In short, a distribution agreement is essentially a contract between suppliers and distributors of a product. These agreements are also referred to as distributor agreements. Despite the name, they may involve other parties, such as manufacturers. A distribution agreement is what allows a distributor the rights to sell and market a supplier’s products.
Distribution agreements between suppliers and distributors can vary greatly based on the needs and goals of each specific distributor-supplier partnership. Such agreements are commonly centered around the supply and distribution of a specific product.
Distribution agreements can cover a wide variety of business and legal matters. The key terms of a distribution agreement include, but may not be limited to:
- The names and information of the different parties involved in the agreement, including their respective representative agents;
- Specific business details for the supply-distribution arrangement, such as shipment quantities, delivery dates, payment provisions, etc;
- How long the relationship and agreement will last;
- Any terms of contract renewal; and
- Specific termination provisions, including no-litigation clauses or arbitration agreements.
In many cases, although not all, distribution agreements may also be classified as exclusive dealing contracts. What this means is that the supplier and distributor agree to work only with one another, and will not work with any other parties. Depending on the business goals of the parties, this could be the more desirable outcome.
What Are the Types of Distribution Agreements?
Although there are many different types of distribution agreements, most agreements will contain very similar terms and provisions. Some of the most common types of distribution agreements include:
- Commission Distribution Agreement: Commissions give the distributor some added incentive to sell as much of the supplier’s goods as possible. A clause will be included in the document which states what the distributor will be paid for selling the product, as well as what the commission is to be. This is based off of the number of products the distributor sells;
- Exclusive Distribution Agreement: An exclusive distribution agreement may be utilized in several different ways. The distributor may be the only distributor of the supplier’s product within a specified geographical area. Or, the distributor may have the sole authority to sell the product to specific customers. Meaning, no other distributor will be allowed to sell those specific products to those specific customers. An exclusive agreement is most commonly used when the product in question is expensive, or when the product is distinct and technical;
- Wholesale Distribution Agreement: The wholesale company provides their product in bulk quantities, and generally at a reduced cost than if the products were being sold as retail. Wholesale distribution agreements are generally made-up terms used to describe the type of transaction. Such agreements intend for a distributor to contract with a wholesale company in order to sell their items in bulk, either to a retail store for consumers to purchase or directly to the customers themselves. The wholesale distributor may buy the product from the supplier, in which case they would become the owner and sell to the next company for a profit; and
- Developer Distribution Agreement: This type of agreement typically involves software creation, as well as the intellectual property included in said software. It is between the developer of an app, as well as the company that distributes the app. The developer is allowed to offer a license to consumers to utilize the software.
What Are Some Common Legal Issues Associated With Distribution Agreements?
Distribution agreements can cover a wide variety of complex legal interactions. As such, there are many different legal issues associated with distribution agreements. Two examples of the most common legal issues associated with distribution agreements are:
- Inequalities and Imbalance in the Contract: One party may seek to gain an advantage over the other part by “drafting inequality or imbalance into the agreement”. Unfair pricing clauses, economic pressure, and/or differences in resources could lead to imbalances in negotiations; and
- Premature Termination of the Relationship: A premature termination of the relationship can occur if the parties get involved in a major dispute. It can also occur if they are constantly engaging in legal disputes. Dissatisfied parties may seek to legally end the relationship through a court proceeding, or through a civil lawsuit
Generally speaking, inequality in the contract is one of the more common types of legal issues that can occur. Engaging in unfair or unequal tactics is often counter-intuitive, as both the distributor and the supplier may share similar business goals which lead to the creation of the distribution agreement. This underlines the need for clear, direct communication during negotiations as well as during the contract drafting stage.
Other legal issues that are often associated with distribution agreements include the existence of fraud in the distribution contract, as well as various types of misrepresentation.
How Are Violations of a Distribution Agreement Handled?
Distributor agreements are subject to contract laws. Because of this, a violation of a distributor agreement is generally addressed under breach of contract laws. A breach of contract occurs when a party to a valid contract has failed to fulfill their side of the agreement. Breaches of contract can lead to legal remedies such as a monetary damages award intended to compensate the non-breaching party for their losses.
Generally speaking, there are two types of remedies that a party can receive for breach of contract: legal remedies, or equitable remedies. Legal remedies may refer to monetary award damages, such as compensatory, nominal, and liquidated damages. Equitable remedies are issued by a court when a legal remedy will not sufficiently make up for the damage done. An example of this would be remedies such as specific performance, reformation, or rescission.
Other examples of damages could include:
- Consequential; and
- Punitive damages.
It is important to note that punitive damages are rarely awarded. However, if punitive damages are awarded, the defendant can expect to pay a much higher amount of fees. This is due to the fact that punitive damages are meant to punish and deter the defendant and others from behaving that way again in the future.
Other remedies may include contract rescission, as previously mentioned, which is the cancellation of the contract. Another remedy would be contract reformation, which is the re-writing of a portion of the contract in order to reflect the parties’ specific needs. Which type of remedy prescribed by the court will largely depend on the type of violation involved. An example of this would be how monetary damages are only available for specific types of contract breaches, while rescission may only be prescribed for other types of breaches.
A distribution agreement checklist can help prevent violations by outlining subjects that should be included in the actual distribution agreement. Such a checklist generally includes the following information:
- Appointment of the distributor, and whether the appointment will be exclusive or non-exclusive;
- Defining the territory, such as geographic limitations;
- Products covered by the agreement;
- Terms of the agreement;
- The distributor’s sales efforts, as well as their performance;
- Acceptance of orders and shipments;
- Confidential information;
- Damages for a breach of contract; and
- All rights and obligations for each party upon contract termination.
Do I Need a Lawyer for Help With a Distribution Agreement?
If you are involved in a distribution agreement, whether as the distributor or the supplier, you should consult with a skilled and knowledgeable commercial lawyers even before any issues arise.
An experienced and local business lawyer can assist in drafting the distribution agreement in order to ensure that it is fair to both parties, and is legally enforceable. Further, should a lawsuit manifest, the business lawyer will represent your interests in court and work towards a suitable damages award if you are the injured party.