A Distribution Agreement is a legal contract between a Supplier (generally a manufacturer) that supplies goods and/or services to another party, the Distributor, for resale in a specified territory. Basically, the Supplier wishes to have its products distributed and the Distributor’s role is to develop the largest possible market for a product through distribution, sales and marketing activities.
A well written Distribution Agreement regulates the relationship between the parties; it should be comprehensive and balanced in that it sets out the rights and obligations of the parties and protects the interests of both parties.
Distribution Agreements may be exclusive or non-exclusive. In an exclusive distribution agreement the distributor will be the only person permitted to distribute the products/services in the territory. Conversely, in a non-exclusive distribution agreement the distributor might be one of several distributors in the same territory.
Distribution Agreements must be carefully drafted to take into account what the parties are trying to achieve and the implications of competition law and other regulations that can have severe penalties.
Key elements to be considered include:
- The territory covered
- Non-exclusivity or exclusivity
- Non-compete obligations
- Responsibilities of the parties in terms of promoting, selling and distributing the products/services
- Intellectual property
- Terms and conditions of sale
- Confidential information
- Circumstances in which the agreement may be terminated
- Consequences of termination
Please note that you can give a distributor exclusive rights to a particular territory, however, under competition law you may not be able to give the distributor exclusive rights and at the same time prevent the distributor from selling competing products.
You can stop a distributor selling competing products provided you do not have ‘selective distribution’ or have a market share of over 30%. However, the restriction on selling competing products must not be indefinite or last more than five years.
You have ‘selective distribution’ if you deliberately limit the number of distributors, or require distributors to meet particular qualifying criteria. ‘Selective distribution’ has implications under competition law. In particular, it is illegal to prevent selective distributors from selling competing products.
You can stop a distributor selling outside the territory if your share of the market on which it supplies the relevant goods or services does not exceed 30%. If you have a market share of over 30% then you cannot.
Furthermore, a distribution agreement cannot restrict passive sales i.e. if a customer approaches the distributor then the distributor should be free to sell to that customer even if it is outside the territory.
Finally, please note that you cannot control the prices a distributor charges their customers for the products/services as it would be a breach of competition law.
The Legal Stop provides several services including fixed fee legal document drafting where you will be able to obtain a distribution agreement specifically tailored to meet your needs. In addition we also offer downloadable distribution agreement templates, our templates are:
Our distribution agreement templates are suitable for use in the UK or abroad where the parties to the agreement are individuals or businesses, and can be used for sale and promotion of goods and/or services. They are flexible and can be adapted to suit specific needs of the parties.
The templates are intended to satisfy the requirements of the EU and UK competition law rules affecting “vertical restraints”. They are drafted on the assumption that the supplier’s share of the market on which it supplies the relevant goods or services does not exceed 30%; the purchaser’s share of the market on which it buys those goods or services does not exceed 30%, and the distributor does not compete with the supplier in the production or manufacture of the products covered by the distribution agreement.
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