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As a business owner, you need to get products in front of potential customers. Many businesses use distribution agreements to set up profitable arrangements with distributors. One of the main advantages of using a distributor is that they handle the marketing and delivery of your goods to end consumers. This article will explore some advantageous sections to insert into a distribution agreement with a distributor to ensure your business can benefit from a distribution arrangement.
What is a Distribution Agreement?
This type of commercial contract (otherwise known as a Distributor Agreement) confirms the duties and responsibilities between your company and the distributor. A distributor is a company that directly sells your products to retailers and customers on your behalf.
A good distribution agreement should confirm the geographical area the distributor covers and whether they have exclusive rights to sell the product or not. It should also cover the extent to which the distributor can market your goods for you and any limits on their use of your intellectual property.
Let us explore four important sections your business should aim to include within its distribution agreements in England.
1. Pricing Information
Naturally, as with any commercial contract, it is vital to set out pricing details.
On the whole, most distribution agreements will pay the distributor in one of the following ways:
- by delivering a fixed fee for each item sold (regardless of the price to the consumer); or
- agreeing to pay a percentage of the sale price as a commission.
The fixed-fee model is more common for high-quantity goods, such as widely manufactured electrical items or make-up products.
Meanwhile, the commission system is more suitable for high-value goods, such as luxury products and exclusive cars, where the high price and exclusivity are part of the demand.
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2. Marketing and Intellectual Property (IP) Usage
One of the main concerns for businesses in England is ensuring the protection of their intellectual property (IP). Unfortunately, the misuse of intellectual property rights is on the rise, particularly given the ease with which someone can copy an image and display it online.
Because of this, your company needs to utilise airtight IP clauses within distribution agreements to ensure that the distributor does not damage your business’ reputation. As such, your agreement should clarify the following:
- when the distributor can use the company logo;
- limits on the distributor using pictures of company products;
- whether the distributor is permitted to include images of your company’s products within sale promotions; and
- what IP images the distributor can use (for example, only being able to use two specific photographs of the product but not display the logo).
3. Exclusivity or Non-Exclusivity Provisions
One of the biggest questions with distribution agreements is whether they are exclusive. An exclusivity clause means that the company is the sole distributor permitted to sell your goods within a specific geographical area. Naturally, a non-exclusivity clause says the opposite, namely that other distributors may sell the same product within that territory. Therefore, a copy of each is an exclusive and non-exclusive distribution agreement, respectively.
So, for example, many different types of stores sell the same video game console. This is because the supplier believes the product will get in front of more people if multiple retailers can sell it.
However, on the flip side, some food production companies agree to exclusivity clauses making a supermarket its exclusive distributor if they believe that will provide a good profit.
4. Termination Terms
Most good termination clauses will contain some of the following details:
- all permitted methods of notifying of termination (for example, letter, email, fax, etc.);
- the written notice period required to terminate the contract;
- any situations in which the contract can end without notice (for example, following a serious contract breach); and
- whether any penalty payment is required from a party if the contract ends before a specific date.
Commercial contracts should always aim for clarity and certainty above vagueness and uncertainty. This is especially important regarding termination provisions.
Key Takeaways
There are various benefits to using a distributor within certain territories. These benefits include better local knowledge, a high number of retail outlets and them being responsible for marketing costs. On the other hand, it is vital to ensure that they have reasonable limits on their ability to use your intellectual property and market your goods.
If you need help with drafting a distribution agreement, our experienced contract lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.
Frequently Asked Questions
What other clauses are useful within a Distribution Agreement?
Whilst this article focuses on four types of clauses, many others can prove helpful, including wording relating to after-sale service, product recall and sales support.
Why is it essential to limit marketing rights to products?
Because, absent suitable restrictions, a distributor may use your product images within situations you are not happy with. For example, some suppliers do not want pictures of their products within national limited-time sales campaigns.
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