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What is a Distribution Agreement? (2020 Update)

What is a Distribution Agreement? (2020 Update)

A distribution agreement sets out the terms between a supplier (who manufactures the goods) and a distributor (who sells on the goods to customers).

1st June 2020
Reading Time: 3 minutes

Distribution agreements

A Distribution Agreement is a contract in which the supplier grants the distributor the right to distribute the supplier’s good or services to customers in a distinct territory. Known as a distributorship, this type of relationship can benefit both parties by allowing the distributor to sell an in-demand product, with the supplier benefitting from wider customer exposure. In this article, we’ll explain what you can expect to find in a distribution agreement and what these types of arrangements involve.

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Some examples of a distributorship include:

  • A Sydney-based supermarket (distributor) distributing the milk products of a Bathurst dairy farmer (supplier) to Sydney-based customers
  • A car dealer (distributor) selling cars by arrangement with the car manufacturer (supplier)
  • An Australian importing company (import distributor) selling clothes imported from a China-based manufacturer (supplier) to a local Australian department store

Distributorship v agency

An agency arises when a person called an ‘agent’ sells your products on your behalf using your name. In return, you pay the agent a commission on the sales made.

This is different from a distributorship. The distributor takes title (or ownership) to the products it is distributing. In other words, the distributor buys products from you and on-sells them in their own right for their own profit. However, the distributor cannot use the supplier’s name.

Key Issues

Of course, distribution agreements vary in complexity depending on the type of goods and services distributed and the industry of the supplier. However, across all distribution agreements, there are a few key issues which parties should consider:

  • Who is the supplier?
  • Who is the distributor?
  • What is the good or service? (i.e. the product)
  • Where will the good or service be distributed? (i.e. the territory issue)
  • What is the payment structure?
  • How long will the distributorship last?
  • What are the terms of the distributor agreement?
  • How does one terminate the distributorship?

Common Clauses

In the light of the above issues, all distribution agreements include:

Sign-on fee

This is a fee paid by distributor for the distributorship.

Duties

Your agreement should outline the duties of the supplier and also the distributor. There should also be a clause which outlines what will happen if there is a breach.

Term

This is the length of the distributorship, for example, 12 months.

Territory

This is where the Distributor will distribute the good or services.

Payment Terms

This is how payment is to be made to the supplier for the goods. This clause will also identify when payment is due.

Exclusivity

This covers whether the Supplier may appoint other distributors within the territory.

Renewal

Whether the agreement may be renewed or extended. This also covers what renewing the agreement will involve.

Termination

How the distributor agreement may be terminated and what the grounds for termination are.

Other clauses which are common in most distribution agreements include:

  • Marketing (whether the Distributor is required to market or advertise the good or service)
  • IP Clauses (whether to allow the Distributor to use intellectual property of the Supplier to market the goods or services)
  • Sales Targets and Reporting Obligations (of the Distributor)
  • Restraint of trade (to restrain the Distributor from competing with the Supplier during the distributorship and also after its termination)
  • PPSA Clauses (whether there is a security interest over the assets of the Distributor in favour of the Supplier to secure debts owed by the Distributor)

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Author
Ray Sun

Ray is a Legal Intern at Lawpath working with the content team. With an interest in Legal Technology, Contract Law and Equity, Ray is currently completing Bachelor of Laws at the University of Technology Sydney.