This article has been written by Himanshu Menghani, pursuing a Diploma in Advanced Contract Drafting, Negotiation, and Dispute Resolution from LawSikho.

Introduction

When a company makes a product it needs to sell it to customers. Now, if the company is well established it may directly sell and reach its customers, however, sometimes the company does not have the expertise to sell and market its product at the retail or wholesale level. In such a case it will engage a distributor, who will have the experience and foothold in the target market. For this purpose, it will need to get into a legal agreement with the distributor, which governs their relationship and clearly defines the terms of their arrangement, and allows the distributor to sell and market the products.

In simple terms, a distribution agreement is a legally binding agreement between an entity that supplies goods and one that distributes goods. The supplier or the manufacturer and the distributor can also have an informal distribution arrangement. In fact, many do, but these verbal agreements more often than not result in misunderstandings that can lead to disputes and end up in courts. A proper distribution agreement, with specifically stated terms of the deal, ensures clarity for both parties so they know exactly what they need to do. When one party fails to live up to the agreement terms, the same agreement will save the non-defaulting party by protecting it legally and providing legal remedies.

Brief introduction and history of Krsma Estates Pvt. Ltd.

KRSMA Estates was established in 2008 by the enterprising husband and wife team, Krishna Prasad and Uma Chigurupati. Nothing could be better than the union of the two very souls that brought together the idea of wine so unique – thus from the first name of Krishna and Uma was born ‘KRSMA’ (Kris – Ma) Estates. They had previously established Triton Laboratories, which would later become Granules India, one of the leading pharmaceuticals companies in India. The couple’s knowledge and expertise in microbiology, manufacturing, and management, together with their passion for fine wine, have been combined to form this exciting new venture.

Their vineyards, which cover 16 hectares, are located in Karnataka’s Hampi Hills some 70 km from the spectacular World Heritage Site. The initial planting was of Cabernet Sauvignon which yielded their first vintage in 2010. 

What is a distribution agreement?

A distribution agreement is a legally binding written arrangement between an entity that supplies goods and one that distributes goods. The supplier in this case can be either a manufacturer or another distributor that is reselling another supplier’s goods. The distributor is a company that plans to market and sell the products, whether to the public or to other companies. The distribution contract defines the terms of the agreement, including the cost of the goods or the commission rate, the length of the contract, where the distributor may operate, and other important details. There are a different kinds of distribution agreements depending upon the terms of Distribution:

• Exclusive distribution agreement:

The terms of which restrict the distribution of goods to certain geographical areas. In such an agreement the distributor will have sole authority to sell such goods to the defined clients and no other distributors would be allowed to sell to those clients. The exclusive distribution agreement is entered whenever the goods have technical or district features and specific knowledge is required to sell those goods.

 

• Non-exclusive distribution agreement

 

In a non-exclusive distribution agreement, the supplier remains free to appoint other distributors within the relevant territory, and may itself supply the products that are the subject of the distribution agreement within that territory.

Hypothetical distribution agreement for Krsma Estates Pvt. Ltd.

NON EXCLUSIVE DISTRIBUTION AGREEMENT

This Non-Exclusive Distribution Agreement (hereinafter referred to as “Agreement”) is being entered into on Day of Month, Year(“Effective Date”) at Location.

BY AND BETWEEN

KRSMA ESTATES PVT LTD registered under the provisions of Companies Act,1956 bearing CIN No. U15520KA2007PTC044113 having its registered office at H NO.112, SY NO.24/1/3 JULAKUNTI VILLAGE, TAVARAGERE POST,KUSTAGI TALUK, TAVARAGERE KA 583279 IN and represented by its Director Chigurupati Krishna Prasad (DIN No. 00020180) (hereinafter referred to as “Company/Manufacturer” which expression shall, unless repugnant to the context, mean and include their successors-in-interest and assigns), of the ONE PART,

AND

WINE ENTERPRISES PRIVATE LIMITED registered under the provisions of Companies Act,1956 bearing CIN No. U51909PB2020PTC051761 having its registered office at Inside Guru Nanak Ice Factory, G.T. Road, Putligarh, Amritsar Amritsar PB 143001 IN and represented by its Director Manpreet Singh Uppal ( DIN No.07493047) hereinafter referred to as “Distributor” which expression shall, unless repugnant to the context, mean and include their successors-in-interest and assigns), of the SECOND PART,

The “Manufacturer” and “Distributor” are herein collectively referred to as “Parties”.

WHEREAS:

1. The Manufacturer is engaged in the business of manufacturing, packaging a variety of premium wines made from  Cabernet Sauvignon, Sangiovese, and having state-of-the-art winemaking facilities, and new varietals planted in the vineyard.
2. The Manufacturer is desirous and wishes of expanding the market for the wines and is seeking partnership with exclusive retail stores in various parts of India.
3. The Distributor is engaged in retail business and wishes to be appointed as exclusive distributor for the Manufacturer.
4. The Manufacturer has agreed to appoint/engage the Distributor Wine Enterprises Private Limited.
5. In pursuant of this Agreement, the Parties have agreed to abide by the terms and conditions of this Agreement.

