What is a Distribution Agreement?

Introduction to distribution agreements

A distribution arrangement entails a distributor purchasing goods from a manufacturer, and reselling such goods on the distributor’s own behalf.

From the outset, it is worth noting that a distribution arrangement is different from a mere re-sale arrangement. Under a re-sale arrangement, the buyer purchases goods from a manufacturer and sells them at a profit.

Under a distribution arrangement though, the parties may owe additional obligations to each other over and above the mere supply and purchase of goods. This is on the basis that the manufacturer may be relying on the distributor to penetrate a market.

These obligations may include:

• an obligation on the distributor to market the products in the relevant territory
• an obligation on the distributor to sell the products at specified prices and/or
• an obligation on the distributor to sell the products to specified purchasers

A distribution agreement sets out the respective rights and obligations of the parties in a distribution arrangement and lends enforceability to these rights and obligations.

In this article, we examine 5 key issues issues to look out for in a distribution agreement.

Issue 1: Scope of goods

Each party needs to be clear about the scope and nature of the goods that are being supplied. The supply of goods contract would need to set these out in sufficient granularity and precision.

Details that ought to be set out include:

• Quantity of goods supplied
• Specifications of the goods supplied
• Name of goods

Where contracting in the position of the distributor, it is important to examine these details carefully, to ensure that you get exactly the goods you need to fulfil any downstream obligations.

Issue 2: Distribution channels

A manufacturer may specify certain channels (e.g. online stores, brick and mortar retail shops etc.) through which the distributor may distribute the goods.

In this regard, it would be prudent to examine provisions with respect to distribution channels to examine the following:

• Is the manufacturer’s list of distribution channels exhaustive (i.e. can the distributor distribute goods through channels beyond that which are stipulated in the manufacturer’s list)?
• Does the manufacturer have a right to change the list of distribution channels?
• Is the distributor required to source for, and recommend, new distribution channels to the manufacturer?

Issue 3: Product marketing rights

As mentioned in the introduction, apart from general obligations with respect to the distribution of goods, a distributor may also be required to undertake certain marketing obligations, in order to aid the manufacturer’s market penetration efforts.

Issues to examine with respect to marketing provisions may include:

• whether there is an obligation on the distributor to set aside a fixed amount of money for marketing efforts in the region?
• whether there is an obligation on the distributor to use marketing material prescribed by the manufacturer?
• who bears the costs of advertising efforts?
• who determines how many campaigns to launch in any given period?

Issue 4: Title/risk

“Title” relates to the legal rights of ownership. A party with “title” in goods has the legal rights of ownership in relation to such goods.

“Risk” relates to the bearing of risk in relation to loss of and/or damage to goods. A party that bears the “risk” in goods bears the risk of loss and/or damage in relation to such goods.

It is important to note that both “title” and “risk” are distinct concepts. “Title” in goods can pass from one party to another without “risk” following suit, and vice versa.

Typically, a recipient of goods would prefer to have “title” in goods as quickly as possible and to receive “risk” in such goods as slowly as possible.

The converse will be true for a supplier of goods, i.e. retain title for as long as possible and pass risk to the customer as quickly as possible.

Issue 5: Product recall agreements

In the unfortunate event that certain safety hazards are detected in the manufacturer’s goods, the manufacturer may be required to recall products to comply with applicable laws.

In this regard, distribution agreements may set out various provision with respect to product recall. It is thus worth examining provisions with respect to product recall – common issues that are worth focusing on may include:

• Is the distributor required to take steps to assist the manufacturer with recalling products in the relevant territory? If so, what steps is the distributor required to undertake?
• What is the process for initiating a product recall?
• What is the flow of title and risk in products that are recalled, viz-a-viz the distributor and the manufacturer?

Conclusion

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*The above content does not constitute, nor is it offered as, legal advice of any kind. GLS Solutions Pte Ltd is not a law firm and any support provided pursuant to this entity is not regulated legal advice or legal opinion.