What is The Use of a Distribution Agreement

What is The Use of a Distribution Agreement

What is a distribution agreement?

An agreement between the distributor of goods and the supplier of those. This is a legally binding agreement on the supplier or manufacturer as well and the distributors.

A distributor is a person or the company who sells the products to the customers in the final market, are also known as the resellers. They can sell those products to an individual or any other entity.

The distribution agreement includes terms of the contract, cost and the commission of the distributor, duration of the contract, and other relevant clauses regarding the operations and execution of the contract.

What are the uses of the Distribution agreement?

Though the reselling activities are often carried on with an informal agreement, there are certain reasons you should enter into a formal distribution agreement:

⦁ Verbal agreement or informal agreement may lead to a misunderstanding, and the parties may feel it is not obligatory to follow all the clauses of an informal agreement.

⦁ An agreement with specific terms and conditions written in clear terms narrows down the chances of misunderstanding and misinterpretation.

⦁ In case, one party deliberately disobeys the terms and conditions agreed, the victim party gets legal protection much easily.

What are the types of Distribution Agreement?

There are four types of distribution agreements based on the requirement of the parties:

⦁ Distribution Agreement For Commission: This is specifically for resellers, who earn a commission from the supplier or manufacturer, based on the products they have sold. The percentage or the fixed amount of commission must be specified on the distribution agreement.

⦁ Exclusive Distribution Agreement: If the distributor is the only distributor for a specific product, then the parties can enter into an exclusive distribution agreement. For example, ABC, a smartband manufacturing company enters into a deal with Amazon India to sell its products. In this situation, no other online seller or distributor can sell the product except Amazon.

⦁ Non-Exclusive Distribution Agreement: Under a non-exclusive agreement, unlike the exclusive agreement, the supplier can enter into a distribution agreement with as many distributors as he or she wants.

⦁ Wholesale Distribution Agreement: The supplier and distributor enter into a wholesale distribution agreement when the bulk supply of products is required in which they specify the required amount of products. Often the distributor sells those products under his/her name. For eg., if a Boutique enters into a contract with weavers that they will supply 500 sarees each month, they will enter into a wholesale distributor agreement, and the Boutique can use its logo to market and sell the products to the individual customers.

⦁ Developer Distribution Agreement: In the case of intellectual property, the developer and the entity distributing the product enter into the developer distribution agreement. This is widely used by the developers of mobile apps, games, websites, etc.

Checklist of Clauses In A Distribution Agreement

A distribution Agreement must carry all the requirements of a valid contract as per the Indian Contract Act 1872 - offer, acceptance, consideration, and intention to a legal relationship.

Certainty and capacity to contract

While preparing the agreement, make sure that you check for these clauses:

⦁ Kind of Distribution Agreement: We have already mentioned the popular types of distribution agreements. While entering into the distribution contract, you need to check carefully the terms relevant to the type of agreement you agreed to enter into.

⦁ Payment: Consideration is one of the main element of a valid contract, and the distribution agreement must specify the percentage or the agreed amount (if fixed) to be received by the distributor. It is also necessary to mention how the amount shall be paid - through bank transfer, cheque or share of profit deducted. Also, if any amount is deducted as per government policy, that should be mentioned.

⦁ Targets: Some distributors are given daily, weekly or monthly targets, which they are expected to fulfil and are subject to their commission or share to the profit. The agreement must mention the period of reporting, and also the targets if any.

⦁ Obligations on Advertising: The marketing strategies are subject to the type of distribution agreement entered into by the parties. The extent of rights of the distributor to use his or her name or business logo, or the limitations imposed on the suppliers to the distributors, are subject to the terms and conditions specified on the agreement of distribution.

⦁ Market Competition: This is an important clause for an exclusive distribution agreement, where the restriction is imposed on the supplier that he or she cannot enter into an agreement with any other distributor for the specifically agreed region. On the other side, under certain exclusive distribution agreement, restrictions are imposed on the distributor as well, usually for food products or products which require extra care. In such a case, the distributor can act only within the specified area, not outside.

⦁ Trademark Usage: It is important to have a clear idea regarding the trademark registered by the distributor. The liabilities of the supplier and the distributor must be clear. For example, you buy a phone from a shop, an advertisement uses the logo of the supplier, but for services, you have to approach the service centre. Here, the repair and servicing is a liability of the supplier, not the distributor.

⦁ Termination of Contract: The biggest advantage of a formal contract is that the parties are legally bound to each other and they can beforehand specify the grounds which will result in termination of the contract. The parties can specify the situations where the contract shall stand revoked or cancelled without much interruption.

As reselling and MLMs are trending and being popular among the customers, the necessity of distribution agreement inevitably increasing to keep the rights and duties specified for all the parties to enable a smooth way to the customer and services.