Distributorship Agreement
A distribution agreement is a form of legal document used between a supplier of a product and the distributor in a specific region. It facilitates the distribution of goods between the supplier and distributor. Unlike agency agreements, the distributor agrees to buy the product from the supplier to sell to clients within specific agreed areas. The distributor will be responsible for selling targets, marketing, and dealing with refund issues. However, to draft an accurate DA, you should put in mind that the law implies some degree of effort on the distributor’s shoulder to sell the product in a reasonable time and manner.
Distribution in nature can take several forms, three of which are:
Exclusive distributor: where the distributor will be the only person permitted to sell the product within a specific region. Even the supplier/ the principal under this model will not be allowed to practice any form of distribution within the territory;
Sole distributor: where the supplier/ the principal commits not to appoint any rivals to the distributor within the same region, but reserves the right to distribute as a supplier. This model is preferred to reduce the risk for the supplier, as will be explained in this article; and
Non-exclusive distributor: The supplier, in this case, reserves the right to appoint other distributors.
A new form of distribution has been around recently, the Developer Distribution, which is an agreement between a software developer and the distributor to promote and sell the software. It allows the distributor to sell the software licence to the customers. A typical example is buying an Amazon gift card or a Microsoft product from your local store. The local store is the distributor.
After determining the distribution model, we should consider the element of conflict of interest. E.g., does the distributor deal with any competing products, or will he be allowed to deal with similar products during the term of this agreement?
Risks of a distributorship
In exchange for receiving a higher profit margin, the distributor would carry higher risks than an agent would have. That differs in the case of exclusive distribution, where the supplier would bear a higher risk if the distributor is not selling the goods in a satisfactory volume. In this case, the agreement doesn’t allow the supplier to appoint another distributor or sell the goods himself.
It is crucial, therefore, to make it clear in the agreement as to the point where the title and risk of goods pass to the distributor. Please note that title and risk can pass at different times.
The Title
According to s. 17 of the Sale of Goods Act 1979 (“SGA”), the title passes at the point the parties intend it to pass. Alternatively, s.18 stated that the title would pass at the time when the contract is made. That means, under s.18, the title would pass before the goods price is paid, which brings to the table the importance of having a Retention of Tile clause (“ROT”). Under this clause, we retain the title of goods to the supplier until the distributor performs certain acts, such as paying the price or receiving the goods.
The Risk
The risk of goods should be passed at the time as the title under s.20 unless otherwise agreed in writing. This section could cause a severe problem for the supplier if he included the ROT clause, as he will be in a position where he delivered the goods but retains the risk of damage. We normally avoid that situation by including an express provision stating the point at which the risk of goods will be passed to the distribution.
You see, drafting a distribution agreement could seem complicated, but not for AIO Legal Services. Please try to hire an expert to draft your agreement in a smart and legal manner, or contact us, and we will be glad to help.
Also, you have to make sure that the agreement doesn’t fall within the scope of competition law. I.e., ensure that the agreement contains no unlawful restraints on trade or no hardcore restrictions under s.2 of the Competition Act 1998.
We have stated the above points because we believe it is crucial to have your Distribution agreement clear and accurate from the outset to avoid potential breaches and liability between parties while the business is on the run.
We hope this article will give you a simple overview of how to draft your distributor agreement accurately and in a legal manner.