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Distribution agreement: How-to guide

No matter what business you’re in, the key to your business success is getting your products to the right markets at the right time. A distributor will let you get your products on the market quickly, avoiding the costly and time-consuming investment of promoting and delivering the products yourself.

Here’s how it works: the distributor places purchase orders, and the payments will be made to you directly. Once you have received these payments, you ship your products to the distributor to be sent to the customers. The distributor receives a percentage of the sales made.

Guidelines for creating comprehensive distribution agreements

Free distribution agreement template by LegalZoom. Create and download agreements for free!

Exclusive distribution agreements or non-exclusive distribution agreements

You can choose to make your distribution agreement exclusive or non-exclusive. If your agreement is an exclusive distribution agreement, the company is not entitled to hire additional distributors to offer the same products in the same area.

If you want to make sure that the company can have more than one distributor for its products, you should ensure that your document is a non-exclusive distribution agreement.

Description of the products 

It is important to include a clear description of which products will be distributed under your agreement.

Imagine a distributor thinks they can sell all of a company's products, but the company says only certain products are allowed to be sold. To avoid confusion, it's a good idea to list the products in your agreement. If products have serial numbers, including these in your agreement may be a good idea to limit confusion.

Purchase of products sold by the company

In more established businesses, the distributor will purchase products from the company outright and then resell them in the territory to which the distributor is assigned.

Exclusive rights for the products

Exclusive rights tend to be used to distribute higher-end merchandise (like cars or luxury brands). Both parties mutually benefit from this arrangement. The seller is freed from competitive marketplace pressures, and the manufacturer has the seller’s commitment to sell items they have the sole authority over. In addition, both parties benefit from the perception that because the product is not available to the mass market, it is more desirable and exclusive.

Exclusive distribution agreements may face legal scrutiny if they limit brand competition or create a monopoly in the market. However, it must be proved (among other things) that the supplier’s products have the ability to restrain trade in the market. This tends to be true only if the company has significant power and the products in question are rare or very unusual.

Hiring independent contractors

Review your state’s laws governing independent contractors. In recent years, many states have made it difficult for individuals to qualify, imposing absolute requirements about the freedom an independent contractor must have from company control.

Cross-check before signing the agreement

The company and the distributor should review the agreement carefully before signing. This helps to stop claims arising in the future regarding misinterpreting the agreed-upon terms and conditions.

Store the distribution agreements safely

The involved parties need to sign two copies of the agreement. One copy is kept by the company, while the other is retained by the distributor.

Keep your copy of the signed agreement for your records. At the end of its term, you and the other party can revisit its provisions and consider whether to renew.

If your agreement is complicated, contact an attorney to help you draft a document that will meet your specific needs.

Understand the key clauses of a distribution agreement

The following instructions will help you understand the terms of your distribution agreement.

Introduction

It starts with identifying the document as an exclusive distributor agreement. In agreement, the hiring party is called the “company,” and the distributor of the product is called the “distributor.” Along with providing the names of the involved parties, you need to mention what type of organization(s) they are. Write the date on which the agreement will become effective.

Recitals

The “whereas” clauses, referred to as recitals, define the world of the agreement and offer key background information about the parties. In this agreement, the recitals include a simple statement of your intent to enter into an exclusive distribution arrangement.

Purpose, appointment, and exclusivity

This section appoints the distributor as a distributor for the company and emphasizes that this is an “exclusive” appointment (i.e., no other distributors can be used). This section also limits the distributor’s duties to certain territories and products.

In a distribution agreement, “products” can mean either products or services. If your distributor is selling services, then you can use the term services instead of products. Here, you have to include a detailed list of all of the products or services that the distributor will be selling for the company.

If there are any limitations on what the distributor will be doing or other requirements that you want to add, feel free to do so.

It also gives the company the right to sell its own products or services (i.e., the distributor’s exclusivity doesn’t extend to the company itself).

