Distribution Agreements: A Walk Through
Introduction- Businesses often require distribution agreements when they are dealing with overseas consumers. They include a third party who is known as a distributor and sells the developer’s products to consumers. Like any other agreement, distribution agreements also talk about the rights and responsibilities of the parties involved and the liabilities of the parties. The peculiar thing about distribution agreements is that in such agreements, liabilities, responsibilities and rights of seller, distributor and also the end user can be included even though the end user is not a direct party to the agreement. We will understand more about distribution agreements in this article.
Breaking down the agreement- Distribution agreements vary greatly in length, depending on how specific the parties wish to get. A distribution agreement should state:
. The names and addresses of the parties and the date of the agreement
. That the developer owns the product and the distributor wants to sell the product
. General definitions of key terms, including end-user, license and what the product includes
. Whether the agreement is exclusive or nonexclusive
. In what geographical area or country the distributor may sell the product
. Whether the agreement contains a non-compete clause
. How much the distributor must pay the developer for the product and the right to sell it
. How much commission or profit the distributor makes
. How long this agreement lasts, such as one year with automatic renewal unless either party notifies the other, often 90 days before the renewal date
. Whether the distributor has a license to reproduce the product
. That the developer will provide training or marketing materials to the distributor to help the distributor make more sales
. That the developer owns the copyright to the product
. That the developer will provide the product to the distributor within a reasonable time, and that the distributor will use their best efforts to effectively market and sell the product
. That the distributor must provide reports to the developer about its sales
. That the developer has the right to see, approve, or disapprove of the distributor’s agreement with end users
. Termination terms, such as that either party may terminate the agreement if there’s a substantial breach that remains uncured for a specific amount of time or that either party may terminate the agreement without cause upon a certain amount of notice
. Limitation of liability, indemnification clauses, and mutual warranties by the parties
. Which state’s or country’s laws govern the agreement
. Signatures of both parties and the date signed
Types of distribution agreements- The type of distribution agreement depends on the type of transaction happening between the parties. Choosing the apt type of distribution agreement is crucial for getting complete protection. Some major types of distribution agreements are:
1 . Exclusive Distribution Agreement: Exclusive distribution agreements are distribution rights granted between a distributor and supplier company. Both parties agree that the distributor will give exclusivity rights to the supplier to sell certain products or services instead of non-exclusive rights. This strategy creates competitive barriers to participation.
Key provisions to consider while drafting exclusive distribution agreements include:
Provision 1. Minimum purchase requirements
Provision 2. Purchase order cancellations
Provision 3. Well defined geographic locations
2. Wholesale Distribution Agreement: Wholesale distribution agreements are between a distributor and manufacturer. They define the terms and conditions surrounding distribution within a specific territory. The distributor must sell goods and services as outlined within the wholesale distribution agreement.
Key provisions to include while drafting a wholesale distribution agreement include:
Provision 1. Information about the products to be sold
Provision 2. Non-competition clause
Provision 3. Payable royalties and commissions
Provision 4. Responsibilities of handling specific costs and fees
3. Distribution Agreement for Commissions: Distribution agreements for commissions define a distributor’s compensation from meeting or exceeding manufacturer sales goals. Commissions will vary according to the particulars and value of products sold. These types of agreements provide an excellent way to encourage growth and sales while rewarding channel partners commensurately for their efforts.
Key provisions contained in commission distribution agreements include:
Provision 1. Sales goals that trigger commissions
Provision 2. Details on commission tiers
Provision 3. How to facilitate payouts
Provision 4. Percentage of commissions
4. Software distribution agreements: Software distribution agreements can be bit more complex than other product based distribution agreements.
Key provisions while drafting a software distribution agreement are:
Provision 1. Data privacy and protection
Provision 2. Reverse engineering of the software
Provision 3. Software training to be given to the distributor
Provision 4. Return or destruction of data
How is it different?– Laymen can often confuse a distribution agreement with other commercial agreements such as agency agreements and franchise agreements but distribution agreements are actually different from these. Some major differences distribution, franchise and agency agreements are:
. Role of an agent is just to negotiate or close the contract. Contracts are formed directly between the seller and the buyer or end user. Agent does not sell the product to the end user and has no ownership on the product.
. The franchisee is allowed and encouraged to use the franchisor’s trademarks and brand name in ordinary business procedures under the terms of the franchise agreement. A franchisee also pays an initial fee and continuing royalties to the franchisor in exchange for allowing it to continue operating under the franchisor’s trademark name.
. A distributor sells a product to clients, generally with a profit margin to cover expenses and profit. Distributor owns the products and is willing to take the risk that they will not sell.
Conclusion- In this article we understood distribution agreements and we reach a conclusion that distribution agreements involve low risk and are a cost-effective approach to expand the business or sales overseas. Before moving ahead with starting distribution, the distribution agreement should be clearly in place and signed by both the parties. Language is of the essence in a distribution agreement and a small mistake in the language can cause unintended consequences, hence in order to get the most out of a distribution agreement, it is always better to consider all possibilities while drafting such agreement.