Top 12 Tips for Exclusive Distribution Agreements ??? ??

12 Most Important Considerations for Exclusive Distribution Agreements

CAUTION! Do not grant any distributor exclusive distribution rights without considering each of these points carefully. An exclusive distribution agreement is a binding contract between a manufacturer, a licensor or a supplier (the principal) and a distributor whereunder the distributor is granted the exclusive right to distribute the principal’s designated products and/or services in a specific geographical area (the territory) for an agreed duration of time (the term). Here are the 12 most important considerations for an exclusive distribution agreement:

1.??? Territory. The territory or geographical area for which the distributor has the exclusive right to distribute the principal’s products should be clearly defined and be as narrow as possible to reflect that actual area the distributor can reasonably cover. This can include specific countries, provinces or states, counties, and/or cities. The general rule is to error on the side of being too narrow over being too broad in terms of the exclusive territory granted.

2.??? Term. The term of the agreement should be clearly defined, including the start date, the end date, and the conditions under which the agreement can be terminated or converted to being non-exclusive. To be clear, the term of the agreement may be longer than the term of exclusivity.

3.??? Products and/or Services, Exclusivity. The products and/or service the distributor is authorized to distribute and the scope of the exclusivity must be detailed clearly. This may include specific product lines, services, brands or other categories. To be clear, only those products and/or services which the distributor can competently sell and support should be included within the scope of exclusivity.

4.??? Minimum Sales Requirements. The agreement may include minimum sales requirements the distributor must meet in order to maintain exclusivity and such requirements can be per product and/or service and should be on a macro level (for the entire territory) and for subparts of the territory (e.g., each specific state within the United States or each specific country within the European Union). As an example, just because the distributor surpasses its sales requirement in New York does not mean the sales overage should be applied to another state for which the distributor fails to achieve its sales requirement. Minimum sales requirements will help ensure the distributor is actively promoting and selling the products and services in question throughout every portion of the exclusive territory. Finally, minimum sales requirements should be increasing annually if not quarterly.

5.??? Pricing. The agreement should define the pricing structure for the products and/or services, including any discounts or other incentives the distributor may receive such as discounts received in connection with achieved purchasing volumes (which should be reset to zero at the end of each contract year at the latest). Discounts on pricing should be based on ‘actual’ sales volumes. It is advisable not to grant discounted pricing based upon a distributor’s estimates or assumptions of sales volumes only, unless any such discounts will be forfeited if such sales volumes are not reached.

6.??? Marketing and Promotion. The agreement should specify the responsibilities of the distributor and the principal with respect to marketing and promoting the products in the distributor’s territory. This can include advertising, trade shows, and other marketing activities. Further, some distribution agreements allocate an agreed proportion of principal revenue from distributor to be utilized by the distributor and/or principal for marketing the products and/or services in the territory.

7.??? Quality Control. The agreement should specify the standards for ensuring the products, services, any add-ons, and support relating to any of the foregoing are of high quality. This can include regular inspections, testing, training, as well as required response times and certifications.

8.??? Intellectual Property. The agreement should specify the ownership and protection of the intellectual property rights, such as trademarks, patents, and copyrights, associated with the products and which party shall own any distributor improvements or derivatives thereof.

9.??? Warranties and Liabilities. The agreement should specify the warranties and liabilities associated with the products and the procedures for handling any claims or returns. To the extent limited warranties and disclaimers shall apply, the agreement should ensure that such legal terms are included as a condition of sale to the end customers. Further, any warranty disclaimers and/or limitations of liability must be carefully drafted to ensure enforceability under applicable law.

10. Termination. The agreement should include provisions for expiration, termination for convenience, the conditions under which either party may terminate the agreement for cause, the conditions under which exclusivity may be revoked, and the procedures for winding up the agreement.

11. Dispute Resolution. What is the procedure in the event of a dispute? Arbitration is commonly believed to be more efficient (faster and less expensive) but the choice of arbitrators, the place of arbitration, and the governing law are always a potential issue and should be reviewed on a case-by-case basis. Further, a contract clause requiring the losing party to pay the prevailing party’s legal fees and arbitration costs (or litigation costs- if applicable) is recommended.

12. Non-Competition. Depending upon the type of products and/or services, the principal may want to require a distributor to refrain from offering any competitive solutions within the territory during the term of the agreement and even for some time thereafter. To the extent that a principal will grant exclusive distribution rights to a distributor, such a non-competition clause is strongly advisable.

In conclusion, an exclusive distribution agreement is a critical legal contract that outlines the terms and conditions of the distribution of a manufacturer or supplier’s products. Careful consideration of the above factors can help ensure the agreement is fair and balanced for both parties, protects the interests of the principal and the distributor, and provides a solid foundation for a successful collaboration. It is important to seek the assistance of a lawyer when drafting and negotiating an exclusive distribution agreement to ensure the agreement is legally binding, enforceable, and promotes the outcome that the principal aims to achieve.

Gary Guttenberg, Attorney, Business Developer, Deal Maker

[email protected]

+4670 752 16 80

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