Dissecting Your Distribution Agreement: A Legal Guide

With excellent distribution agreements - comes great opportunity! From expanding into new markets to bolstering a brand, a distribution agreement can be a considerable asset to suppliers and distributors. However, the mishandling or even absence of one can trigger a litany of issues, from the erosion of intellectual property to grave financial losses.

We've taken a deep dive into distribution agreements (also called channel partner agreements, sales agency agreements, or reseller agreements), from when you need one to key terms you should be aware of. 

In this article, we’ll cover:

• What is a distribution agreement?
• Do I need a distribution agreement?
• Different types of distribution agreements
• What should a distribution agreement include?
• How do you negotiate a distribution agreement? 
• What are the issues with distribution agreements? 
• Get the most out of your distribution agreement with Biztech lawyers

So, let's get into it...

What is a distribution agreement?

In a nutshell, a distribution agreement defines the legally binding terms through which a distributor will sell and market the goods of a supplier. Understandably, this is a crucial agreement that will govern the business operations, financial arrangements, and logistics of a professional relationship. 

By their very nature, distribution agreements must be bespoke to the products sold and the markets in which they'll be distributed. As a result, they will often vary quite a lot in substance and form, with terms related to geography, exclusivity rights, prices, intellectual property, delivery schedules, duration, dispute resolution, and more.

So, before we get into the details of distribution agreement terms - do you actually need one?

Do I need a distribution agreement?

A distribution agreement provides suppliers and distributors with legal protections - while setting the foundations for a mutually beneficial relationship. If you're a supplier or a distributor, it's beyond advisable to get one in place–it’s crucial. While trust should be at the core of every professional relationship, you don't want to leave conditions to chance. A well-drafted distribution agreement will help prevent misunderstandings, mitigate disputes, and pave the way for a fruitful long-term relationship. An agreement allows suppliers and distributors alike to focus on the day-to-day without distractions from battling out terms during the relationship that should have been managed from the outset. 

Many risks lie in wait for those deciding to park the distribution agreement and proceed with the relationship. Most often, the parties don’t have a “meeting of the minds” regarding some key concepts beyond pricing and delivery, such as confidentiality, exclusivity, and branding. From financial losses to reputational damage, weakened intellectual property rights, and more, there's a lot that can go wrong when you don't get your terms in writing–and that can both ruin the opportunity and find you embroiled in disputes. 

Your distribution agreement is more than a legal document - it's a strategic asset and a security blanket.

Different types of distribution agreements

As mentioned, distribution agreements can vary in form and substance. Let's look at the most common types and what they entail. Any of these relationships may also involve either an agency relationship, where the distributor facilitates sales transactions between the supplier and the end customers, or a reseller relationship, where the distributor buys the supplier’s goods or services and resells them to the end customers.  

Exclusive distribution agreement

As the name suggests, an exclusive distribution agreement grants a distributor exclusive rights to sell a supplier's products, often for a limited geographic region or a specific group of customers. This type of agreement also prevents the supplier from encroaching on this established territory (for example, they are prevented from selling these same rights to another distributor and from engaging in direct sales themselves). This ensures the distributor has a protected competitive edge in the market—against suppliers and other distributors alike.  

Sole distribution agreement

Next are sole distribution agreements. A sole distribution agreement grants a distributor the right to sell products within a region or market while preventing other distributors from operating in the area. However, it does not prevent the suppliers themselves from operating in the area (e.g., if they wish to go directly to customers). 

Non-exclusive distribution agreement

Under a non-exclusive distribution agreement, suppliers can appoint multiple distributors to sell their products or services. Unlike sole or exclusive agreements, a non-exclusive distribution agreement often results in many regional or market distributors. For suppliers, this can reduce the risks of relying on one distributor, allowing them to expand their market without limitations. It can also open up a range of territories, making non-exclusive agreements particularly beneficial for businesses looking to expand quickly.

It's worth noting here that non-exclusive distribution agreements often require a bit more "thinking" to avoid the conflicts that can arise in a supplier-dense territory.

