Essential clauses for distribution agreements

Businesses often rely on distributors to expand into new markets, increase sales and strengthen their brand presence without the cost of establishing a direct sales operation in a particular territory.

A distribution agreement often governs the distribution relationship and should manage expectations, allocate risks and provide a clear framework for the relationship. However, a poorly drafted distribution agreement can expose both suppliers and distributors to significant risk without careful consideration of how the arrangement will operate in practice. To manage this risk, we have identified key provisions to be considered when preparing a distribution or reseller agreement.

1. Territory and Customer Scope

The first question any distribution agreement should consider is where, and to whom, the distributor may sell the products.

The agreement should define the geographical territory in which the distributor may operate and specify whether any specific customers are reserved to the supplier. Uncertainty in this area can lead to disputes where distributors compete for the same customers or seek to operate outside their specified market.

Businesses should also consider whether sales through online channels are included within the agreed territory, particularly where customers can place orders from multiple jurisdictions. A clearly defined territory helps avoid confusion and provides certainty for both parties as the relationship develops.

2. Exclusivity Provisions

Exclusivity is often one of the most heavily negotiated aspects of a distribution arrangement.

A distributor may be willing to commit significant time and resources to developing a market if it knows it will not face competition from other distributors appointed by the same supplier.

This may be a benefit to the supplier as they can obtain a share of a market without heavy investment in multiple distributors. However, suppliers may be reluctant to place all their sales opportunities in the hands of one distributor, especially if they do not already have an existing relationship.

The agreement should clearly state whether the appointment is exclusive or non-exclusive, and the supplier should understand the consequences of both models. Suppliers should be cautious about granting exclusivity unconditionally, in many cases, exclusivity should be linked to performance criteria so that it can be reviewed or withdrawn if the distributor fails to meet agreed targets.

3. Minimum Purchase Requirements and Performance Targets

Suppliers will want to ensure that the distributor actively promotes and sells their products. For that reason, many distribution agreements include minimum purchase obligations, maintaining minimum stock levels, sales targets and marketing commitments. These provisions provide a measurable way of assessing performance and ensuring the distributor remains engaged in developing the market.

The exclusivity provisions should also address the consequences of not meeting the targets. This may include a requirement to implement a performance improvement plan, loss of exclusivity and/or a right for the supplier to terminate the arrangement. Without clear targets, suppliers may find themselves tied into underperforming relationships with limited contractual remedies.

4. Pricing and Payment Terms

The agreement should set out the basis on which products will be supplied, applicable payment terms and any rights to review or amend pricing over time. This is particularly important where the supplier’s costs are affected by inflation, supply chain disruption or fluctuations in exchange rates.

Pricing clauses should address discounts on products, promotional support, credit limits and the supplier’s ability to amend prices over time.

5. Intellectual Property Rights

For many suppliers, their brand represents one of their most valuable business assets. Distribution agreements should clearly regulate how trademarks, logos, advertising materials and other intellectual property may be used by a distributor, especially if the supplier is concerned with a third party damaging their brand.

The supplier should only grant the distributor a limited licence to use the supplier’s intellectual property for authorised purposes and in accordance with brand guidelines. The agreement should also consider who owns any goodwill generated through the distributor’s activities.

Failure to properly regulate intellectual property can lead to reputational damage, and disputes regarding ownership of branding and customer recognition.

6. Confidentiality and Protection of Business Information

Distributors are often given access to commercially sensitive information, including pricing structures, customer information, marketing strategies and future product plans. A robust confidentiality clause helps protect that information from misuse both during and after the relationship.

The agreement should clearly define what information is confidential, the permitted purposes for which a party may use it and any exceptions to the obligation. The parties should also consider the duration of the confidentiality obligations following termination. Valuable information can be more commercially significant than the products themselves, making confidentiality protection essential if you are considering a distribution agreement.

7. Termination Rights and Post Termination Provisions

While parties usually focus on the opportunities created by a distribution arrangement, equal attention should be given to how the relationship can come to an end. The agreement should set out the circumstances in which either party may terminate, including but not limited to:

• a material breach of the agreement (e.g. a failure to achieve minimum volume targets);
• insolvency; and
• force majeure events.

Distribution agreements should also address what happens to remaining stock, marketing materials, confidential information and intellectual property rights once the arrangement concludes. The parties should consider whether unsold stock must be repurchased, whether a sell-off period should be permitted, and what ongoing obligations should continue after termination.

These provisions help ensure an orderly transition and protect the commercial interests of both parties.

What to do if you are considering a distributorship relationship

A well drafted distribution agreement should do more than record the commercial deal. It should anticipate potential areas of conflict, allocate risk appropriately and provide both parties with a clear framework for growth. Investing time in getting the agreement right at the outset is often considerably less expensive than resolving disputes once the relationship has deteriorated.

While every arrangement will have its own commercial nuances, the seven clauses outlined above provide a solid foundation for most distribution and reseller agreements. Businesses reviewing existing arrangements should consider whether these protections are already in place and, if not, whether it is time to review your agreements.

For more information on distributorship and commercial contracts, the Geldards commercial team are on hand to assist you.