Creating a Distribution Agreement

Creating a Distribution Agreement

by Ronna L. DeLoe, Esq., November 2018

A distribution agreement, also known as a distributor agreement, is a contract between a supplying company with products to sell and another company that markets and sells the products. The distributor agrees to buy products from the supplier company and sell them to clients within certain geographical areas.

A supplier and a distributor shaking hands in a factory

Distribution agreements give a distributor the right and duty to sell and market the supplier's products. It's a win-win situation for both the supplier and the distributor: for a fee or a commission, the distributor markets the product so the supplier doesn't have to worry how to get its products into the right hands. These agreements are also known as product distribution agreements and distribution rights agreements.

Distribution Agreement for Commissions

Many distribution agreements contain a clause providing what the distributor gets paid for selling the product, as well as a commission based on the number of products it sells. Commissions give the distributor the added incentive of selling as much of the supplier's product as possible. The distributor receives a percentage of the overall sales, so the more it sells, the more money both parties make.

Exclusive Distribution Agreement

Both parties to the agreement can use an exclusive distribution agreement in a few different ways. Sometimes, the distributor is the only distributor of the supplier's product within a specific geographical area. In other exclusive agreements, the distributor has the sole authority to sell the product to certain customers, meaning no other distributor can sell to those customers. Exclusive agreements are often used where the product is expensive or when it is distinct and technical, thereby requiring special knowledge of the goods and the market.

If your company is contemplating using an exclusive distribution agreement, consider checking with an attorney to ensure that your company is not violating any antitrust laws for free competition.

Wholesale Distribution Agreement

A wholesale company provides its products in bulk, generally at a cheaper cost than if it were selling the products retail. While wholesale distribution agreements are often made-up terms to describe the type of transaction, the basic idea is that a distributor contracts with a wholesale company to sell items in bulk, either to a retail store for consumers to purchase or directly to consumers. Sometimes the wholesale distributor buys the product from the supplier and becomes its owner, which allows the wholesaler to sell to the next company for a profit.

Developer Distribution Agreement

A developer distribution agreement often involves software creation and the intellectual property in such software. The agreement, which is a contract between the developer of an app and the company that distributes the app, allows the developer to offer a license to end-users or consumers to use its software. Some companies who own apps are big companies such as Google, although smaller companies and even individuals create and distribute apps as well.

Basic Distribution Agreement Checklist

Other than a developer distribution agreement, which is a separate type of agreement, a basic distribution agreement should contain certain language to make it legally binding. Such information includes:

  • Identifying the parties and stating, in the introduction, that the agreement is for resale of the supplier company's product
  • Describing the territory where the distributor can sell
  • Whether the contract is an exclusive agreement or whether the distributor is only one of multiple distributors in the region
  • Termination of the agreement for cause or simply if the parties choose not to continue their business relationship
  • Specifying the product and its delivery dates
  • Specifying whether payment is commission-based or whether there is another type of fee arrangement
  • Describing the relationship between the parties, such as the distributor being an independent contractor and not an employee of the supplier
  • A statement that the supplier must accept the distributor's orders in a timely manner
  • What happens if the distributor is unable to sell the goods and whether there is a quota
  • How and when to pay the distributor
  • That the agreement is binding, legal, enforceable by the laws of a state specified by the parties, and whether arbitration must precede any lawsuits
  • How long the agreement is in effect and what date it takes effect

Distribution agreements come in many forms and have numerous working parts, so it's important they are created properly from the outset to avoid disagreements between parties down the road. If you need help creating a distributor agreement, consider using a distribution agreement template to help ensure it's drafted properly.