-exclusive. Exclusive means the distributor is the only distributor of the goods or services within a specific territory (sometimes an exclusivity agreement may be needed) while a non-exclusive agreement is a direct opposite.
- Minimum Performance or Standard
The agreement states the level of performance that the distributor is expected to maintain. This may be based on minimum purchase orders or target revenue.
- Marketing & Promotion
The agreement will clearly state the party that is responsible for the marketing and promotion of the products or services. The supplier is usually the one that undertakes the marketing and promotion of their products. However, in some cases, the distributor takes on the responsibility to market and promote the products of the supplier.
Other basic terms include:
- Training & support
- Orders, Delivery & Payment
When Should We Need a Distribution Agreement?
Manufacturers produce products to sell them to end-users. Some manufacturers have the capacity and resources to sell their products and services directly to the consumers. However, some would require the service of middlemen, also known as distributors or wholesalers, to get their products into the hands of their potential customers. This is where the use of distributors comes in.
Companies engage the service of distributors who already have a strong presence in a specific territory to distribute and sell their products to the final consumers. This is when a distribution agreement is needed. The business engagement requires that a distribution agreement be drawn up to highlight the responsibilities and entitlements of each party. The terms and conditions of the agreement must be spelled out to ensure that there is no misunderstanding or ambiguity in the business transaction.
When it comes to creating an exclusive distribution agreement template, different factors should be considered. The agreement must highlight the length of period that the contract will be binding and valid. Additionally, it must specify the details associated with the supply of the goods and the sales territory that is covered in the agreement.
It should cover details such as the order placement, payment terms, returns, delivery, transfer of risk, inspection prerequisites, title transfer, and other important details. This is why you need to give your sample distribution agreements to an attorney for review before both parties sign the document.