Exclusive Distribution Contract: Everything You Need to Know
An exclusive distribution contract means only one distributor is appointed in a specific marketplace by a supplier.3 min read
2. Potential Conflicts With Competition Law
3. Some Common Conditions of Exclusive Distribution Contracts
4. Incentives for Distributors
An exclusive distribution contract means only one distributor is appointed in a specific marketplace by a supplier. As part of the agreement, the supplier promises not to allow the distribution of the products by any other party in the given market area. In exchange for this kind of exclusivity, the distributor typically has to offer something valuable to the supplier. The compensation can be something like accepting a minimum purchase agreement, or it can be other obligations related to the distributor's performance.
Sole Distribution Agreements
An exclusive distribution agreement is also sometimes referred to as a sole distribution agreement. This can be deceptive, however, because sole distribution rights being granted can imply that the supplier retains the right to personally distribute products in the protected territory while only giving up the option to appoint third parties to sell in that marketplace.
Potential Conflicts With Competition Law
It's important to proceed carefully with exclusivity provisions because they can fall under the control of competition laws and laws regarding trade restraints in some jurisdictions. This makes it important to be sure that any exclusivity provisions you enter into are legal and enforceable under local laws.
There are a number of important details to know regarding exclusive distribution contracts, including:
- The term of the contract: You need to know when the term begins and ends.
- Exclusive distributorship: Appointing an exclusive distributor places restrictions on the supplier and distributor due to the agreement not to compete in the area where the product is being sold.
- Obligations of the distributor: The distributor holds common second-party obligations, can't give product warranties, has to follow the laws, and has to protect the reputation and goodwill of the supplier.
- Obligations of the supplier: The supplier in an exclusive distribution agreement has to provide marketing support and protect the distributor's reputation and goodwill.
- Procedure for ordering: Ordering goes through the steps of negotiations before an order is placed, placing the order, and accepting the ordered products as long as all terms and conditions are met.
- Payments: The payment procedure begins with issued invoices, knowing the deadline for making the payment after it has been invoiced, knowing which methods of payments are acceptable, and paying interest if the payments are late.
- Warranties: It's important to know what's permitted in regard to warranties, such as if the first party has the authority to issue a warranty, if the second party does, or if implied warranties are applicable.
- Limitations and liability exclusions: It's important to understand what the exceptions to liability limits are, how liability limits are interpreted, and if there's a liability for unforeseen complications, lost profits, lost revenue, loss of use, lost chances, lost data, or loss as a result of another occurrence.
- Contract termination: This type of contract may end without cause on the part of one party or without cause by both parties if the deal is breached or if one party becomes insolvent.
- Effects of termination: It's important to know if some provisions of the deal will survive if the contract is terminated and if termination will affect accrued rights.
Some Common Conditions of Exclusive Distribution Contracts
In general, these contracts are set up so they can't be waived or severed easily. However, a certain amount of variation is written in and signed by both parties. These contracts can't be assigned without the other party's written agreement, and there are no third party rights under the law governing the contracts.
Incentives for Distributors
Distributors and manufacturers frequently enter into exclusive distribution contracts with a great sense of hope. The manufacturer's hope is that the arrangement will stimulate distributors to promote the manufacturer's products more enthusiastically. Distributors enjoy the opportunity to own their own territory without competition from others. The exclusive territories give distributors freedom from price-related competition and other sales entities that may otherwise enter their territory.
However, these exclusive agreements don't always end up the way early expectations indicate they will. This is because there are lots of things that can go wrong and the manufacturers often find they need to proceed with caution when offering and signing this type of distribution agreement.
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