Selective distribution agreement

Finally, we have a selective distribution agreement, which means a supplier agrees to sell products only to a select group of distributors. In response, these distributors have to adhere to certain criteria, with the aim of maintaining a certain level of quality (for example, in delivery or service). 

This type of agreement is common in sectors like technology or automotive, allowing suppliers to protect their brand value while encouraging market expansion. For example, an electronics manufacturer might use a selective distribution agreement to ensure their products are only sold in stores with trained staff and high customer service. This approach helps to maintain a premium brand image while providing a consistent customer experience. 

What should a distribution agreement include?

Let's move on to the details: What should a distribution agreement include? As we've discussed, your distribution agreement must be bespoke to you, your relationship, and your agreed terms. However, we've tackled some of the most pertinent terms you should know below. 

At a very top level, your distribution agreement will need to set out: 

• Parties involved: Define who the distributor and the supplier are, including legal names and addresses. 
• Scope of appointment: Next, specify the scope of the distribution rights, from the products included to the geographic territory and relevant exclusivity clauses. 
• Terms and conditions of sale: You'll want to detail things like payment methods and any minimum purchase requirements. You'll also want to consider delivery schedules and procedures. Further, terms may need to be imposed upon the end customer, and the parties may need to lay out who is responsible for post-sale customer service.
• Intellectual property rights: Intellectual property and its uses must be clearly defined. Consider who owns the rights and what "acceptable usage" might look like. 
• Marketing and promotion: Marketing will be key in the distribution of products and services—make sure both parties understand their responsibilities, including handling advertising, using promotional materials, and more.
• Performance metrics: You may want to build in terms around sales performance, with penalties for "non-performance" where necessary. For example, a distributor may want the right to terminate an agreement if sales are not what they'd initially expected. 
• Confidentiality: For many businesses, plenty of sensitive information is worth protecting - particularly where competitors are involved. Consider confidentiality clauses defining what is and isn't for public consumption.
• Duration and termination: Define the agreement's length, the circumstances that would trigger its end, and any post-termination obligations both parties would need to consider.
• Governing law and dispute resolution: Depending on the relationship, your supplier-distributor arrangement may cross legal jurisdictions. Ensure your agreement considers legal differences between regions and the steps that must be taken in the event of a dispute.
• Amendments and modifications: Will you need to change the agreement? You'll want to plan for this and outline the change process. Typically, you'll require written consent from both parties.

By tackling these basics, you can go a long way towards preventing misunderstandings and limiting potential legal disputes. But what are the most essential terms of a distribution agreement? Let's get into some of the nitty-gritty. 

Distribution rights

Fair to say - distribution rights are key to distribution agreements! You'll want to carefully (and clearly!) define the terms under which a distributor can market and sell a supplier's products. These rights will include the scope of a distributor’s authority, specifying whether the arrangement is exclusive, non-exclusive, or based on other conditions. Essentially, your distribution rights must ensure both parties are clear on who has the right to sell the products and under what circumstances. Additionally, your distribution rights will need to specify the duration of the agreement, renewal terms, and the responsibilities each party holds in promoting the products.

It's worth noting that these rights will also influence how conflicts, if any, will be resolved. For example, some agreements might include clauses that prevent distributors from selling competitor products within the same market.  

Negotiating these terms in a way that benefits both parties is key to building a long-term partnership. We'll touch on contract negotiation tips and tricks later. 

Territory

Territory rights often come with their own unique set of concerns. Your distributor will be authorized to sell products or services in a specific geographic location that could be as broad as entire countries or as narrow as particular cities.

