A Quick Guide to Distributorship Agreements

In this increasingly connected world, goods cross borders at an increasing pace and quantity. Some businesses rely on their own resources to set up their own subsidiary companies overseas to tap on new customers and create their own direct distribution centres. Some decide to set up a distributorship network by entering into agreements with businesses within the territories they wish to enter.

Whether you are a distributor or someone looking for distributors overseas for your products, here’s a quick introduction to the issues you should consider before and while embarking on your new venture.

What is a Distributor?

A distributor sells certain products obtained from an identifiable vendor, manufacturer, or supplier after having been appointed by a vendor, manufacturer, or supplier. A distributor is normally given the rights to distribute (sell) to retailers, who then sell the products to the end user.

A distributorship can typically be characterised by the following:

• The distributor is only a reseller of goods, and not an agent of the supplier.
• The distributor contracts in its own name (not as an agent of the supplier).
• There is no direct contractual relationship between the distributor’s customer (the retailer in most cases) and the distributor’s supplier.
• The distributor trades on its own accounts – it bears the risks of its customers’ bad debts
• The distributor makes money by marking up the prices (unlike an agent, who takes a commission).

Such arrangements often require a distributorship agreement to define the relationship and scope of operation between the supplier and the distributor.

2 Types of Distributorships

The 2 types are exclusive, or non-exclusive distributorships.

Exclusive distributorships confer upon the distributor the right to be the sole distributor of the goods or services within the specified territory/area/country.

Non-exclusive distributorships, commonly seen in FMCG (fast-moving consumer goods) sectors, is one where the distributor is one of many distributors of the specified goods.

Things to Look Out For in Distributorship Agreements

Like any other contract you enter into, distributorship agreements should be reviewed in detail for terms like confidentiality, termination, term, indemnity, liability, governing law, dispute resolution, etc.

However, there are certain specific considerations you should be mindful of when it comes to distributorship agreements, as follows:

• Exclusivity – this has been discussed above.
• Territory – take care to define the applicable territories in detail.
• Sub-Distributorships – does the distributor have a right to appoint sub-distributors in the territory? This is normally not allowed unless pre-approved by the supplier.
• Goods
  • Specifications of Goods (sometimes, suppliers reserve the rights to change the specifications of goods supplied due to improvements in technology or the manufacturing process)
  • Prescribed manner/s of making orders from the supplier
  • Changes in volume and types of product upon pre-determined events
  • Changes in the price of products (for example, when certain targets are met by the distributor, or when certain volumes are ordered by the distributor)
  • When does the title to the goods pass to the distributor? This may be upon partial or full payment.
  • What are the delivery terms? Are they CIF or FOB?
  • Who bears the risk of goods lost or damaged in transit?
  • What is the agreed procedure for notifying the supplier of defective goods? What is the returns policy and procedure?
  • What are the consequences for late or non-payment?
  • Are there recommended prices?
  • If the end-user suffers loss, damage or injury, who bears the responsibility?
  • The intellectual property rights normally remain with the supplier, while the distributor is under a duty to report infringements within the territory to the supplier. In case of enforcement proceedings to safeguard intellectual property rights, the supplier usually retains full control over the legal proceedings and bears the costs.
• Supplier Duties:
  • to supply the goods in good condition (sometimes, this includes minimum supply amounts the supplier is obliged to supply per month)
  • to provide sufficient and detailed information about the goods
  • to provide sales, marketing, logistics, and technical support and even training
  • to provide a licence to the distributor to use the supplier’s intellectual property rights vested in the products
  • to warrant and represent that the supplied products are not in breach of any other entity’s intellectual property rights
•  Distributor Duties:
  • to advertise and engage in other marketing efforts to promote sales of the products
  • to purchase a minimum quantity of products (purchase targets) or meet other performance indicators
  • adherence to distributor policy mandated by the supplier
  • not to distribute or sell competitors’ products
  • to stick to the territory
  • to provide sales records (sometimes the suppliers insist on reports on competitors and competitive products as well)
  • not to change products or packaging
  • not to bring disrepute to or otherwise tarnish the brand name of the product
  • to comply with all regulations and laws
  • to employ qualified staff (some suppliers require their distributors to maintain a certain number of sales staff)
• Actions upon Termination:
  • resale of products that are still in good condition for sale back to the supplier
  • disposal of unsold products – How? By Whom? Who bears the cost?
  • In some distributorships, the distributor is contractually obliged to provide its lists of customers and their contact information to the supplier.
  • Cessation of all rights conferred to the distributor, especially intellectual property rights.

Conclusion

If you are considering entering into a distributorship agreement, take the time to consider the issues outlined above, with the assistance of an experienced lawyer if possible. As you do so, you will be led towards deeper thought and inquiry into what will work best for your commercial interests. You should then work these into your agreement with the help of a lawyer. A well-drafted distributorship agreement will allow you to confidently take strides to improve your business upon a firm legal footing.