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.
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.
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.
The advantages of outsourcing the distribution of your products include:
The disadvantages of outsourcing distribution include:
A well-drafted distribution contract should include the following:
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