This article has been written by Manju Sharma pursuing Diploma in Advanced Contract Drafting, Negotiation and Dispute Resolution and edited by Shashwat Kaushik.

This article has been published by Sneha Mahawar.

What is a distribution agreement

A distribution agreement is a legally binding contract between two entities that creates some rights and duties towards each other during the tenure of the agreement. A distribution agreement is one under which a supplier or manufacturer of goods agrees with the distributor to market and sell the goods. The distributor buys the goods on their own account and trades under their own name. A distributor purchases a bulk number of products from a supplier or manufacturer and distributes them either directly to consumers or to retailers, who then sell them to consumers.

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Importance of distribution agreements

Distribution agreements play an important role in the business market. A distribution agreement helps a manufacturer expand its market reach, increase its sales volume, and reduce its operational costs, although it involves some risk and challenges. Distribution agreements benefit distributors as well as manufacturers. A distribution agreement should be clear and comprehensive and leave no room for doubt. The manufacturer grants the right to sell its product to the distributor within a specified or unspecified region.

Components of distribution agreements

A distribution agreement typically includes the following basic key components:

  • Details of parties: Every distribution agreement begins with legal names and registered offices of the manufacturer and distributor.
  • Territory: This clause describes the scope of the products that are subject matter of agreement and the territories in which the distributor is authorised to operate or sell the products.
  • Rights and obligations: In a distribution agreement, both parties get some rights and obligations towards each other. The manufacturer and the distributor both have the right to work in the prescribed area. For example, the distributor has the right to sell the products in a “specified area in exclusive agreement,” whereas the manufacturer also has the right to monitor the activities of the distributor.
  • Term and termination: The agreement must mention the effective date and the expiration date of agreement, as well as the date for renewal or termination.
  • Confidentiality clause: Both parties have a duty not to disclose confidential information to any third party without the consent of the other party to the agreement.
  • Payment clause: This clause sets out the price of products, the discounts or commissions that “the distributor may receive,” and the mode of payment.
  • Product warranty clause: A strong distribution agreement sets out the quality standards of products and warranties that the manufacturer provides to the distributor,  and in some cases, even to customers.
  • Governing laws and jurisdiction: The agreement shall be governed by and construed in accordance with the Indian Contract Act, 1872 and other laws as applicable. 

Types of distribution agreements

There are different types of distribution agreements, like exclusive and non-exclusive agreements. The parties should determine whether the agreement is exclusive or non-exclusive and how exclusivity is defined. In an exclusive agreement, the specified distributor will be the sole distributor with the right to sell the product within a particular region, whereas in Non-exclusive agreement, the manufacturer may supply the products to many distributors, sometimes competing in the same market. Exclusive agreements put limits on distributors and restrict the supply of goods to particular areas or markets for the sale of goods.

Important clauses of exclusive distribution agreement

There are some of the most important and essential operative clauses in this Exclusive Distribution agreement and the points of negotiation in the clauses are, as given below: –

  • Scope of distributorship: A distributor can also be exclusively confined to specific territory, where it can sell the products/product of manufacturer or supplier. Both parties shall negotiate the territory or geographic region.
  • Exclusivity clause­: The agreement should specify whether the distributor has exclusive rights to distribute the product in the defined territory. A distributor can also be exclusively confined to specific territory, where it can sell the products/product of manufacturer or supplier.
  • Terms of sale clause: Marketing and promotion may be the responsibility of the distributor, the supplier or both parties. The supplier or manufacturer may require that the distributor only use specific assets to market or sell the products for distribution. The supplier may require the distributor to follow particular guideline relating to branding
  • Payment clause: The agreement should set out the payment terms, such as the time frame for the distributor to settle invoices, increasing the price due to inflation or anything else that affects the costs of the supplier. The agreement should outline the pricing and margins that the distributor will receive for the sale of the product.
  • Indemnification clause: Both parties should consider when the legal ownership and risk of the product will pass on to the other party. 