NOW THIS AGREEMENT WITNESSETH AND IT IS HEREBY MUTUALLY AGREED AND DECLARED BY AND BETWEEN THE PARTIES HERETO AS UNDER:

 

• REPRESENTATIONS, WARRANTIES, AND OBLIGATIONS BY/OF THE DISTRIBUTER

The Distributor hereby represents and warrants that:

1. It is validly incorporated as per the Companies Act, 1956
2. It owns and operates a retail store in Bengaluru as per standards and capacity specified by the Manufacturer
3. It shall employ and train staff required to maintain the quality and standards of the wine brand to maintain the goodwill of the Manufacturer.
4. It shall not engage in the sale of any products of the competitor.
5. It shall maintain confidential information and trade secrets (“Confidential Information”) acquired from the Manufacturer in relation to the sale, purchase of the manufactured wine brand.
6. It shall comply with all the laws and regulations that govern the Agreement including the Indian Contract Act,1872, Sales of Goods Act, 1930, Intellectual Property Laws, Competition Act, 2002, Consumer Protection Act, 2019.
7. Information provided by it to the Manufacturer in relation to the sale, purchase, and maintained accounts with respect to the wine is true to its knowledge and authority.
8. It shall make timely payments to the Manufacturer and provide all the accounting details of the sale and purchase within five (5) business days after the end of each month, to the Manufacturer.
9. It shall comply with the terms of return of damaged wine bottles by informing the Manufacturer within Seven (7) days of receiving such shipment or coming to light of such defect.

 

• REPRESENTATIONS AND WARRANTIES BY THE MANUFACTURER

 

The Manufacturer hereby represents and warrants that:

1. It is validly incorporated as per the Companies Act, 1956.
2. It has the requisite assets and resources to enter into this agreement
3. It has all the necessary approvals from the local authorities and has complied with the necessary laws including the Sales of Goods Act, 1930, Competition Act, 2002, Indian Contract Act, 1872, Intellectual Property laws, and Consumer Protection Act, 2019. 
4. It has complied with all the policies and regulations provided by the Central Government, concerned state governments and taken all the regulatory approvals from the concerned authorities.
5. It shall supply the wine to the Distributor within a stipulated time of seven (7) business days after the receipt of the order, placed by the Distributor, is received by the Manufacturer. It shall not delay the supply of the orders.
6. It shall make available the wine for sale by the Distributor in its place of business.
7. It shall maintain the quality of wine as prescribed by the Food Safety and Standards Authority of India (FSSAI).
8. It is not in the process of insolvency and neither is subject to any insolvency proceedings.
9. It’s entering into this agreement shall not result in a breach of any legal or contractual obligations.

 

• COMMERCIAL MODEL

 

1. The Distributor shall be responsible to purchase and sell a specified inventory within a specified time period, failing which, the Manufacturer shall have the right to terminate the Agreement after giving the Distributor a notice of one month.
2. In the event of any defective Products, the Distributor shall promptly inform the Manufacturer about the same and hand over such defective Products to the Manufacturer, at its own cost. The Manufacturer shall replace the same with another Product free of cost or at a discounted price, as the case may be within (seven) 7 business days from receiving the defective Products and verifying the defective nature of the Products.

 

• INDEMNITY

 

1. The Distributor shall at all times indemnify and hold harmless the Company, Company’s Affiliate, directors, officers, agents, representatives, nominees, and employees against any Loss Which may be commenced against and/or proposed and/or threatened and/or incurred by the Company, as a result of any breach, negligent act or omission or wilful default on the part of the Distributor arising either directly or indirectly from the performance (or non-performance) by the Distributor of any obligations under this Agreement, breach of any terms and conditions of this Agreement or breach of any representation, warranties, covenants, and responsibilities of the Distributor under this Agreement.
2. The Manufacturer shall not be liable to the Distributor for any special, indirect, consequential, punitive, or exemplary damages, including for greater certainty any damages on account of the loss of prospective profits.
3. The Manufacturer shall be liable for the damages, including consequential damages, or loss of profit caused to the Distributor, whether intentionally or in a negligent manner by the Manufacturer.

