An exclusive distribution agreement is a contract between partners that goes over the responsibilities of each partner. This legal agreement is between a supplier of goods and a distributor of goods, and is part of a broader category of distribution agreements.
What differentiates exclusive distribution agreements is that the distributor is granted exclusive rights over a product line, territory, and/or sales channel. The supplier agrees to not distribute the product throughout the market or through any third party channels, usually for something in exchange to this promise of exclusivity.
The supplier will have a say in how goods will be merchandised or advertised, especially as they expect some sort of return by entering this exclusive agreement. If they did not expect a great enough amount of returns, there would be no incentive to enter the agreements with distributors.
Exclusive distribution agreements may be subject to restrictions via competition law and restraints of trade laws, so you must look into your own state and national laws before proceeding with this agreement. Further, a business contract lawyer should be used to review the contract.
Elements of an Exclusive Distribution Agreement
The terms and conditions in the exclusive distribution agreement should include (but is not limited to) the territory in which the distributor has rights (i.e., a company may have exclusive domestic rights, but not exclusive international rights), the minimum sales target and rights of both parties if sales are not being met, when payment will be made for the distribution of goods, how the agreement can be terminated, and who is responsible for the cost of the product.
Generally, when drafting an exclusive distribution agreement, both parties will have terms they want in mind. On the supplier’s side, they can demand that the distributors have a set of performance obligations, and if they fail to meet them, will still have to make up any monetary deficit if the performance obligation is not met, although it is entirely contingent on the terms and conditions set during the drafting of the agreement.
The agreement will have manysections to ensure that there is no room for error or misinterpretation. Both the supplier and distributor will have to agree on how warranties and product liability claims will be factored into the agreement, and who will bear the cost of each. Typically, a business lawyer will review the terms of the contract before the contract is signed.
The Relationship Between Supplier and Distributor
In these agreements, suppliers have an advantage over the distributor, as they have full knowledge of the product and an idea of what the target market is, which the distributor will have to be made aware of.
For both the suppliers and distributors, it will do them well to research each respective company, as they will want to know their past history with previous partners and how successful they are.
For the distributor, it is important to know the supplier’s business background and whether or not the supplier has financial substance to support the product. For the supplier, knowing the experience of the distributor in selling and distributing is essential, as they are the ones who will drive sales.
Pros and Cons of Exclusivity
For distributors, they stand to gain the most out of an exclusive distribution agreement. The supplier will lose out on potential deals that can be made with multiple distributors, although they gain the benefit of having a distributor who will be more willing to spend more on advertising the product.
It is during this period that suppliers lose out on the chance to franchise their product, although it can also be used as at testing ground to see how successful the product is on the market as long as they put their faith in the distributor. Once the exclusive distribution agreement expires, each party is free to either end the partnership or extend the contract.
To ensure that you will be getting the most out of an exclusive distribution agreement, it is best to obtain references and ensure that each party has a properly authorized, dated, and signed copy of the exclusive distribution agreement to keep in on file. Independently sought legal advice from a business contract lawyer is also highly recommended, as they will not be skewed towards either party during negotiations.
Finally, remember to negotiate all necessary details that need to be addressed. A business contract lawyer can definitely help negotiate your side. Being as thorough as possible will ensure that conflicting assumptions cannot be made after the agreement is created, which will decrease the chance of a court case or contract conflict.
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This post is written by Maggie Pa, a UCLA Class of 2017 student with vast experience in social media and marketing.