Responsibilities

Here you have to list each party’s responsibilities under the agreement. For example, if the distributor doesn’t need to provide financial reports to the company, clarify that in this section. Another example could be each party has an obligation to comply with the other’s privacy policies.

Territory

This clause lets you limit the geographical area in which the distributor’s efforts should be focused. If it’s an exclusive distribution agreement, the appointed distributor will have an exclusive sales region.

In the case of a non-exclusive distribution agreement, the distributor does not have exclusivity since there will be multiple distributors assigned to the same area.

There can be cases where the distributor is the company’s exclusive distributor in multiple geographical areas or in all areas. You need to mention clearly which geographical areas the distributor shall be supplying your products or services.

If it’s a new distribution relationship, make sure the territory is relatively small to begin with. Expand the territory gradually if the results in the initial area are promising.

Customers

Here, describe the type of customer that the distributor should be seeking. This can be a select group of individuals or a class of businesses. Provide a list of the company’s existing customers along with the distribution agreement.

Price

This section provides the pricing details and payment terms of the distribution agreement.

(a) It states that the company is responsible for setting the price and the terms of any product sale by the distributor. You also need to provide the list of initial prices and give the notice period the company must give if there is a change to the listed prices.

(b) Include the “Free on board” (FOB) pricing terms in this section. FOB term refers to who pays the cost of shipping.

Minimum commitments

Under the terms of this section, the distributor is required to obtain (and sell) a certain amount of products from the company. You and the other party can agree on these minimums and set them out clearly.

If the distributor can’t keep up with its obligations under this section, it must provide notice to the company at least thirty days before the time period ends. The parties can then discuss whether the requirements are too difficult and should be changed or whether the distributor needs to change its own procedures to try to keep up.

Product warranty

In this part, the only promise that the company is making about the products is that they are contained in the official warranty. This is usually limited to a promise that the items are not defective in how they were made. If someone claims the products are defective, the distributor promises to notify the company before taking further action.

Product recalls

Sometimes, products don’t work correctly, and it’s up to the manufacturer to fix those problems and prevent damage or injury. If the company decides that the products must be recalled (i.e., taken off the market and/or returned by customers), the distributor promises to help ensure this happens.

To make sure this process is as easy as possible if it happens, both parties agree to keep track of where the products are at all times (both at their own facilities and at those of the customers to whom the products were sold).

No conflict of interest

In this part, the distributor promises that it is not currently representing any other company or product that competes with the company. Under this section, the distributor must also provide a list of its current products/clients and agree to amend that list as it changes.

Note that this doesn’t prevent the distributor from working on behalf of other companies. However, if they are new companies and there is a question of whether or not a product competes with the product in the territory, the parties should discuss the matter further.

Nature of relationship

It explains that the distributor is not an employee, partner, or agent of the company and vice versa. This is an important distinction for many reasons, including those relating to insurance coverage, legal liability, and taxes.

Representations and warranties

To ensure there are no misunderstandings, this section lists each party’s “representations” about their company’s current state of affairs. In other words, each party makes promises to the other, and each party agrees to enter the arrangement based on the other’s promises.

More specifically, each party swears that:

  • Each party is authorized to enter into the agreement, and there’s nothing preventing them from doing so.
  • The company promises about the products to be sold, including its promise that they will be made properly and that they will not infringe on any third party’s ownership rights (e.g., using another party’s patent without permission).

Term

This section indicates how long the initial agreement will last. It’s a good idea to make this about one year, with continuing one-year renewals. This provides enough time to test the relationship without locking yourself in a long-term deal.

Termination

This clause explains that certain actions or events, including written notice or material breach, will cause the distribution agreement to end out of time (i.e., before the services are completed or the end of the term, if any). Write in the notice period a party must give of its intent to terminate or to notify the other party of a breach.

Return of property

This is an extremely important provision, which states that property should be returned after the end of the agreement. Enter the time period within which the distributor must return the property after the agreement is terminated.