 

• Term and Termination

 

1. Unless earlier terminated as provided in this Agreement, the term of this Agreement shall commence as of the Effective Date and shall automatically expire at the end of the two (2) years (“Term”) following the Effective Date.
2. Either Party may terminate this Agreement as follows:

1. Upon thirty (30) days prior notice with or without cause;
2. For any breach or default of this Agreement by the other Party which has not been cured within a period of fifteen (15) days after the delivery of notice thereof to the defaulting party;
3. Upon dissolution, insolvency, or any adjudication in bankruptcy of the either Party or if the other Party ceases to conduct business in an ordinary manner;
4. If required by law or any rule, regulation, order, decree, judgment, or other governmental act of any governmental authority;
5. The Manufacturer may terminate this Agreement if the Distributor breaches any of its obligations of confidentiality or protection of the Manufacturer’s proprietary rights

 

• EFFECT OF TERMINATION

 

Upon notice of termination of this Agreement for any reason, the following provision shall apply:

1. All the rights granted to the Distributor under this Agreement shall cease.
2. The Distributor shall be liable to pay all the outstanding amounts due to the Manufacturer.
3. All the pending orders or deliveries shall be completed after the termination.
4. The Manufacturer shall have the right to appoint a Distributor to serve the existing customers and continue to sell the clothes in the Territory.
5. The Distributor shall not represent itself to be connected to the Manufacturer after termination
6. The Manufacturer shall have the right to repurchase all the quantity of the wine of KRSMA Estates available with the Distributor at a lower price. 
7. The Distributor shall cease to use all Confidential Information provided by the Manufacturer during the Term of this Agreement, and promptly return to the Manufacturer or destroy any documents (whether written or electronic) in its possession or under its control that constitutes Confidential Information.

 

• DISPUTE RESOLUTION

 

1. The Parties agree that in the event of any dispute or difference arising between the Parties in connection with this Agreement, the aggrieved party shall notify the other of the dispute within fifteen (15) days of such dispute.
2. The Parties shall attempt to reach an amicable solution by mutual discussion within thirty (30) days. In case of failure to resolve the dispute amicably, the Parties will resort to mediation or conciliation, by submitting the dispute to an independent mediator (“Mediator”) appointed by mutual agreement between the Parties to assist them in resolving the dispute.
3. Any Party may give written notice to the other Party describing the nature of the dispute, requiring the dispute to be submitted to a Mediator and proposing the name of up to three (3) suitable persons to be appointed. If no Mediator is appointed within fifteen (15) days of such notice.
4.  If the dispute has not been resolved within sixty days to the satisfaction of the parties, the Parties shall resort to arbitration for the effective and binding resolution of disputes.

1. The arbitral tribunal shall consist of three arbitrators, each Party shall appoint one arbitrator and the third-party presiding arbitrator shall be appointed by the two appointed arbitrators.
2. The language of the arbitration proceeding shall be English; and
3. The seat and venue of arbitration shall be in Karnataka, India
4. No payment due or payable by the Parties shall be withheld on account of a pending reference to arbitration to the extent that such payment is the subject of such dispute.
5. The cost of arbitration in settling or determining the dispute shall be borne equally by the Parties unless the arbitrators otherwise determine. The arbitration proceedings shall be confidential.
6. This Agreement shall be governed by the Law of India and Chennai Courts shall have exclusive jurisdiction for the settlement of all disputes arising under this Agreement.

IN WITNESS WHEREOF the Parties have caused this Agreement to be executed and delivered by their duly authorized representatives. 

SIGNED AND DELIVERED ON BEHALF OF

1. The Manufacturer:
2. The Distributor: 

ALL IN THE PRESENCE OF:

1.

2. 

How to draft a good distribution agreement?

1. Collect Information required before drafting an agreement

 

2. Legal issues to be ensured

 

 

 

 

• Offer and acceptance

 

One of the parties to the agreement makes an offer to do or not to do certain things and the other party accepts the offer for a valid agreement to exist. There cannot be an agreement without an offer and its acceptance by the other party.

 

• Consideration

 

For a binding and enforceable agreement it is necessary that for the services or goods to be supplied by a party to the agreement, the other party shall compensate the first party.

 

• Capacity to contract

 

The parties to the agreement must have the legal capacity to bind each other to the terms of the agreement. This means a minor, a lunatic or an insolvent cannot enter into an agreement. For a legal entity to be bound by an agreement, it shall be executed by someone who is authorized to execute it.

 

• Certainty of subject matter and terms

 

The subject matter of negotiation and the terms and conditions governing that subject matter should have certainty.

3. Other important points to remember:

 

• Understand the type and the commercial intent of the transaction

 

E.g. whether it is a licensing agreement (where some intellectual property is licensed) or simply a marketing agreement, whether an agreement is a joint venture agreement or a private equity investment agreement.

 

• Locate a template that resembles the transaction as closely as possible

 

If you are doing an investment document that has a foreign investor, try and get a precedent (template of another transaction) that has a foreign investor. Don’t use a template that has a domestic investor. If you have a strategic investor who is interested in integrating a start-up with his own company, do not use a template for a financial investor who is simply interested in making a financial return.

 

• If possible, speak to the client about various commercial possibilities that could arise

• Check any changes in the law (substantive and procedural) from time to time

 

E.g. guidelines and procedures for valuation of shares may change, which may alter the way you arrive at the price for a subscription to the shares of a company.

References

 

• http://www.mca.gov.in/

• https://www.indianwines.info/krsma-estates/

• https://krsmaestates.com/krsma-history/

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