Are you a supplier or distributor needing a few pointers about distribution agreements?
In this piece I will look at some key areas to consider when having a distribution agreement drafted as supplier, or when you are a distributor thinking about taking on a new product line for distribution.
Definitions
The first essential part of your distribution agreement, or any well drafted agreement, is the definitions. Getting the necessary definitions correct from the outset will make the agreement easier to draft, and understand for both parties.
Critical definitions will be:
1. The products which will be the central focus of the distribution arrangement
2. The prices of those products
3. The term of the agreement
4. The territory to be covered by the agreement.
Questions/Issues to consider
Important questions to consider include:
- Is the distributor to be appointed as an exclusive or non exclusive distributor in the territory?
- You will need a clause setting out clearly that there will be no activities carried on outside the territory, if that is the agreement
- It should be clearly stated that the distributor will carry on the business in his own name and not as an agent of the supplier
- Will there be minimum orders to be placed? Will there be minimum orders for each product or range of products?
- Will there be an exclusive purchase requirement, that is, is the distributor bound to buy all his products from you as supplier or is he free to shop around?
- The conditions of sale from supplier to distributor will need to be clearly set out
- Will sales be on no less favourable terms than sales to other distributors or will this be at the discretion of the supplier?
- What are the terms in relation to price and payment, specifically will there be a discount for, say, early payment?
- What are the methods of payment?
- What are the payment/credit terms?
- When will invoices issue?
- There should be a “no deductions” clause also which will set out that no deductions or set off are permissible by the distributor
- What liabilities has the supplier after sale to the distributor, if any?
- There should be a clause dealing with trademarks and intellectual property of the supplier
- How can the agreement be terminated? In what circumstances?
- What are the consequences of termination?
- A Force Majeure clause will also be required in any effective agreement
- Who are notices to be addressed to and in what language?
Like any agreement, commercial or otherwise, its value will only be apparent when there is a dispute or threatened dispute.
So don’t cut corners when you need one drafted as supplier or need advice as a distributor before binding yourself legally.
Considering the above questions and definitions will set you on the right track, but this is not an exhaustive list.