Distribution Agreements

The supplier is often the manufacturer of the goods but not always. Sometimes the supplier has an exclusive arrangement with the manufacturer and is looking for sub-distributors.

As a supplier, it is helpful if you understand the demand for your product if you are seeking distributors, so as to direct them where to distribute for maximum market penetration – which may give them the best chance of success.

Each agreement can be individual to the territory and the distributors. We can help you to clarify your needs and ensure that your product and business adequately protected.

If you already have existing distribution arrangements on foot, you might want to carefully consider who you are allowing in so as to maintain brand stability and reputation.

A distributor will often be required to invest substantial funds into the distribution process. There may be significant, freight, storage and marketing costs in getting the product deep into the Territory.

• Hence, the first thing a distributor should do is to get educated about the product and the supplier.
• You should ensure that your investment is properly protected and that you have adequate rights under the agreement.
• We can help guide you through due-diligence in relation to the proposed distributor.
• How long as the supplier been in business? Is the supplier financially stable?
• A distributor want to know that ongoing demand can be met and that there is minimal defective product.

A distributor should probably want to know about existing distributorships and talk to those distributors where possible. This will likely provide you with insight into the supplier and the overall experience with them.

As distribution agreement lawyers, we have observed that there are many matters to consider and then properly document.

Some of these are:

Agreed Products:
Are distribution rights to be given to certain products or the whole range? Are there options if the whole range is not included?

Price:
Are there different prices for different volumes?

Is there a discount off the standard retail / wholesale prices?

Modification of Products:
Is the distributor authorised to alter the products?

Sub-distributors:
Are sub-distributors allowed? What are the rules that relate to them?

Territory:
How is the distribution territory to be defined? The territory may be as small as a few suburbs or as a big as a country or even a continent.

Sales Targets:
Are there minimum sales targets?

Payment terms:
When will payment be due? What security is required to ensure payment?

Demand forecasting:
This is quite critical so that a manufacturer can match demand with production – by producing enough to keep up with distributor demand while not overproducing unnecessarily. This can be a delicate balance and requires careful thought when drafting the agreement.

Exclusivity:
Is the distributorship an exclusive one? If so, for how long? For all or some products? Distributors of course want maximum exclusivity while manufacturers like to keep their options open with minimum exclusivity. Getting this right is very important.

Packing, delivery and transit:
Whose responsibility is this? Typically, the manufacturer will pack the items to the distributor’s specifications. International transit will often mean different packaging, which comes with different costs. What are the distributors expectations? What type of packing will be required?

Quality control:
A manufacturer has a duty to supply goods of “merchantable quality”. How will control be managed? Is there a possibility of deterioration in quality during transit? How can quality be controlled best? Who is responsible if there is a problem with quality?

Intellectual property rights:
What rights does the distributor have in relation to the goods? What brand will the products bear? Is any modification allowed? Is product licensing allowed?

Termination:
Who can terminate and what triggers give rise to the right to terminate?

Trial Period:
Is there a “run in” period, when parties are still getting to know each other? Distributors often want a manufacturer to be locked in while manufacturers tend to like more flexibility to end the relationship if something is not working – or if a better offer comes up. Sometimes, it is the other way around, whereby the manufacturer wants to lock down a distributor for a period of time with guaranteed order volumes and the distributor may want to road test the success of a product before being committed long term. All such things are negotiable but require considered thought and careful drafting. Experienced lawyers will negotiate the best outcome for you with minimal fuss.

Rights that survive the termination of the agreement:
When the agreement is over, there will be a run-off period. What happens in relation to such things as outstanding payment or defective products complaints that arise post-conclusion of the relationship?

Permitted marketing activities:
To whom may the distributor market the goods? Some manufacturer companies will want strict control to ensure consistency in a large market. Smaller manufacturers will often be more flexible – but will depend on individual circumstances.

We would say absolutely yes, for the following reasons:

• It is the foundation of you/business relationship and how your business is ultimately valued.
• The questions to ask are numerous, the issues are complex and getting the wording right requires an understanding not only of the deal but the law behind obligations and promises being made.
• It will clarify important issues such as legal liability and responsibilities.
• Getting it wrong (with a DIY approach or if the agreement is not thorough) will likely have a significant financial consequence to both parties, far outweighing the cost of competent legal advice at the start. Agreements with terms that are unclear are the ones that will lead disputes.
• Informal agreements may work at the start but as time goes on, there are issues that will arise and being able to refer back to the  agreement for the direction on how to deal with the issue is a great comfort.
• If a distributor is taking the goods offshore, this gives rise to a raft of other issues that should to be considered, which if not thought through could be financially crippling if things go wrong.
• Due diligence of the other party is desirable, if not essential. Lawyers are well placed to carry out various searches of the other party.
• Not asking the hard questions upfront can make it hard to address them later when parties have developed expectations.