Key Challenges in Distribution Agreements

Distribution agreements are often used as a low cost method of expanding into new markets and geographical areas. The mechanism of the distribution arrangement is that the manufacturer/ supplier sells its products to the distributor, who then sells the products on to its customers. In purchasing and reselling the products (and adding a margin), title to the products in question will pass to and from the distributor. There are a number of key considerations that are apply to the large majority of distributions agreements:-

Regulatory Compliance: In the UK, a key consideration in entering a distribution agreement is that it complies with competition law to avoid incurring substantial penalties.  

Territorial Restrictions: The extent of the territory or customer group needs to be dealt with precisely in the distribution agreement.  

Basis of Appointment: Is the appointment on an exclusive, sole or non-exclusive? The distribution agreements need to clarify what these terms mean in the context of the agreement, for example, by stating that the supplier will not appoint another distributor in the territory, or that the supplier will not itself sell directly into the territory.

Termination and Renewal: Terms on duration of the distribution agreement, notice periods, grounds for termination, and renewal options need to be clear.

Product Ranges: The distribution agreement needs to define the products or ranges of products which are to be covered. The parties should also consider whether the distributor is to have the right to market new products as they become available. 

Local Formalities: The distribution agreement should set out who is to be responsible for complying with local formalities (such as for importing the goods) and obtaining any necessary permits.

Performance Metrics: Setting and monitoring performance obligations is another challenge in a distribution arrangement. The supplier may wish to ensure that distributors meet agreed upon minimum sales targets and adhere to quality standards. .

Conclusion

Navigating distribution agreements requires careful consideration and strategic planning. These agreements serve as vital tools for expanding market reach, but they come with challenges that can impact both suppliers and distributors. A well crafted distribution agreement can help foster successful and enduring partnerships for suppliers and distributors. 

Our commercial solicitors represent manufacturers, suppliers and distributions in putting distribution agreements in place.  Please do contact me, James Macdonald if you need any advice on distribution agreements.