A marketing and distribution agreement is a contract between a manufacturer and the vendors engaged to market and/or sell their products. This legal document specifies the roles and responsibilities of both parties.

Elements of a Distribution Agreement

The distribution agreement typically covers:

  • The time period for which the contract is valid.
  • The terms and conditions of the supply.
  • Territories and regions covered by the agreement for sales purposes.
  • Whether the distribution deal is exclusive.
  • Marketing rights.
  • Trademark licensing.
  • Performance and reporting metrics.
  • The circumstances of and procedure for termination of the contract.

Some distribution agreements cross international lines, so many large tech distribution companies set up subsidiary facilities around the world.

Key Points to Cover in Distribution Agreements

The scope of distributorship covers:

  • The specific geographic area where the distributor may promote and sell the products in question.
  • The products, brands, and lines to be distributed and whether additional brands acquired or developed will be included in or excluded from the agreement.
  • Whether the distributor has exclusive rights in its territory or whether the supplier will also engage other distributors in the same territory. The provisions about this must consider local and state laws, which sometimes prohibit exclusive distribution agreements.
  • The term of the agreement and the process by which it can be renewed.

Pricing and terms of payment information must include:

  • The price of the products the distributor is purchasing.
  • Provisions about resale pricing, including who has a right to set this price.
  • The terms of payment, including frequency, process, and late fees and penalties.

Provisions about the rights and obligations of each party to the agreement must cover:

  • The scope of sales, marketing, and advertising efforts, including who is responsible for marketing and advertising the products in question, defined sales and marketing goals, the creation of a marketing plan, and whether the distributor will be required to make reasonable efforts to market the product as well as penalties for failing to do so.
  • The content and timing of required inventory, sales, marketing, and other reports.
  • Inventory requirements, delivery parameters, and required quality control measures.

Intellectual property rights usually remain with the product supplier, though the agreement should give the distributor legal right to use this IP for marketing, including trademarks and brand names.

Termination clauses should cover:

  • The provision of termination for cause by either party, such as a breach of agreement.
  • Notice requirements for breach of agreement and whether the ability to cure this breaches within a reasonable time will be required before termination is pursued.
  • The obligations of both the distributor and the supplier in the event that the agreement is terminated, such as inventory buy-back or transfer, status of open orders, and ongoing marketing and sales obligations.

Common Distributor Agreement Mistakes

Having an insufficient distributor agreement can lead to problems if disagreements arise. Some of the most common mistakes associated with distributor agreements include:

  • A manufacturer and distributor enter a partnership too soon.
  • Not allowing termination of the contract for any reason or allowing termination by only one party.
  • Not providing annual termination and semiautomatic renewal.
  • Not indicating the exclusivity of the agreement.
  • Restriction as to how often prices can be adjusted.
  • Not indicating how often amendments can be made.
  • Not detailing the responsibilities of each party when the agreement ends.
  • Not including provisions that are specific to and/or standard in your industry.
  • Not taking active involvement in the process of creating an agreement and leaving it only in the hands of your attorneys.

Product Goodwill and Territory Exclusivity

The negotiating of this agreement must account for both product goodwill and the exclusivity of territories. Granting exclusivity means that only one distributor will handle your products in a specific geographic area for a specific time period as defined by the distribution agreement. When no time period is provided, the exclusivity clause is considered indefinite.

The agreement should indicate that the distributor retains exclusivity only when performance objectives laid out in the agreement are met or exceeded. The agreement can also provide for exceptions to exclusivity under specific limited circumstances.

A product's good reputation, or goodwill, is a large part of its value. When both the distributor and manufacturer invest in a product's marketing and development, increased goodwill and improved profit will result. A well-written distribution agreement allows both parties to benefit from the collaboration.

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