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This article is written by Muskaan Aggarwal, pursuing a Diploma in Advanced Contract Drafting, Negotiation, and Dispute Resolution from LawSikho.com.

Introduction

Distributors are parties that import goods from the suppliers for resale in the market, keep the process of distribution of products throughout the market, continuous, and also, legally take possession of the goods before a sale is made. They are mainly hired to increase the reach of the products in the market. The distributors are primarily responsible for the possession of goods by paying the appropriate amount to the company for such possession. Distributors are mainly bound by the terms of the agreement signed between the seller and the distributor. Therefore, they carry the inventory or demo goods of the seller and provide after-sale services, if necessary. Thus, distributors directly purchase goods from the seller and resell the goods into the market. This is mainly done in cases where the supplier wished to expand their business in other parts of the country or other countries altogether. The distributors, being locals in the area, help the suppliers to reach their products to a wider audience, and hence, increase their sales.  

Contracts are created in this entire transaction

  1. The contract created between the supplier of the product and the distributor responsible for the reselling of the product.
  2. The contract is created between the distributor of the product and the purchaser of the product. 

Therefore, the purchasers of the product become the customers of the distributors of the product, instead of becoming the customers of the supplier. 

Difference between exclusive and non-exclusive distributors

In the case of exclusive distributors, the distributor responsible for the resale of the product is the only distributor who is given the right to sell the goods in a particular territory, and the distributor is not allowed to engage in the distribution of other products which compete with the products of the supplier. The exclusiveness of the distribution agreement between the distributor and the supplier is taken to be an advantage to the distributor. This is because, at the initial level of the distribution process of the products, there are many costs (such as the promotion costs, purchase costs incurred by the distributor, etc) incurred by the distributor, and the distributor wants to ensure that the earnings earned through the distribution process are not reduced due to the presence of other distributors in the same territory. Moreover, even though the distributor is not allowed to engage in the distribution of products in competition with the supplier, the distributor is still free to engage in the distribution of other products, not similar to the products sold by the supplier. Some of the common target areas where exclusive distributor agreements might be entered by the parties are:

  1. Where a particular industry sector is targeted by the supplier.
  2. Where a particular region is targeted by the supplier.
  3. Where a particular consumer base is targeted by the supplier.
  4. Where a particular application area is targeted by the supplier. 

Therefore, while entering into an exclusive distribution agreement, the supplier must test the commitment of the distributor beforehand. Considering that the distributor shall be the only person in contact between the supplier and the new market that the supplier aims to reach, exclusive agreements require a higher threshold of selection from the supplier. 

In the case of non-exclusive distributors, the distributor responsible for the resale of the product is not the only distributor present in that particular territory. Therefore, there are other distributors, hired by the supplier, in the same territory, who engage in the distribution of the products of the supplier. Moreover, the distributor is not limited to the supplier and is free to engage in the distribution of products in competition with the supplier. The non-exclusiveness of the distribution agreement between the distributor and the supplier is taken to be an advantage to the supplier. This is because, if the business relationship between the supplier and the distributor faces any problems or irretrievable breakdown of the relationship, then the supplier already has another distributor to rely upon, who shall then be responsible to continue the resale of the products in that particular territory. 

The competition in non-exclusive distribution agreements is often taken to be a motivating factor, where the distributors try their best to meet the requirements of the supplier, and hence, earn more profits through the resale of the products. Moreover, the biggest advantage of non-exclusive agreements for the suppliers is reaching more market coverage in less time, as compared to a single distributor doing the task. This helps in increased opportunities for the supplier, and hence, increased profits. 

Difference between agent and distributor

The fundamental legal difference between an agent and a distributor is that the agent is responsible for negotiating the terms on behalf of the supplier and is also responsible for the creation of a legal relationship between the supplier and the customer. However, this is not the case for a distributor. A distributor is responsible for the resale of the products to the customers. So, the sale contract exists only between the customer and the distributor, and it is the distributor and not the supplier, who takes the risk of not being able to completely sell the products in the territory. 

Another primary example between the two is that the relationship between the supplier and the distributor is mutually exclusive, where the supplier is not responsible or bound by the acts of the distributor in any manner. On the other hand, for a relationship between an agent and a supplier, the supplier is responsible for all acts of the agent, and hence, the principle of vicarious liability comes into play in such a case.

Preference for distribution

In spite of having alternatives for distribution, like agency as discussed before, the distributor-supplier relationship is more preferred. Some of the reasons for this are:

Lower financial risks for both distributor and supplier 

Considering that the supplier pays for the goods that are supposed to be resold in advance, there is a limited financial risk that the supplier is subject to. The only financial risk that the supplier may be subject to shall be loss in reputation, and hence finance, due to the conduct of the distributor during the resale of the products. However, the same is mostly taken care of in the agreement between the parties, and the distributors do not subject themselves to such losses, as that results in a loss in their earnings as well. Similarly, from the distributors’ side, distributors mostly associate themselves with reputed companies and suppliers, and hence, take advantage of their already established market presence, to resell the products. Therefore, limited financial risks exist for both the supplier and the distributor. 

Less relationship management is required between parties 

The relationship of supplier-distributor is mutually exclusive, and the two parties do not interfere in each other’s business unless dire circumstances require them to do so. This is something that shall be specified in the agreement between them as well. Therefore, no such relationship management is required, and the parties are free to function the way they want to.

More flexible relationship between parties 

As discussed before, the parties are free to function the way they want to, without the interference of the other party. This results in a very flexible relationship between parties, which is not something that is noticed in other alternatives of distribution. 

Preference of non-exclusive distribution over exclusive distribution

Non-exclusive distribution is often preferred over exclusive distribution. This is because this gives the suppliers the flexibility to terminate the presence of any non-performing exclusive distributors from the resale of the products. Commonly, a termination is due from the supplier to the distributor, in case the supplier terminates the agreement with the distributor, which results in the supplier paying a much higher sum to the distributor just to eliminate the presence of such a non-performing distributor. 

Normally, the distributors want the presence of an exclusive distribution agreement with the seller, which is not something that the suppliers prefer. However, the same can be taken care of by drafting the entire distribution agreement between the parties in a way where the parties reach a common understanding concerning the agreement. This understanding shall suggest that as long as the distributor is able to meet the objectives of the supplier and able to meet the terms and conditions of the distribution agreement, no other distributor shall be appointed in the territory of that distributor. This arrangement does not limit the supplier to an exclusive distribution agreement, and also encourages the distributor to meet the required goals in an effective and efficient manner. 

It is important to also be aware of the timeline of such arrangements between the parties. Sometimes, in some countries, the absence of the appointment of a second distributor in a specific territory is de facto taken to be equivalent to an exclusive distribution agreement. Therefore, it is important for the supplier to research the country or the market in detail, before entering into any distribution agreement with the distributor. 

Conclusion

Exclusive and non-exclusive distributors, both act as an important part of the sales conducted by the supplier, and hence, contribute to the expansion of the supplier’s business. However, exclusive distributors have more responsibilities and hence, are often not preferred by the suppliers, even though these agreements are preferred more by the distributors themselves. 

References


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