What is a Distribution Agreement?
A Distribution Agreement, also known as a Distributor Agreement or Distributorship agreement, is an agreement between a supplier of goods and a person or business that wants to distribute (sell) them.
The supplier is often the manufacturer, however they can also be an importer of goods. The distributor is usually a business, or chain of businesses that want to sell the goods.
Distributor agreements can be used for a wide range of goods. These agreements benefit suppliers because it gives them access to a wider market for their product. Distributors like them because it enables them to offer a product that sets them apart from competing businesses or attracts more buyers to their business.
Why are these agreements important?
Distributor agreements are important because they create the terms of the legal and business relationship between the parties. You should make sure that anything you agree to verbally goes into the written agreement!
However these agreements can be tricky where one party is more experienced than the other. Experienced businesses tend to know how to write up an agreement that suits them and the end result can be unfair to the other party.
So getting another pair of eyes, particularly a contract lawyer, to have a look over it for you can save you a lot of grief and expense down the track.
What should be in a Distribution Agreement?
Here are some of the terms that you should make sure are included in your agreement:
- The parties – who is the supplier and who is the distributor?
- The product or products that are being distributed
- The area of distribution – is it one town, a region, a state or an entire country?
- Sales targets that the distributor should meet – are there sales targets that need to be met? What happens if sales targets aren’t met?
- Whether the distributor has the exclusive right to distribute the goods in their area, or can the supplier supply other distributors in the same territory as well?
- Can the distributor sell the goods to sub-distributors?
- Can the distributor sell competing products?
- Are there any obligations about how the products should be marketed?
- The price of the goods – how the price is calculated and whether it can be changed. Consider whether the distributor should have any discretion as to the price, such as if they want to offer discounts to buyers.
- A policy on after-sales service – what happens if a product is faulty? Is there a warranty offered and who is responsible for honouring it?
- A confidentiality clause – is there information that needs to be kept confidential?
- A clause is covering intellectual property issues such as copyright, trademarks and patents.
- The payment terms – when and how should the distributor pay the supplier?
- The term of the agreement – how long should the distributor agreement continue? Is there a trial period? Can the agreement be renewed?
- A dispute resolution and termination clause – how are disputes to be resolved and when and how can the agreement be terminated?
Remember that distributor agreements need to comply with the Australian Consumer Law. For example, the law provides minimum guarantees that products will be of a certain quality and gives consumers the right to return products to the shop that sold them or the manufacturer. There are also competition laws in Australia, so be careful and consider getting some advice before agreeing to a clause about the minimum process and a broad exclusivity clause.
Overall, a good distributor agreement allows some movement and flexibility. Market conditions change, business needs change and the distributor agreement needs to allow both parties to re-evaluate when needed. This could include having a clause that allows the parties to terminate the agreement with notice, even if neither party has breached the terms.