How To Avoid Distribution Agreement Dilemmas
What is a distribution agreement? A distributor buys goods or services from a manufacturer or wholesaler and resells them on its own behalf.
Distribution arrangements are commonly used where a manufacturer needs assistance in bringing products to a particular market (e.g. in an overseas territory with which it is not sufficiently connected or familiar) or where a distribution arrangement is preferable to an agency channel or to an internal sales and marketing team. The arrangements are often long term and can include additional incentives to encourage the distributor to develop the sales of the relevant goods (or services) in exchange for a reduced wholesale price.
Is there a difference between a distributor and an agent?
Distribution has certain features in common with agency, but the legal structure is different. A distributor buys and sells on its own account, rather than for a principal and the customer relationship is therefore with the distributor, not the manufacturer. The distributor thus assumes legal and commercial risk that (normally) an agent does not.
What are the different types of distribution?
There are three different types of distribution arrangements: non-exclusive, sole and exclusive.
A sole distributorship occurs when a manufacturer retains the right to sell products into the territory concerned, but cannot appoint anyone else (aside from the sole distributor) to do so. In an exclusive situation, only the distributor has the right to sell the goods or services; meaning the manufacturer forgoes their distribution rights.
The terms ‘sole’ and ‘exclusive’ are often used inter-changeably. It is therefore imperative that the parties' rights and duties be set out in full within the distribution agreement.
Non-exclusive rights allow the supplier to appoint further distributors and to actively seek direct sales within the territory.
What are the advantages and disadvantages of a distribution agreement?
The advantages of outsourcing the distribution of your products include:
- the distributor may have a better knowledge of the local customs and laws relating to the market you are trying to sell into
- the distributor incurs the risks associated with storing the goods and transporting them
- the distributor is responsible for marketing your product
- the distributor may have an existing brand you leverage against
The disadvantages of outsourcing distribution include:
- you could lose control over certain marketing aspects or the pricing of your product
- the distributor may want discounts on products and privileged credit terms
- distributors can demand long-term exclusive agreements, which can keep you bound under contract even if they fail meet the sales targets
What should a distribution contract include?
A well-drafted distribution contract should include the following:
- the geographical boundaries of distribution
- clauses setting out how to sell the product
- the identity of other authorised distributors
- what the distributor will be paying for your product
- the credit terms that will apply
- details of bonuses to be paid to the distributor if targets are met
- how long the agreement will last and whether it can be terminated early by either party
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