Indemnification

This provision allocates responsibilities between the parties if problems arise in the future and protects each party from the financial consequences of the other’s illegal or harmful conduct.

Use of trademarks

In this section, the company allows the distributor to use their trademarks and intellectual property in order to distribute the products. However, the company doesn’t transfer ownership rights of the trademark to the distributor. The distributor can use the company’s trademarks only till the agreement lasts.

The distributor also agrees not to misuse the company’s trademarks and intellectual property.

Confidential information

This clause defines confidential information for purposes of the agreement and explains how the distributor will treat that information.

You need to note two important details:

  • The distributor can use the information only for purposes intended by the agreement (e.g., if the information was disclosed to help the distributor complete its services, the information can be used only for that purpose)
  • The distributor can discuss the information only with certain individuals in the company itself.

You can create an optional provision as a subsection that allows you to set an expiration date for the distributor’s obligation. In other words, after a certain period of time, the distributor will no longer have a duty to keep the information confidential.

There is some debate about whether a time limit on non-disclosure is required; after all, confidential information received during the relationship doesn’t always become less confidential over time. You should review the laws in your area, and consider the specific context, to determine whether or not you will need to set an absolute deadline.

Assignment

Explains that a party can’t transfer its obligations and interests under the agreement without the other party’s prior written consent.

Successors and assigns

This section makes clear that if another company or person takes the place of a party under the agreement (e.g., because a company took over a party, because an individual who was a party died, etc.), that company or person will have the same rights and obligations as the party they took the place of.

No implied waiver

This explains that if either party allows the other to ignore or break an obligation under the agreement, it does not mean that the party waives any future rights and obligations.

For example, say the agreement requires the distributor to distribute 100 units a month, but the company only requires the distributor to distribute 50 units monthly. Later, the company could tell the distributor to distribute 100 units monthly, as the agreement requires. If the distributor claims that this right was “waived” because the company didn’t enforce it before, the company can point to this section: its failure to enforce the provision at one point doesn’t mean it can’t enforce it later.

Notice

Lists the addresses to which all official or legal correspondence should be delivered. Write a mailing address for both the company and the distributor.

Governing law

The distributor may work in one state and the company in another. This provision allows the parties to choose the state laws that will be used to interpret the document.

Counterparts; electronic signatures

This section says that even if the parties sign the agreement in different locations, or use electronic devices to transmit signatures (e.g., fax machines or computers), all of the separate pieces will be considered part of the same agreement.

Severability

Protects the terms of the agreement as a whole, even if one part is later invalidated. For example, if a state law prohibiting assignment clauses is passed, it will not undo the entire document. Instead, only the section dealing with assignment would be invalidated, leaving the remainder of the agreement enforceable.

Entire agreement

The parties’ agreement that the document they’re signing is “the agreement” about the issues involved.

Headings

It states that the headings at the beginning of each section are meant to organize the document. Any interpretation of the clauses should not be based on the headings.

Benefits of using a distribution agreement template

A good distribution agreement outlines the rights and responsibilities of the company and the individuals and organizations that will sell its products. Vague verbal agreements can lead to disputes and ill will. Hence, using a distribution agreement template to kick-start your document creation is a good practice. It ensures that you add all the important terms and conditions precisely. It helps to create multiple distribution agreements faster and easier.

Use LegalZoom’s simple and easily understandable distribution agreement template to create your distribution contract quickly. Provide answers to the guided questionnaire, and download the document created from the template for free.

Frequently asked questions

What’s a distribution agreement?

Your products are ready. It’s time to get help moving them to the right markets at the right time. With a distribution agreement, distributors can promote, deliver, and sell your products throughout a specific area, sometimes with exclusive regional rights.

Here's the information you'll need to have handy to complete your distribution agreement:

  • Who the supplier is: Keep the supplier’s name and contact information ready
  • Who the distributor is: Keep the distributor’s name and contact information ready
  • Whether the agreement is exclusive: Know whether the distributor has exclusive selling rights to their region
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