What are the key terms of a distribution agreement?

by | Jun 29, 2024 | Blog, FAQ, YBL Blogs

A distribution agreement lays the groundwork for longstanding business relationships and protects the interests and expectations of all involved parties.

However, a distribution agreement includes some risks and challenges. You have the potential for conflicts of interest, competition, or liability issues. Due to these challenges, a distribution agreement must be clear and comprehensive – with absolutely no room for doubt or misunderstanding.

What is a distribution agreement?

Firstly, we need to explain what a principal is. A principal is a manufacturer, supplier, or a distributor.

A distribution agreement allows a distributor to market and sell the products of the principal in a specific market or territory. This is typically one where the principal lacks a presence. The distributor acts as a middleman for the principal’s products by purchasing them from the company and then reselling them to their own customers. The principal may be a manufacturer, supplier, or another distributor seeking assistance in handling certain sales duties.

In this article, we’ll cover the key terms of a distribution agreement so you understand what you need in your business.

What are the key provisions of a distribution agreement?

In these agreements:

  1. Parties involved, roles and responsibilities: The agreement outlines the roles and responsibilities of both parties. The principal is responsible for manufacturing or supplying the products. The distributor handles marketing and selling them in a specific market or territory.
  2. Territorial scope: The agreement defines the geographical area or market where the distributor has the right to sell the products. This could be a specific region, country, or even multiple countries, depending on the terms negotiated.
  3. Product pricing and terms: It specifies the pricing structure, including the wholesale prices at which the distributor purchases the products from the principal. It also outlines any discounts, payment terms, and conditions of sale.
  4. Exclusivity: Some distribution agreements grant the distributor exclusivity within a defined territory. This means that they are the sole distributor authorised to sell the products in that area. Others may allow multiple distributors to operate in the same territory.
  5. Duration and termination: The agreement stipulates the duration of the contract and conditions under which either party can terminate the agreement, including breach of contract, non-performance, or changes in circumstances.
  6. Intellectual property rights: It addresses intellectual property rights related to the products, including trademarks, copyrights, and patents, ensuring that the distributor respects and protects the principal’s intellectual property.
  7. Reporting and performance metrics: The agreement may require the distributor to provide regular reports on sales, inventory levels, and market conditions. Performance metrics may also be included to measure the distributor’s effectiveness in selling the products.

Confidentiality and non-disclosure: Provisions to protect confidential information exchanged between the parties during the course of the agreement.

Key benefits of a distribution agreement

The key benefits of using distribution agreements are that the principal can pass on the risk and liability associated with the products to the distributor.

For instance, failure to sell,  inflationary pressures, bad debts, or imports and logistics issues. The principal is not liable for the acts of the distributor, and in the UK there is no requirement to pay compensation on termination of the agreement to reimburse the distributor for the value the distributor has brought to the principal’s business.

As a commercial solicitor, my focus is on distributor-specific and industry-specific considerations. Such as whether the distributor is allowed to ‘add value’ to the product in some way to increase their profit margin on the sale to their customer. This could be an offer of an after-sales service.

Overall, distribution agreements serve to formalise the relationship between the principal and the distributor. A distribution agreement provides clarity on rights, obligations, and expectations. With a view to smooth and mutually beneficial business operations.

If you’re unsure on how to formalise your business’s distribution agreement and you need to speak to a solicitor, then call Steven Mather – your contract lawyer in Leicester.


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