Contracts Part V: 7 Unique Features of Distribution Contracts

Distributorship agreements are comparable to Supply and Service Agreements but have some special features.

Editor’s note: This is Part IV in the contracts series. Prior pieces in this series: Part I:  Small Business Contracts Part I: A Different Perspective, Part II Contracts Part II: Laying the Groundwork ,Part III: Contracts Part III: The Role of Legalese in Contract Drafting and Part IV Supplier Contracts- What Small Business Owners Need to Know

For new businesses (who we are calling producers), after securing necessary supplies and services, the next objective is to enter into an arrangement with a distributor to sell its product. Distributors are often large companies that have the capacity to store and transport goods from one location to another.

Distributors can also promote goods to wholesale and retail establishments with which the distributor has relationships. Regardless the intrinsic value of the product in question, if there is no ability to get it to market, the business will inevitably fail.

Distribution Contracts include many of the same provisions that we encountered in Supply and Service Contracts, but there are also unique features.

1. Scope of Distribution Services

• The first question to consider upon entering into negotiations with a distributor is should the relationship be exclusive or non-exclusive; that is, should the producer be restricted to using the distributor’s services to the exclusion of other distributors? 
• The next question is, if the relationship is exclusive, should the scope of exclusivity be restricted to a specific state or region, or should it be worldwide.

Among the factors to consider are the nature and quality of the product, the volume of anticipated sales, the character of the market and its barriers to entry, transportation costs, geographic reach of the distributor, its expertise in operating in a region or across regions or, even countries, its capacity to transport and warehouse the type of goods in question, and its capacity to efficiently respond to the needs of the producer. 

2. Specification of the Product

Since how a product may be transported and its intended market may be significantly affected by the specifications of the product, such specifications should be precisely delineated in the distribution agreement, usually as part of an attached schedule.

Producers should understand that vague and overly general descriptions of product could lead to a range of problems bearing on how the product is transported and warehoused. Indeed, quite frequently the distributor will seek to have a specific guarantee in the distributorship agreement that the producer will supply only product that meets the specifications therein stated.

3. Term of the Agreement

Distributors like exclusive relationships and long term distribution contracts. Emerging enterprises, generally, look for short term, non-exclusive arrangements.

The resolution will probably yield an arrangement somewhere in between where a distributor may be afforded shorter-term exclusive relationships in certain markets and more long term less exclusive arrangements in others.

If the nature of the venture requires the producer to enter into an exclusive, long term relationship, it should bargain hard when the producer has leverage to secure protections against higher future costs and deteriorating services.

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