• Exclusivity: One primary concern is exclusivity, or in other words, whether the distributor has exclusive rights to sell within the defined territory. If an agreement is non-exclusive, multiple distributors may be allowed to operate in the same region, which could lead to competition and market saturation. Conversely, an exclusive deal might restrict the supplier’s ability to find additional sales channels within that territory. As a supplier, you'll want to carefully weigh up the pros and cons facing you - and make a strategic choice that considers the long-term health of your business, your distributors, and your end customers. 
• Clarity: Another key aspect here is the clarity and specification of territories. Vague definitions can (and will!) lead to misunderstandings. Make sure a territory is clearly defined, often detailed in a schedule or appendix attached to the agreement, ensuring both parties are on the same page. 
• Conflicts: When tackling territory rights, you'll want to think about potential territorial conflicts with other distribution agreements. Reserved territories might overlap with existing commitments, causing a legal quagmire. Always cross-check with existing obligations to ensure your agreements aren't pitted against each other.
• Modification: Finally, your agreement should also address the ability to expand or modify territories as the business grows. Flexibility clauses can be useful tools when adjusting territories based on market demands or performance. 

Exclusivity rights

Depending on your agreement, your distributor may have exclusive rights over territory or share regions with fellow distributors or even the supplier itself. These rights need careful consideration, as they can not only be a source of disputes but also a strategic tool for the expansion of the brand overall. 

When exclusivity rights are secured, distributors benefit from reduced competitors entering the same market, effectively providing a competitive edge. On the other hand, the supplier benefits by securing a dedicated distributor, who will often have extra "obligations" to keep these exclusivity rights.

With that in mind, securing exclusivity rights comes with its own set of risks. To retain these exclusive rights, the distributor will need to commit to certain performance benchmarks, such as minimum sales targets. Failure to meet these targets can result in the loss of exclusivity. As a result, a supplier must carefully assess a distributor’s ability to meet market demands and avoid underperformance. 

Exclusivity rights often include clauses protecting intellectual property and ensuring the distributor upholds the brand's integrity when marketing and selling the products. Which brings us to...

Intellectual property protection

Intellectual property rights are worth their weight in gold (actually more than that!), and when it comes to distribution agreements, you'll want to ensure they're clearly defined. An agreement will cover things like patents, trademarks, copyrights, and trade secrets - clearly defining the ownership and usage rights of the intellectual property. 

Distributors must clearly understand permitted uses of logos, trademarks, and copyrighted materials, allowing suppliers to maintain control over how their brand and products are represented in the market. Perhaps one of the most crucial things for a supplier is the maintenance and protection of a brand's integrity, as it often has an enormous impact on an end buyer's willingness to engage with the business.

Suppliers will also want to outline licensing requirements and restrictions associated with their intellectual property, including limitations on how a distributor can use IP and requirements for maintaining its confidentiality. 

Marketing

Marketing is tied to intellectual property. Distributors and suppliers will want to have a mutual understanding of how marketing is handled, from which kinds of promotional materials can be used to who takes responsibility for promotions at specific strategic levels. 

Your distribution agreement will want clear guidelines for marketing and promotions, such as the support a supplier will provide, the opportunity for co-promotional activities, or how to access approved marketing materials. This can include shared marketing costs, exclusive territories, feedback mechanisms, or the use of intellectual property rights related to branding. 

Price and payment terms

Next, we have price and payment terms. These terms will outline how much the distributor must pay for products and when these payments need to be made. Typically, your agreement will specify the price per unit of the product, any applicable taxes, and any discounts available for bulk purchases. 

Your payment terms include details such as the currency in which payments should be made, payment deadlines, and penalties for late payments. For instance, some agreements stipulate payment within 30 days of invoice receipt, while others might require immediate payment upon delivery. It’s common for agreements to mention acceptable payment methods, whether wire transfer, credit card, or another method. 

Additionally, these terms will want to outline what happens in the case of non-payment or partial payment, including any interest charges on overdue amounts. This includes the right to terminate the agreement (something we'll touch on below). 

Renewal

If things are going well, your renewal terms may come into play! While distribution agreements will generally renew automatically (unless one party chooses to terminate the contract), a renewal phase can be an excellent opportunity to reflect on the current arrangement. Evaluate whether the terms align with your business goals and if any adjustments are necessary.

Many businesses will take this time to either sign off for a continuation or open the floor for renegotiation. Remember that if any dissatisfaction exists or market conditions have shifted significantly, this is the ideal moment to address them. 

