What You Should Know About Supply & Distribute Agreements
Supply& Distribute Agreements are normally used when one company (”Supplier/ Principal”) agrees to provide goods or services to another company (“Distributor”), and the distributor, in turn, sells those products to customers in a certain geographic area. The contract usually includes provisions on how long the distributor will be paid for the products they sell and how much they will pay for these products.
When you start your distributing agreement, you should first consider that distributorships take several forms:
Exclusive Distributor: Where the distributor will be the only person who is permitted to sell the products within the agreed areas.
Non-exclusive Distributor: In this case, the Supplier will, at his own discretion, appoint other distributors in the same area.
Sole Distributor: Where the Supplier agrees not to appoint any other competitor but reserves this right to himself.
Also, bear in mind the legal title of the goods and when exactly the distributor will be the owner of the goods. This element is so essential in case of accidents and damage during the transportation process.
Companies in the UK and EU should also draft their agreement carefully in a way it does not contain any hardcore restrictions or unlawful restrain on trade as a vertical agreement in breach of competition law.
Key terms IN a Supply& Distribute Agreements :
Parties and Territory
This section identifies the parties, specifies the territory within which the Supplier will provide goods and services, and indicates whether the Supplier has any affiliates that may also provide goods or services. I.e., in case of a sole or non-exclusive agreement.
Specifications
This section contains details about how the Supplier should manufacture, process, pack, label, store, and handle the goods being supplied. It may also contain details about how the Supplier should perform any services to be provided. These details should be as specific as possible as they may affect patent protection for any inventions created during the process.
Price
This section specifies whether pricing will be fixed or variable; if variable, it defines how prices. Again, if your company is located in the UK or the EU area, please refer to the hardcore restriction (price-fixing) before commencing your agreement.
The most important elements that AIO Services considers while drafting a Supply& Distribute Agreement
1- Standards of work
This clause sets out the quality standards for the goods provided. The inclusion of the standards of work clause provides certainty as to the expected quality between the parties. This is proved to be very important if there is a complaint or dispute over quality. If this occurs, either party can refer to this clause as guidance.
2- Payments
The Payments clause establishes the financial obligations of the parties to the agreement. This includes the rights and obligations of each party in relation to payments for goods and any associated materials. This clause should consider:
- The payment schedule
- Failure of payment
- Delay interest
- Consequences of winding-up or liquidation
3- Ownership
Sometimes it is called a title clause. As discussed previously, it specifies which party owns the product at different stages during the process until the product is produced or delivered to the Buyer. I.e., at which time the legal title will be transferred to the other party. In many cases, the clause will include provisions for resolving disputes over product ownership.
4- Confidentiality
The confidentiality clause in a Supply& Distribute Agreement is the section that governs how proprietary information will be kept confidential. This provision may also require the parties to keep certain secret aspects of the deal, such as the terms of the deal, or it might restrict certain disclosures, such as those to competitors. The confidentiality clause is important because it protects confidential information disclosed during negotiations and during operations. It is one of the most important clauses in any legal document. The confidential information can include technical, commercial and financial information. In this type of agreement, this clause should consider confidentiality after expiration and termination.
5- Safety regulations
The safety regulations clause defines the safety standards that must be followed when manufacturing or delivering any products. This clause defines the applicable standards and who is responsible for ensuring that the standards are met.
Example:
“The Principal/ Supplier will ensure that all Products comply with all applicable safety and regulatory requirements, including those set by …………….., as well as all applicable laws, rules, and regulations of each jurisdiction in which Manufacturer manufactures or distributes products.”
This clause also may include the required training, if any, and the number of staff required for training, frequency of training and who will bear the training costs.
6- Warranties and protections
This clause should discuss the warranties and guarantees that the Supplier is responsible for, including the guarantees of the quality and lien-free of goods. The warranties and protections clause also provides details about how product defects are handled. For example, the Supplier may be required to repair or replace products that do not meet the stated specifications, or products damaged during the process, or as long as he carries the legal title.
In conclusion, drafting good Supply& Distribute Agreements is vital for your legal protection. The right agreement can protect your business from a large number of risks and can facilitate the development of your business. Legal issues in this area of law are often not straightforward, but a good contract will set out the terms and conditions so that you can deal with potential problems as they arise. Furthermore, by having an agreement in place, both parties know where they stand, which minimises the likelihood of disputes arising and adds a level of legal certainty to your business arrangements.
Ⓒ AI Othman
Lawyer- BA, LLB, GDL, LLM