Simple Guides

What should we cover in a distributorship contract?

It is probably helpful first to explain that there are different types of Distributorships; namely an Exclusive Distributorship, a Sole Distributorship, a Non-Exclusive Distributorship and a Selective Distributorship.

An Exclusive Distributorship

This is an arrangement whereby a supplier agrees not to appoint another distributor within a defined territory and also agrees not to sell the products directly to customers within that territory. Such an arrangement is frequently used to exploit a product within a new territory. A distributor agrees to take on the risk and cost associated with promoting the new product in the knowledge that he alone will benefit from his efforts. A supplier has the advantage of knowing that the distributorship will be motivated to sell his products.

Sole Distributorship

This is an arrangement whereby a supplier appoints a distributor as his only distributor within a defined territory, but retains the right to promote the products himself within the territory and to sell products direct to customers in the territory in direct competition with the distributor.

Non-Exclusive Distributorship

A non-exclusive arrangement gives a supplier complete freedom both to sell directly and to appoint other distributors in a territory.

Selective Distributorship

A supplier appoints distributors to establish a network provided that additional distributors meet certain criteria. This effectively limits the number of additional distributors who will be appointed within a defined territory. Such arrangements are perceived as particularly suitable where the product requires an enhanced level of service or advice at the point of sale or where the supplier or manufacturer is required to provide after sale support.

Distributors generally agree only to sell products to end users or to other approved distributors and individual distributors are in a position to compete against each other.

The Contents of a Typical Distributorship Agreement

  • Agreement to supply product
  • Clear order and delivery procedures
  • Passing of risk
  • Payment terms
  • Imposition of specific obligations on pricing and other conditions under which the distributor may sell the product to its customers
  • Minimum sales targets
  • Inspection of records
  • Reservation of intellectual property rights
  • Competition and restraint of trade – the supplier may wish to prevent the distributor from manufacturing or distributing products which compete with the contract products for a period after termination of the agreement.
  • Exclusion of liability – the principal may want to limit the warranties which are given on sale of the goods
  • Product Liability – limiting the circumstances/procedures in which the supplier will be liable to the distributor in the event of defective products
  • Length of agreement
  • Termination of agreement
  • Consequences of termination – disposal of stock upon termination
  • Additional obligations, such as after sales maintenance service.