Contract Distribution: Everything You Need to Know
Contract distribution is a legally binding agreement between a supplier and a distributor of goods that includes the roles and responsibilities of each party.3 min read
Contract distribution pertains to elements of an agreement between a supplier and a distributor of goods. It is legally binding and involves negotiating the roles and responsibilities of each party to the agreement.
The supplier may be a manufacturer or a redistributor of goods operating under either an exclusive or non-exclusive agreement to provide the goods to another distributor. Regardless of the specific goods involved in the transactions, distribution contracts have basic elements that are addressed. These include the term over which the contract is in effect, the territories over which the distributor has authority to sell the goods, and the specific terms and conditions of the transaction, such as price, delivery methods, and warranties as to condition of the goods.
Exclusive and Non-Exclusive Agreements and the Distribution Strategy
It is up to the supplier to determine whether the distribution agreement will be exclusive or non-exclusive.
- In an exclusive agreement, the supplier grants sole rights to the distributor to sell the goods in a designated territory. It can pertain to the entire product line of the supplier or only one specific product line. The supplier may enter into reseller agreements with other distributors to sell the goods throughout the territory, and these agreements can also be exclusive or non-exclusive.
- With a non-exclusive agreement, the supplier still retains the right to sell to as many other parties as it wants to, and the distributor is just one of many competing for customers in the territory.
These agreements are just one element of an overall distribution strategy developed by the supplier.
- A selective strategy usually incorporates exclusive agreements to limit the number of places where consumers can purchase the goods throughout the supplier’s intended market. This strategy is most often applied when the supplier has developed brand recognition for their goods with consumers. They know that the distributors will offer favorable terms in order to limit the competition for the goods they are selling.
- An intensive strategy is when a supplier wants to increase consumer access to the goods through as many sales channels as possible. Non-exclusive agreements are more common with this strategy and typical with consumer-oriented goods. Using an intensive strategy, the supplier wants to use the distributor’s ability to generate sales to maximize profits. In some cases, the seller even allows the distributor to repackage the goods with their own brand labels.
Important Components of Distribution Contracts
The meat of distribution contracts is found in the terms and conditions, whether they exist within the formal contract or are included as addendums separately. These include items like delivery particulars, assumption of risk, insurance liability, and return policies. It is important that distribution agreements not violate free trade or non-compete statutes that exist. For that reason, it is always suggested to consult an attorney experienced in negotiating supplier contracts.
The most important subjects most often addressed in distribution contracts include:
- Territory throughout which the distributor has distribution rights
- Whether the agreement is exclusive or non-exclusive
- Whether or not any non-compete rights are granted (within legal limits)
- Responsibility for marketing the goods
- Minimum performance standards that must be maintained
- Intellectual property rights
- Termination language and rights
- Methods and frequency of financial reporting
In addition to these subjects, every distribution contract should include:
- Legal names for each party to the agreement and the state in they were formed or incorporated
- Distribution rights
- Term of the contract and renewal mechanisms
- Specific descriptions of the goods in question
- Pricing terms imposed by supplier, such as discount percentages allowed
- Payment terms, such as due dates, letters of credit, etc.
- Compliance language
Common Obligations of the Supplier
In most issues concerning contract distribution, the supplier assumes the following duties:
- Agreeing to supply minimum or maximum orders
- Developing product literature
- Providing technical support (if necessary)
- Providing training (if necessary)
- Providing marketing support
- Providing quality control
- Providing remedies for damaged or defective products
Common Obligations of the Distributor
The Distributor, in many cases, assumes the following duties:
- Timely ordering according to negotiated schedules
- Reaching sales quotas as negotiated
- Managing storage facilities and regulating their upkeep
- Maintaining supplier brand standards
- Obtaining relevant permits and licenses
- Maintaining insurance
If done right, distribution contracts benefit both the supplier and distributor. Both parties are protected, and each realizes the role they play in a hopefully successful partnership.
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