Summary
- A distribution agreement sets whether the distributor is exclusive or non-exclusive and defines the territory where they can sell.
- Pricing, payment terms, performance targets and brand controls keep the arrangement commercial and protect your reputation.
- A retention of title clause keeps ownership of the goods with you until the distributor pays in full, which protects you if they become insolvent.
- This guide explains the key terms in a distribution agreement for UK manufacturers.
- LegalVision’s business lawyers specialise in advising clients on distribution agreements.
Tips for Businesses
Decide on exclusivity and territory before drafting. Set measurable performance targets. Use a retention of title clause on all credit terms. Fix pricing, payment and late payment interest. Include termination rights and a sell-off period for unsold stock.
A distribution agreement is a contract under which a manufacturer appoints another business to buy its products and resell them, usually within a defined territory. For UK manufacturers, the terms that matter most are the scope of distribution rights, whether the arrangement is exclusive or non-exclusive, pricing and payment, retention of title, and termination. Retention of title protects you if a distributor fails to pay or becomes insolvent, because ownership of the goods stays with you until payment. Clear performance targets and brand controls keep the distributor accountable. Getting these terms right protects your revenue, your brand, and your position if the relationship ends. This article will outline the key terms you should include in your distribution agreements to protect your business interests.
Defining the Scope of Distribution Rights
One of the first decisions is whether to grant exclusive or non-exclusive distribution rights. Under an exclusive distribution agreement, you cannot appoint other distributors in the territory, and you cannot sell directly to customers there yourself. That gives the distributor real commercial protection, which usually pushes them to invest more in marketing and building the market. The risk is that your sales in that territory depend on one business. The main types of distribution arrangement each carry trade-offs, so decide which one fits before you draft.
A non-exclusive arrangement lets you appoint several distributors in the same territory and sell to customers directly. You keep flexibility and you do not rely on one distributor. State clearly which approach you are taking, so there is no ambiguity later.
Define the geographical territory where the distributor may sell. It could be the whole United Kingdom or a single city or region. Clear territorial limits stop your distributors competing with each other and keep your distribution network organised.
Minimum Performance Requirements
To keep your distributor actively selling, include minimum performance requirements. These are measurable targets the distributor must hit to keep the distribution rights. A common one is a minimum order quantity per period, for example at least 1,000 units per quarter.
You can also require the distributor to spend a set share of revenue on marketing. For example, at least 5% of the purchase price on promotion each year. That keeps them building demand for your products rather than sitting on stock.
Performance targets give you leverage when a distributor underperforms.
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Pricing and Payment Terms
Your agreement must set out how pricing works and when payment is due. Specify whether you quote a fixed price per unit or a schedule of rates you can update. If you can vary prices, explain how and when, and whether the distributor can terminate if they reject an increase.
Payment terms matter just as much. You might require payment in advance before you dispatch goods, or offer credit such as payment within 30 days of invoice. Some manufacturers split it: a deposit on order, the balance on delivery. Your choice depends on your cash flow and the distributor’s creditworthiness.
Deal with late payment too. You may want to charge interest on overdue amounts, often at the Bank of England base rate plus a margin.
Control Over Brand and Marketing
Protecting your brand matters once someone else is selling your products. Give yourself control over how the distributor markets and promotes them. Require the distributor to use only approved marketing materials, and to get your written consent before creating their own.
The distributor should not make any warranty, representation or guarantee about your products beyond what you have authorised. That stops them promising things you cannot deliver, which could damage your reputation or expose you to liability. Prohibit the distributor from altering your products, their packaging or labelling without your consent.
Retention of Title
A retention of title clause protects you financially when you supply goods on credit. It keeps legal ownership of the goods with you until the distributor has paid in full. The distributor holds the goods, but you keep title.
If the distributor becomes insolvent or does not pay, retention of title lets you recover your goods instead of ranking as an unsecured creditor. State that title passes only on full payment. Cover what happens if the distributor resells the goods before paying you, usually by holding the sale proceeds on trust for you.
Reserve the right to enter the distributor’s premises to recover goods if they do not pay. That gives you a practical way to enforce your position if the relationship breaks down.
Termination Rights and Sell-Off Periods
Set out clearly when and how either party can end the agreement. You might allow termination for convenience on notice, for example 30 or 60 days. That gives both sides flexibility and time to make other arrangements. Well-drafted termination and breach clauses prevent uncertainty about how the contract ends.
Include termination rights for material breach as well, so you can end the agreement immediately if the other party fails to fix a serious breach within a set period. Material breaches might include missing performance targets, non-payment, or breaching confidentiality. Knowing your options when a distributor breaches the contract helps you act quickly.
At the end of the agreement, deal with any remaining stock. You might buy back unsold goods in merchantable condition, or require the distributor to return them at their own expense.
Key Takeaways
Distribution agreements are detailed commercial contracts, and careful drafting protects your interests as a manufacturer. Decide whether the arrangement is exclusive or non-exclusive, and define the territory. Set measurable performance targets. Get pricing and payment right to protect your cash flow, and control how the distributor markets your products and handles your brand. A well-drafted retention of title clause protects you if the distributor does not pay. Make sure the agreement sets out termination rights and what happens to stock when the relationship ends.
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Frequently Asked Questions
What is the difference between exclusive and non-exclusive distribution?
Under an exclusive agreement, you cannot appoint other distributors in the territory or sell to customers there yourself, so the distributor has sole rights in that area. A non-exclusive arrangement lets you appoint several distributors and sell direct, which keeps more flexibility and control.
What is a retention of title clause and why is it important?
It keeps legal ownership of the goods with you until the distributor pays in full, even while they hold the goods. It matters because if the distributor becomes insolvent or does not pay, you can recover your goods instead of ranking as an unsecured creditor, which improves your chances of getting paid.
What can I do if my distributor breaches the agreement?
Your options depend on the contract. For a material breach, a well-drafted agreement lets you terminate if the distributor does not fix it in time. You may also claim damages or an injunction. Clear breach and termination clauses make enforcement faster and cheaper.
How much notice do I need to end a distribution agreement?
The notice period is whatever your agreement states, commonly 30 or 60 days for termination for convenience. For material breach, you can usually terminate immediately once any cure period passes. If the contract is silent, ending it becomes uncertain, so set the notice period out clearly.
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