Distribution agreement: what to negotiate
A distribution agreement organizes the relationship between those who produce and those who resell. Properly defining territories, exclusivity and targets usually prevents disputes throughout the partnership.
What is a distribution agreement
It is the agreement by which one party acquires products from another in order to resell them, as a rule in its own name and at its own account and risk. The distributor usually takes on the marketing in a given market, while the supplier maintains the supply and, often, guidance on how to operate. It is common in consumer goods, industry and technology supply chains.
Clauses that usually deserve attention
Some points tend to be decisive for the balance of the relationship and deserve careful drafting:
- Territory of operation and any exclusivity
- Targets, minimum volumes and consequences of non-compliance
- Pricing policy, discounts and payment terms
- Term, renewal and grounds for termination
- Rules on inventory, brand and use of distinctive signs
Exclusivity: benefits and risks
Exclusivity can be advantageous for both parties, but it also creates obligations. For the distributor, it tends to guarantee market space; for the supplier, it can ensure dedication and volume. On the other hand, it usually creates dependency and requires attention to the termination rules, in order to avoid abrupt disruptions that cause losses and disputes over indemnification.
Ending the relationship
The end of the agreement is one of the most sensitive moments. Disputes commonly arise over the notice period, the clearing of inventory, the investments made and the clientele developed. Providing objective criteria for the termination, including notice periods and any compensation, tends to reduce litigation. The appropriate treatment depends on the particularities of each commercial relationship.
Frequently asked questions
What is the difference between distribution and commercial representation?
In general, the distributor buys the products and resells them on its own account, assuming the risks of the marketing. The commercial representative, in turn, usually intermediates sales on behalf of the represented party, without acquiring the goods, being remunerated by commission. The differences have relevant legal implications and depend on the structure of the relationship.
Is exclusivity mandatory in a distribution agreement?
No. Exclusivity is an option that the parties may or may not adopt, according to their commercial interest. It may be total or limited to a given territory or product line. When provided for, it is usually accompanied by consideration, such as targets, and by clear rules for any termination.
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