What Should Be Included in a Contract Between Manufacturer and Distributor

A sample contract between manufacturer and distributor should cover several topics that clearly explain the business relationship from start to end. Part of that explanation will be terms that define the rights and obligations of both parties under common, and even unexpected, events that may arise over the term of the contract. Below are some of the key terms you are likely to see in a distribution agreement:

• The elements of a contract: Your distributorship agreement should contain a clear offer, acceptance, and consideration (usually payment in exchange for products and distribution rights) evidenced through a signed written agreement, which could include an eSignature solution.

• Identify the parties: Have the names of the parties included, which will usually follow their company name as listed on state registries where incorporated or organized.

• Define the scope of distribution: This is where you outline where the distributor can sell the products, state the products sold, and list other items like exclusivity and a non solicitation clause.

• Quality control procedures: Any obligations of the manufacturer or distributor related to the delivery and storage of the goods you are distributing under the agreement.

• Indemnification: Terms to allocate risk arising from liability surrounding the distributed products such as property damage, civil claims, defects, etc.

• Resellers: Your distribution deal should clarify whether the distributor has rights to resell products to other distributors or must sell directly to consumers (D2C).

• Term and renewal options: How long you want the agreement to last and the process (if any) for being able to renew or extend the term.

• Payment and pricing: The form and frequency for the distributor to make payment to the manufacturer for the right to obtain and sell a product. This term should also include options for adjusting the price to reflect changes in the market or unexpected operational costs.

• Advertising and marketing rights: The ability of the distributor to market the products and the allocation of costs for doing so.

• Intellectual property licensing: The distributed products may have various trademarks or copyrights associated and your agreement should discuss the distributor’s ability to use them for marketing (or cross-reference a separate IP licensing agreement).

• Regulatory compliance and reporting terms: Depending on the nature of the products and where distribution is occurring, you may have regulatory obligations that require reporting to substantiate (e.g., tax returns, licensing and registration numbers, inspection, VAT, etc.). You will want to carve out the division of related responsibilities between the manufacturer and distributor.

• Termination: The conditions under which the manufacturer or distributor can end the distributorship agreement, including the process for doing so (e.g., written notice) and the consequences of termination like additional payment.

• Dispute Resolution: Any sales agreement, such as a distribution agreement, should anticipate the potential for conflict and provide terms for what that process should look like. Some parties may prefer arbitration, mediation, or other alternative dispute resolution. However, you should also address terms for more formal proceedings in state or federal court (e.g., venue, governing law, attorney’s fees, etc.).

While most of these terms belong in your distributorship agreements, the depth and complexity they warrant in a particular deal can vary greatly. Depending on your operation, you may be able to use a distribution agreement template for all arrangements. More complicated transactions, however, will likely require some customization based on legal advice. For example, the distribution of alcohol often involves greater regulatory compliance measures compared to the distribution of a children’s toy. In any case, having a contract review checklist can be a helpful guide to walk through common key terms that may apply to your situation.

Another thing to remember is that you may not always have the leverage to negotiate the terms of a particular agreement depending on your counterparty. Small manufacturers may be at the mercy of big box retailers to agree to terms that may involve exclusivity or one-sided termination. Conversely, a global producer may be able to exert greater control over a small distributor because of the many outlets they have for taking their products to market.

Mistakes to Avoid in a Manufacturer Distributor Agreement

The agreement between manufacturer and distributor can be tricky to navigate because of the many different factors that affect the contractual relationship. Some terms become more or less important as a result. Despite the potential for variance in your distributor agreements, here are some general mistakes to avoid:

• Limited price adjustment opportunities: The last few years have shown that changes in market conditions can lead to sudden increases in manufacturing or delivery costs. As a result, it’s important to be able to change prices to distributors accordingly. In some cases, having unilateral power to change the price as a manufacturer may be appropriate with a certain number of days' notice (e.g., 30 or 60 days).

• Failing to address exclusivity: Non-exclusive distribution agreements versus exclusive distributors are important to define and failing to consider the impact can be a serious mistake depending on your side. For manufacturers, non-exclusive may be preferable to keep your options open while a distributor may value exclusivity to capture control over a product’s market. The parties should properly account for the value of exclusivity (e.g., paying extra for exclusivity) and consider their business goals of the distribution when negotiating this term.

• Limited termination: Because supply and demand circumstances can change so easily in the distribution of goods, broader opportunities for terminating an agreement may be prudent. You normally allow for termination of a contract in one of two ways. The first is for-cause, which is when you terminate for specific, pre-determined reasons (e.g., non-payment or other breach of contract). However, no-cause termination may also be appropriate to allow either party to end the legal agreement with proper notice.

Need Help with a Manufacturer and Distributor Agreement?

Whether you are a manufacturer or distributor, having a distribution agreement in place can be a helpful document for clearly setting expectations and promoting a sustainable business relationship for the delivery and sale of goods. Knowing what that legal agreement should look like can be another story without the help of an attorney with experience in state of Florida contracts.

The business attorneys at Legal Department Solutions provide representation to clients on all matters related to a manufacturer-distributor agreement. We provide initial guidance in drafting and negotiating the terms of the contract. We also provide support and advocacy in the event you need to terminate or enforce a previously entered contract between manufacturer and distributor.

Contact Legal Department Solutions today for legal representation involving a distributor agreement.