What is a distribution agreement?
A distribution agreement is a contract used by suppliers or manufacturers to engage with a distributor to distribute products in a particular territory. It is a contract that sets out the terms and conditions between a supplier and distributor to resell products at wholesale or retail level. The distributor first purchases the products from the supplier and then resells the products to customers in the territory.
A distribution agreement template will also specify if the distributor’s rights to resell will be exclusive to the territory or if other companies can also distribute the products (i.e. an “exclusive” or “non-exclusive” distribution agreement).
Why use this distribution agreement template?
To promote products and reduce risk: The success of a business is often determined by how well it can distribute its goods or products. Entering into a distribution agreement can be advantageous for both companies to profit from the products whilst reducing risks on both sides. If carefully drafted, a distribution agreement can protect both parties and clearly set out their intentions by defining the products, where the distributor will have the right to resell and the terms that will govern each sale.
Expand into new markets: Partnering with a distributor can help increase sales and build a supplier’s customer base in new territories and larger markets. Distributors tend to know their territory thoroughly and will already have access to established sales channels to resell the products. A distributor can enhance a supplier’s reach to businesses or consumers without the need for local market knowledge or a physical presence in the territory.
Protect intellectual property (“IP”): It is important to expressly set out that each party will continue to own their existing IP and whether a party may use the other’s IP (such as trademarks) to sell the products. The distribution agreement can also clarify which party will own any new IP that is created in connection with the products after the distributor has purchased them for resale.
For more information about the importance of distribution agreements and real-life examples of when they should be used, check out this blog.
What information does a distribution agreement include?
Key provisions: This distribution agreement template contains key provisions in relation to:
- products to be distributed;
- where the distributor will resell the products;
- the distributor's obligations;
- the supplier's obligations;
- pricing and payment terms;
- intellectual property right protections;
- the process for product recall and insurance (if applicable); and
- governing law and jurisdiction.
Exclusivity: This distribution agreement template also contains optional clauses to establish if the distributor will have the right to sell the products in the territory with sole rights, or on an exclusive or non-exclusive basis.
• Sole rights - An appointment of sole rights under a distribution agreement restricts the supplier from engaging any other distributors, however, the supplier can still sell the products directly to customers in the territory.
• Exclusive rights - An exclusive distribution agreement gives the distributor the right to be the only distributor selling the products within a specific territory. It limits the supplier from reselling the products to customers or engaging other distributors in the territory.
• Non-exclusive rights - A non-exclusive distribution agreement allows the supplier to appoint other distributors to resell the products in the territory.
This distribution agreement assumes that the parties are contracting B2B, that they are incorporated in the UK, and that English law applies.
UK Competition Laws
There are certain laws in the UK that make it illegal for businesses to behave in a way that could limit competition and trade. The Competition Act 1998 prohibits agreements and arrangements between businesses that restrict competition in the UK (unless they meet the conditions for an exemption, see VABEO below). These laws are policed by the Competition Markets Authority (CMA).
The consequences of failing to comply with UK competition law can have significant implications for a business and its directors, for example:
- The agreement can be deemed unenforceable.
- Fines of up to 10% of the company's global turnover for the previous financial year.
- Personal liability for company directors, such as criminal prosecution and/or disqualification.
Some examples of anti-competitive behaviour include:
Price-fixing: this is an agreement between two or more companies to fix prices, which can lead to consumers paying more for goods or services. Instead, recommended or maximum prices can be agreed upon, provided that it does not actually lead to fixed unit pricing.
Market sharing: this is an agreement between companies to divide up the market and not compete with each other in certain areas or with certain customers, which can limit consumer choice and lead to higher prices.
Bid-rigging: this is an agreement between companies to coordinate their bids for a contract, which can result in higher prices and less competition.
What is The Competition Act 1998 (Vertical Agreements Block Exemption Order) 2022 (VABEO)?
The VABEO is a set of rules that regulate certain types of agreements between businesses operating at different levels of the supply chain in the UK. The VABEO provides a block exemption from certain competition laws in the UK on the basis that certain conditions are met, such as:
Market share: each party's market share must be below 30%; and
Hardcore restrictions: the agreement must not contain "hardcore restrictions" (e.g. price fixing, etc.).
This means that under VABEO an agreement between a supplier and a distributor may be exempt from certain provisions of UK competition law if it meets the relevant criteria and does not harm competition.
The VABEO also includes certain obligations that must be carried out, such as an obligation to provide any information requested by the CMA. It's important for businesses to understand and comply with VABEO if they are involved in vertical agreements. For more information, check out the CMA's VABEO guidance.
Jurisdiction of UK Competition Laws
Since Brexit, the UK now has its own system for governing vertical agreements such as distribution agreements. Although the UK’s VABEO has taken an approach that is similar to the EU Vertical Block Exemption Regulation, there are notable differences between the two regulations. As the EU and UK have separate regimes for governing vertical agreements, this template is drafted in compliance with UK rules and does not take into account considerations of another jurisdiction’s competition laws. Therefore, if this template is used in another jurisdiction, it may not be compliant with the laws of that jurisdiction.
Docue creates templates that are customised to meet your needs
Tailored to protect your interests: This distribution agreement template contains alternate clauses depending on whether you are the supplier/manufacturer of the products (known as the company) or the distributor.
What are the differences: For example, in the pro-distributor optional clauses, there is the freedom to carefully select terms that are in favour of the distributor to avoid unintentionally limiting the ways in which the distributor can resell and market the products. However, in the pro-supplier/company optional clauses, the supplier is able to choose how strict or relaxed the obligations of the parties will be and if there will be a minimum quantity of products that must be purchased by the distributor annually. A list of “reserved customers” can also be included to allow the supplier to sell the products to certain customers in the territory even where the distributor has exclusive rights.
Other distribution and supply of goods agreements
When should this template be used: This distribution agreement template should be used where a supplier or manufacturer is looking to appoint a distributor to resell or distribute its products in a particular territory.
When should the supply of goods agreement template be used: The products that are sold under the distribution agreement will be governed by their own terms and conditions that are separate from the terms of the distribution agreement. A supply of goods agreement will contain the commercial terms and conditions relating to the goods, whereas the distribution agreement governs the relationship between the supplier and distributor to distribute the products. Our Supply of Goods Agreement template can be found here.
When should the software reseller agreement template be used: If the products being resold consist of software rather than goods, a software reseller agreement would generally be more appropriate. Our software reseller agreement template can be found here.
Quick contracts, without compromising quality: With Docue, you can create a high-quality distribution agreement in minutes. The platform includes model clauses designed by business lawyers to help you draft the contract yourself and tailor it to your needs.
E-signature and secure storage: Signatures can be collected electronically, and all contracts you make are saved in your company's own contract account.
Tags: distribution agreement template, distributor, distribution of products, reselling goods and services, product distribution, channel distribution, distribution arrangement, distribution contract, non-exclusive distribution, exclusive distribution, sole rights distribution