Termination clauses

Finally, termination clauses. These will establish the terms under which a distribution agreement can be terminated, allowing a relatively smooth transition for all parties involved. Typically, these clauses will require close attention to ensure the interests of all parties are safeguarded. 

Here, you'll consider the requirement for written termination, the terms under which an agreement can be terminated, and severance terms. 

These will often detail the financial implications of a termination, including compensation or settlement of outstanding dues. 

How do you negotiate a distribution agreement?

Negotiating a distribution agreement can seem daunting, but with the right approach, you can secure a deal that benefits both parties. Here are some best practice steps to guide you through the process.

Looking for something a little more in-depth? Check out our guide to commercial negotiation.

Understand the needs and objectives

Before you begin negotiations, clearly outline your goals. What do you hope to achieve with this distribution agreement? Are you looking for broader market reach, increased sales, or specific product handling and marketing terms? Knowing your objectives will help you negotiate effectively without getting bogged down with distractions.

Research your potential partner

This goes for suppliers and distributors alike. You'll want to familiarize yourself with your partner, their market position, their reputation, and their distribution network. In doing so, you'll have a better understanding of what's on the table and how best to navigate discussions.

Clarify scope and territory

Get clear on a distributor's scope and territory, clearly defining where a distributor will operate and whether an agreement will be exclusive or non-exclusive. Ambiguities in this aspect can lead to conflicts later on. 

Define performance metrics

Set clear performance expectations, including sales targets, marketing commitments, and customer service standards. Both parties should agree on these metrics to ensure mutual accountability is built in from the very beginning.

Address pricing and payment terms

Discuss pricing structures and payment terms in detail. This should include a distributor's margin, payment schedule, and potential incentives for meeting or exceeding sales targets. A transparent approach to financial terms will quickly foster trust while minimizing future disputes. 

Establish termination conditions

Discuss what could trigger the agreement's termination early and ensure both parties are on board. This might include breach of contract, failure to meet performance metrics, or changes in business strategy. 

Seek legal counsel

By their nature, distribution agreements are a strategic and financial imperative. With that in mind, you want to ensure they protect your best interests. Securing legal guidance through the negotiation and drafting process can help distributors and suppliers, from capitalizing on key opportunities to guaranteeing compliance.

What are the issues with distribution agreements?

Are you preparing to embark on your distribution agreement journey? Before doing so, it can help to be aware of the pitfalls.

• Ambiguity: One of the primary issues with distribution agreements is the presence of vague or ambiguous terms. When language isn't clear, it can lead to different interpretations that cause disputes between parties. Ensuring that all terms, conditions, and responsibilities are clearly defined is essential. 
• Lacking IP protections: Your intellectual property (IP) is a valuable asset. A common issue with distribution agreements is inadequate clauses to protect and define IP rights. Ensure that your agreement includes provisions that explicitly state how your IP can be used and any limitations on its use.
• Insufficient termination clauses: Another pitfall can be the lack of well-drafted termination clauses. These clauses should clearly outline conditions under which an agreement can be terminated, both for cause and without cause. Without these, you might find yourself stuck in an unfavorable contract with no easy way out.
• Lack of performance metrics: Distribution agreements often falter when they lack clear performance metrics. Without specific criteria for measuring performance, it can become challenging to hold distributors accountable. Clearly define performance expectations and metrics to ensure both parties truly understand what is required.
• Legal compliance: Differing regions can have differing legal requirements, and failing to adhere to these can result in legal challenges. Here it can be helpful to consult with a legal expert, to ensure you're taking a compliant approach to multi-jurisdictions.
• Dispute resolution: Even with a well-drafted agreement, disputes can arise. Issues will often stem from inadequate dispute resolution mechanisms. Ensure that your agreement includes detailed procedures for resolving disputes, such as mediation, to avoid costly disputes.

Get the most out of your distribution agreement with Biztech lawyers

Diving into a distribution agreement? Biztech Lawyers is an international law firm with experienced expertise in drafting air-tight agreements.

Get in touch to see how we can help you foster a great professional arrangement - from the get-go.