Distribution Agreements

When adopting and drafting a distribution agreement, it is important to consider the business and legal ramifications of doing so. Naturally, some of the business considerations will also contain a legal component, and vice versa. The following is a list of suggested clauses viewed from the perspective of a business owner:

  • Purpose or Recitals
    • A statement identifying who the parties are (supplier and distributor) and what their relationship is to entail.
    • In writing, define what the products or services subject to the agreement are.
  • Appointment of Dealer or Distributor
    • A statement that the supplier is officially appointing the distributor to sell the supplier’s products in accordance with the terms in this agreement.
    • This section may also include whether the agreement is to be exclusive or nonexclusive. In other words, will the distributor’s rights to sell the supplier’s products be restricted to particular geographic areas? Or will the supplier retain the right to sell its products directly to consumers in that area, despite distributor’s efforts to sell there?
    • Will you permit or prohibit the assignment of sub-distributors?
  • Sales Efforts
    • This section would include a statement that the distributor will, to the best of its abilities, make all efforts to sell the supplier’s products under the terms of this agreement.
    • This section could also define any other obligations the distributor may have towards the supplier, such as a quota.
  • Quota
    • An amount of the supplier’s product(s) the distributor is required to sell and any potential consequences for not meeting that quota.
    • This could also be included in the Sales Efforts section mentioned above.
  • Commissions and/or Compensation
    • A thorough explanation as to how the distributor will be paid by the supplier.
    • Will they be paid on commission or a fixed payment system more akin to a salary?
  • Title and Risk of Loss
    • This section pertains to the transfer of the supplier’s products to the distributor.
    • It would be wise to have a statement declaring when title of the products officially transfers from the supplier to the distributor. This would prove helpful from a legal point of view in the event of a lawsuit.
  • Inventory
    • This section would list a level of inventory the distributor is required to have on hand at all times.
    • Supplier should be careful not to require the distributor to have too much inventory on hand, or else said requirement could be construed as a licensing fee.
  • Term
    • A statement of how long the agreement is to last and whether it is renewable at the end of its term.
    • If the contract is renewable, it would be wise to include an explanation of the ways in which it can be renewed.
  • Termination
    • This section works hand-in-hand with the “Term” section mentioned above, but would expand to include the conditions under which the agreement can (or will) terminate and any consequences of termination.
  • Independent Contractor
    • A statement that the distributor is an independent contractor you are hiring to distribute you products.
    • It would also be wise to include an official statement that the distributor is not one of your registered agents.
  • Indemnity
    • A section where both parties would agree to indemnify the other with respect to liability that is caused by the party at fault.
  • Trademarks
    • A formal statement that you are licensing out any trademarks you own to the distributor for use in connection with the distributor’s selling of the supplier’s products.
  • Confidentiality
    • This section would be included if you wanted any terms in the agreement to remain confidential.

 

As noted earlier, it is crucial to also keep the law in mind when drafting a distribution agreement. The following is a list of considerations of terms to include, taking the law into account:

  • Dispute Resolution Process
    • In the event that a dispute arises between the supplier and distributor, it would be wise to include a clause describing how such a dispute will be resolved.
    • It is common in this section to require the parties to commit to binding arbitration, which generally is a speedier process than going through with a lawsuit.
  • Quantity of Goods
    • Contracts that violate the statute of frauds are not enforceable.
    • In order to avoid violating the statute of frauds the agreement must specify, in writing, the quantity of goods at issue in the contract.
    • Failure to do so could render the agreement unenforceable.
  • What constitutes a breach
    • It’s helpful to include terms that define what does or does not constitute a breach of the agreement.
  • Intellectual Property
    • What, if any, trademarks will be covered by the agreement?
    • What, if any, rights in those trademarks will the distributor have?
  • Territory
    • Will the distributor be limited to specific geographic regions?
  • Term of the Agreement
    • How long will the agreement last for?
    • How may the agreement be renewed?
    • Who may renew the agreement?
  • Termination of the Agreement
    • How may the agreement be terminated?
    • Who may terminate the agreement?
  • Employee Raiding
    • May the distributor hire the manufacturer’s employees?
    • May the manufacturer hire the distributor’s employees?
  • Warranties
    • Will the manufacturer warrant the goods to the distributor or to the end user?
    • Is the distributor required to make good on any of the manufacturer’s warranties?
  • Finances
    • Will the manufacturer be able to view the finances of the distributor?
  • Insurance
    • Will the manufacturer require the distributor to obtain any types of insurance policies relating to:
      • Commercial general liability?
      • Worker’s compensation?
      • Product liability?