Distributor obligation clause

  • The distributor shall have the exclusive right to advertise within the prescribed territory such products under the trademarks, service marks and trade name of manufacturer.
  •  The distributor will be the sole distributor with the right to sell the product within a particular geographic area.

Distributor’s general duties

  • The distributor shall use its best efforts to promote the products and maximise the sale of the products in the territory. The distributor shall neither advertise the products outside the territory nor solicit sales from purchasers located outside the territory.
  •  The distributor shall report monthly to the manufacturer in a written report due by the 15th of the following month concerning sales of the product and marketing activities of the previous month. The marketing activity report shall include a general synopsis of activities, such as advertisements, articles, and, trade shows.

Term and termination clause

The agreement must clearly indicate when the agreement came into effect and the incidents  wherein the parties can terminate an agreement before the prescribed time period. Tenure must be specified. A termination could happen in following situations: –

  • Termination for breach- If either party breaches any obligations assigned under an agreement, the agreement may be terminated due to a breach of terms and conditions.
  • Termination for insolvency- Either party shall have the option to terminate the agreement without notice upon the institution of a proceeding of insolvency or bankruptcy.
  • Termination of exclusivity- The manufacturer may retain the option, upon termination, to terminate the distributor’s exclusivity right and may allow the agreement to continue as a non-exclusive distributor agreement.

Upon termination, the distributor shall return all materials, such as trade names, patents, design formula or other data, to the manufacturer.

Important clauses of non-exclusive distribution agreement

A few important clauses of the non-exclusive distribution agreement are as given under:

Terms of sale clause

  • The distributor sells the agreed products manufactured by the manufacturer.
  •  Delivery of the products ordered shall be made by the manufacturer to the distributor on the date mentioned in the purchase order.
  • The manufacturer shall ensure the safe delivery of products to the distributor. Any in-transit damage to the goods shall be borne by the manufacturer until the goods are delivered to the distributor.
  • The discretion to select the carrier/shipper shall vest in the manufacturer, and the distributor shall not have any right to select the carrier/shipper of his own choice.
  • In the event the manufacturer cannot deliver the ordered goods at the agreed time, the distributor shall have the right to cancel the order.
  • The distributor cannot change the terms of sale without prior written consent from the manufacturer.

Payment clause

  • The price of goods shall be decided by the manufacturer and same shall be notified to the distributor by means of prior notice of at least 15 days.
  • No purchase order shall be placed or accepted until and unless the price of goods is decided. Any objection to the price of goods after delivery will not be entertained and the price of goods decided by the manufacturer shall be final and binding.
  • The price of goods shall include the shipment charges for delivery at the location(s), as decided by the distributor.
  • All payments by the distributor shall be paid to the manufacturer by the 15th day of every English calendar month.
  • The mode of payment shall be online, either through RTGS, NEEFT, or any payment app used by both parties.
  • All amounts that are not timely paid by the distributor shall be subject to a late payment charge equal to one-half percent (1.5%) per month.

Warranty clause

  • The manufacturer shall ensure that goods are merchandisable and fit for sale. Any item with manufacturing defects or other defects shall be replaced by the manufacturer. The manufacturer further undertakes to ensure timely delivery of goods at the destined location.   
  • Any warranty for the products shall run directly from the distributor to the purchaser of the products. 

Termination

Termination for breach

If either of the parties defaults on any of the obligations as per the agreement, then the non- defaulting party may give the defaulting parties a written notice, and if the default is not cured within thirty days of the notice, then the agreement will be terminated.

Termination of insolvency

Either party shall have the option to terminate this agreement without notice:

  • upon the institution of actions against the other party for insolvency, receivership, bankruptcy, or any other proceedings for the settlement of other party’s debts,
  • Upon the initiation of dissolution, proceeding against the other party.

Conclusion

An agreement should cover all aspects of the parties’ negotiations. It should leave no scope for the parties to have to negotiate any aspect in the near future. Distribution agreements plays a crucial role in the modern business world in facilitating the transfer of goods from one place to another. These agreements sets the terms and conditions under which the products are distributed and sets the framework for a successful business relationship between the parties.  

References

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