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A distribution agreement occurs when one party, the distributor, purchases goods from another, the supplier. The distributor then sells goods directly to the final customer. This arrangement is advantageous to a supplier as distributors can reduce costs and help suppliers to expand into new territories; the distributor having knowledge of local culture and laws whilst also being able to utilise existing customers and contacts.

For distributors, they receive a better profit margin on the goods than a comparable commercial agent would receive in commission. However, the reason for the higher margin, is as distributors attract a level of risk as they contract directly with the customer.

The main categories of distributors are:-

  • Exclusive distributor – the distributor is the only party entitled to sell the product in the territory. The supplier is prohibited from selling the goods in the territory itself or through another party.
  • Non-exclusive distributor – the distributor has no exclusive rights and the supplier can appoint as many other distributors within the territory as it chooses.
  • Sole distributor – the distributor is the only distributor that the supplier will contract with in a particular territory and the distributor will generally consider the supplier to be the only supplier of that type of goods. However, the supplier is able to sell its products in the territory itself.
  • Selective distributor – the supplier will only appoint an agreed number of distributors within the territory.

The agreement between the distributor and the supplier is usually governed by a distribution agreement which sets out the rights and obligations of each party. The terms of the agreement will usually deal with:-

  • The type of distribution agreement
  • The territory
  • Term of the appointment
  • Pricing and payment
  • Marketing of products
  • Minimum requirement and/or sales targets of the distributor
  • Restrictions on both the supplier and the distributor. This can include where the distributor can deal, the goods that the distributor can sell and restrictions on sale of competing products.
  • Confidentiality
  • Liability
  • Termination
  • Parties’ choice of governing law and jurisdiction and any arbitration agreements

Also, when preparing a distribution agreement, the parties need to consider the terms of the agreement and also the impact of relevant legislation, particularly competition law; distribution agreements are potentially in breach of UK and EU competition laws.

Parties to distribution agreements may find themselves in difficulty in the event that the distribution agreement is breached. For example, the distributor may fail to meet agreed targets or the supplier may deliver goods that are not fit for purposes.

Additionally, distributors need to ensure that they act in compliance with contractually agreed terms with their customers. Should the distributor breach these terms, they may face claims for breach of contract from the customer.

For more information on Distribution please call us on 0151 735 10000, or request a call back and one of our Liverpool solicitors will call you back.




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