A Supply and Distribution Agreement is a contract between a distributor of products and a supplier of products that are legally binding. A distribution agreement is generated when a distributor agrees to resell another party’s products (usually the supplier’s who can also be the manufacturer). In other words, suppliers will sell distributors their products to provide to retailers from whom customers will buy the product.
Suppliers selling their product to a distributor can be a better option than selling it directly themselves. On a large scale, suppliers may not have the capacity or the means to do so themselves. Large distributors will have more networking and marketing power, as well as the proper systems in place that can take the burden off of suppliers who would otherwise have to pay the costs of creating a distribution channel themselves.
As you can imagine, these types of agreements can be complex because of the nature of the supply and distribution chain where there are many external factors that could disrupt and complicate the structure of operation.
We discuss the basics about supply and distribution agreements.
Types of Supply and Distribution Agreements
There are two main types of supply and distribution agreements, one of which your agreement will follow. An Exclusive Agreement is one in which a supplier gives exclusive coverage to a distributor allowing them control over a region, a product, or sales channel. The other type is a Non-Exclusive Agreement. For this type, the supplier may appoint other parties to distribute the products in the marketplace or the suppliers may act as direct distributors themselves.
What Supply and Distribution Agreements Should Include
Whether you are drafting an exclusive or non-exclusive supply and distribution agreement, it should be geared towards a long-term approach, and include terms that contribute to building a healthy supplier-distributor relationship that commits to the mutual development of both parties.
To that end, below are sections and elements which all supply and distribution agreement should contain.
Identify Parties – At the beginning of your agreement you should include all parties involved. The appointment of the distributor, the supplier and any other parties, suppliers and distributors who are involved, and in what capacity.
Products, Territory and Market – A major part of supply and distribution relationships will center around the products and territory. Region assignment is important to consider. For instance, you may want to place special emphasis on territories where the market for your product or distribution channel has potential. Within certain regions, targeting distributors and suppliers that have several locations or channels in one city could be a strategy you can work into the agreement. This section should also involve clauses that address the right to resell products for profits and make room for your sales strategies moving forward.
Duties, Obligations, and Confidentiality – A core portion of the supply and distribution agreement that should be added is a list of duties and obligations of everyone involved. This should cover how the goods are delivered, who is obligated to perform such tasks, how title and risk to the products are transferred, how meeting inspection requirements will be made and under what terms product returns will be processed. If you are a manufacturer who is also the supplier, be sure to include any points that involve confidentiality, intellectual property rights, and copyright information on your product.
Terms, Pricing, Promotion – The terms of the agreement are critical – typically a supplier entering distribution is giving up previous margin in return for increased volume and exposure.. Pricing, payment, condition of sale, shipping and delivery terms should be discussed and laid out clearly so as not to have any misinterpretation. Trademark licensing and marketing rights should also be considered at this point.
Resolution and Contract Termination – Be sure that you have a plan on how to handle negative situations and what happens after the contract is terminated. It is important to include what responsibilities and under what conditions each party will act after the contract is terminated. Be specific about timelines and products that can be returned, for instance.
Your agreement should include the standard clauses for risk allocation, limitations of liability, indemnification, and legal jurisdictions in which to operate under. Importantly, it should contemplate and describe the preferred dispute resolution options.
Also, a supply and distribution agreement should allow reasonable terms for both parties to terminate the agreement. Doing so can prevent unbalanced agreements from escalating into legal disputes later on.
Things To Consider When Reviewing your Agreement
When reviewing an agreement, each party should consider how the other operates and assess the differences in work culture to come to an acceptable agreement to ensure a strong partnership that works. The respective size of each party may also speak to product and process standards and may dictate who has more power or leverage between the two in negotiations.
A supplier-distributor relationship is ongoing and continually developing as your business grows. Consequently, it is good to regularly evaluate suppliers or distributors and research the market for other strategies as your business needs start to shift. While you want to build strong supplier and distributor connections, you want to remain open to other opportunities down the road.
Your agreement should not focus primarily on goals, such as budgeting. This could lead to unwanted pressure for parties to deliver and assume the costs associated with unreasonable expectations.
The terms in a supply and distribution agreement should be closely checked. They could be in favour of either the Supplier or Distributor. Depending on which side of the agreement you are on, an imbalance in terms could put you at a disadvantage.
One step towards ensuring your agreement is fair and within reasonable limits, is to take a look at other model industry agreements. It will give you a good idea of where you should be. Moreover, you should go over the conditions and terms with a lawyer so that you know exactly where you stand or if the terms should be renegotiated.
Overall, it is good practice to have your agreement looked over by a legal professional who can read and interpret the legal jargon for you. Having a well-drafted agreement can save time and money on resolving issues that can arise from unfair terms.