What Is a Distribution Agreement?

By Keith S. Ng

When a manufacturer and a supplier agree to distribute and/or sell manufactured products, they generally enter into a distribution agreement. A supplier will normally enter into such an agreement with several distributors in different geographical locations. A distribution agreement can stipulate how the product in question will be marketed, the price the distributor must pay for it and or the amount of the product that will be available to the distributor. Occasionally, such an agreement may also indicate the way in which a product may be advertised.

What You Need To Know

An arrangement between a distributor and a manufacturer must be mutually beneficial. Both parties will be seeking to generate profit from their relationship, and the terms of the arrangement are therefore of critical importance. The price at which the manufactured sells the goods in question to the distributor is therefore perhaps the most important issue in a distribution agreement.

Another extremely important clause is that relating to exclusivity. In many circumstances, the distributor will want to be the sole distributor of the product in question in a set geographical region. If so, an exclusivity clause should be built into the agreement. Obviously if the goods in question are a commodity, such as potatoes or cotton, such an exclusivity clause will perhaps not be necessary.

Every Case Is Different

Distribution agreements are used in many industries. The film industry is a particularly interesting example of an industry that uses such agreements. A director may make a film and sign an agreement to have a studio advertise and sell that film to various theaters. In addition, the agreement may provide for distributing the film to online entertainment provides such as Netflix. The key, as with any agreement, is to ensure that all parties profit from the arrangement.

Studios often produce films themselves, which means that distribution becomes their responsibility. If that film is being marketed outside the country of origin, it might have to be distributed by another party, and that would require another distribution agreement.

When There Is No Agreement

Note that certain manufacturers decide against using a distributor to market their products, and this often happens if the inventory is relatively small. For example, a farmer may have a small farm and plan on selling his produce at nearby farmers' markets instead of working with a distributor. He may be charged a small fee for dealing with those farmers' markets, thus avoiding the need to deal with a distributor.

It is also possible to two parties to enter into a verbal agreement. It's not a great idea to do this, as the terms can become confused very quickly; it's much better to set out your arrangement in a distribution agreement.

Keith Ng is a legal writer specializing in Distribution Agreements and templates. For tips and advice on drafting this document, read his article on the Terms of a Distribution Agreement.

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