Blog Article

Introduction

Once goods are manufactured they need to be sold so that they reach the customer. Manufacturers are suppliers who readily can produce the goods or products. But to make it available in the market and reach to the hands of millions of customers they need the help of people from all areas of the country or state. For this they have to approach certain persons who can take the goods from the manufacturer or suppliers and sell it in the market to the customer in need. Such persons or agencies are termed Distributors.

It is always a practice to enter into agreements with the Distributors in order to make the terms and conditions of the transactions and dealings safe and secure.

What is a Distributorship Agreement?

A Distributorship or Distribution agreement is made when there is an arrangement between the distributor and the supplier or manufacturer where the manufacturer supplies goods to the distributor to sell the goods on the basis of various terms and conditions.

It is the right given by the manufacturer to the distributor to sell the goods of the manufacturer in the respective territories.

While making the distributorship agreement it is very essential that both the parties know their rights and obligations under the agreement.

Entering into the supply of goods with any person and giving rights to sell those goods without any written agreement is like inviting problem in the future between the parties.

What are the Necessary Requirements of the Distributorship Agreement?

A Distributorship agreement should be made very carefully including the following important details:

1. The details of the product that is to be sold
2. The area or Territory covered by the Distributor and the exclusivity
3. Price fixing of the product
4. Promotional discounts and responsibilities
5. New products policy
6. Distributor’s income out of the sales
7. Details of any Sales target to be achieved by the Distributor
8. Payment options as to how and when payment shall be done
9. Advertising and promotion
10. Terms and conditions when there is a breach
11. Defective goods and liability
12. Confidentiality and protection of trade secrets by the Distributor
13. Period of agreement with a right of renewal
14. Probationary period
15. How to terminate the agreement
16. If target not achieved rights of either parties
17. Modification of the agreement and product change
18. Dispute resolution and Arbitration

What are the Supplier’s Responsibilities?

The Supplier has to follow these:

1. The Supplier has to know and understand the product very well and have a good understanding of the target market so that he can guide and direct the Distributor.
2. The Supplier has to provide the details of the availability and volume of the product to the Distributor and also provide some information on the financial position of the Supplier.
3. Where multiple Distributors are operating for the same product the Supplier has to provide such details to the potential Distributor.
4. If the product is manufactured or imported and supplied by the Supplier then the Supplier has to provide the warranty as to the fitness and working condition of the product.
5. The Supplier has to find out the background of the Distributor regarding the Distributor’s experience in selling and distributing and also get the right person to  distribute the products.
6. If any sub-distributor is appointed by the Distributor, the Supplier has to make it clear in the agreement whether such sub-distributor is allowed to be appointed. Also the supplier has to ensure that the Distributor is responsible for any payments to the sub-distributor in case such appointment is allowed in the agreement.
7. The Supplier should make sure that if the Distributor is a Company, then the Directors of the Company should provide personal guarantee for the products and for fulfilling the obligations by the Distributor.
8. The Supplier has to provide all the good and bad characteristics of the product to the Distributor by making a complete package of the product information so that the Distributor can sell and market the product accordingly.
9. Make a clear picture as to how the Distributor gets paid. Whether the Distributor pays for the product initially and keeps the profit or whether the Distributor pays the cost plus Supplier fee as and when sales happen.
10. The Supplier should provide only genuine and true facts about the product. Any false misleading description of the products would make the Supplier liable.
11. The Supplier should mention clearly as to which are the territories of the Distributor. Also whether there are other Distributors and their details or whether the territory is exclusive. The supplier should have good knowledge of the demography of the area.
12. The Supplier can include an indemnity clause if the Distributor agrees to take up the liability if the customer suffers any loss due to the use of the products.
13. The Supplier should have the right to terminate the agreement if the Distributor does not achieve the sales target or fails to pay the money to the Supplier for the goods.
14. The Supplier should be able to terminate the agreement by giving a prior written notice to the Distributor at any time during the agreement term.

What are the Distributor’s Responsibilities?

The Distributor should follow these :

1. The Distributor should find out who is the Supplier and the background of the Supplier’s dealings in the business. The financial position and the volume of the product should also be checked. Also the distributor should check how the earlier or other distributorships were run by the same Supplier.
2. The Distributor has to obtain some warranties on the products from the Supplier about the fitness and quality of the products.
3. The Distributor should provide all the details of himself to the Supplier regarding the experience in business and knowledge of running business.
4. If the Distributor is a Company they have to provide personal guarantee from the Director of the Company.
5. If the Distributor wants to appoint Sub-distributors then the distributor is responsible for any payments to the Sub-distributor. Also the Distributor does not absolve from the obligations to perform.
6. All details about the product given by the Supplier should be verified. Any false information given by the Supplier can be claimed under the Trade Practices Act by the Distributor.
7. The Distributor has to be clear as to how the payments to the Supplier are to be made. Whether the Distributor pays for the product initially  and sells it and keeps the profit or whether the Distributor sells the product and then pays the Supplier out of the sale plus Distributorship fee.
8. The Distributor should make it clear from the Supplier as to the territory of Distributorship. Also make sure that the Supplier provides you with the Demography of the area of Distribution territory.
9. The Distributor should make it clear from the Supplier whether the Distributorship is exclusive or whether there are other Distributors. If there are other Distributors then the Distributor should find out how much sales is happening and how is the market for the products.
10. The Distributor should demand an indemnity from the Supplier that if any third party suffers any damage or loss due to the use of the products the Distributor shall  not be liable, but that the Supplier shall take the liability.
11. Always include a dispute resolution clause in the agreement so that in case you fail to meet the target in sales or pay the Supplier in time, you can still try some resolution measures.
12. The Distributor should have the right to terminate the agreement by giving a prior written notice at any time during the agreement term.

Distributor, Not an Agent

There is a vast difference between an Distributor and an agent.

An agent is a person who sells the product on behalf of the Supplier or Manufacturer and thereby is paid a commission by the Supplier based on the quantum of sales done. But a Distributor is a person who has purchased the goods from the Supplier and resells it for a higher price to make profit. The profit is the income of the Distributor and the Supplier has no say in it.

The Distributor is not under the control of the Supplier, but the agent is fully under the control of the Supplier.

Conclusion

It is therefore always recommended that before and after making the distributorship agreement get it checked by a lawyer or a legal expert to identify whether all the safe clauses have been included and whether to remove any ambiguous and unfriendly clauses.

The hurry to start up a Distributorship business should not put you into a never ending legal battle because of the careless attitude of not making a proper and perfect agreement. A poorly drafted Distributorship agreement can always result in disputes and fights between the Supplier and the Distributor. Hence, be shrewd and keep your eyes open before proceeding. LegalDesk offers ready formats of various online legal documents required for personal use and business purpose too. To place a request, click the button below and get started!