Making a Product Distribution Agreement – Importance and Procedure

Aditya Pratap is a lawyer practicing in business and contract law. He can be reached at aditya@adityapratap.com.

Every product used by human beings passes through various intermediaries. First, the manufacturer brings them into existence. Second, the distributor or wholesaler procures them from the manufacturer and sells them to retailers. In the final stage, the retailer sells these finished products in small quantities to end-users, who end up consuming or using them.

Role of a Product Distributor:

The duty of a manufacturer is to bring the products into existence. Once that is done, he needs to have them transported to retailers far and wide, in order to place them within easy reach of the buyers. To achieve this, he needs to engage a product distributor.

Thus, in simple language, a distributor is the person who sells the goods/product of the supplier or manufacturer in the market for a fee or commission or specific percentage as agreed between supplier or manufacturer and the distributor.

What is a Product Distribution Agreement?

An agreement executed for procurement of finished goods from the manufacturer’s premises and their transportation and sale to retailers through an intermediary is termed as a ‘Product Distribution Agreement’. It is a legal relationship designed to achieve maximum market reach and penetration of the manufacturer’s goods.

A well-drafted product distribution agreement contains all the necessary terms and conditions that are legally binding upon the manufacturer and the distributor. These stipulations specify the respective rights, duties and obligations of each party in an exhaustive manner without leaving any room for ambiguity. By doing so, it prevents any conflicts of interest or occurrence of disputes, which could jeopardise the manufacturer-distributor relationship and lead to heavy losses.

Key Elements of a Product Distribution Agreement:

The basic elements of a distribution agreement include the term (time period for which the contract is in effect), terms and conditions of supply and the sales territories covered by the agreement. The manufacturer or Supplier must also determine whether the distribution agreement will be exclusive or nonexclusive.

In an exclusive agreement, the specified distributor will be the sole distributor with the right to sell the product within a particular geographic region or within multiple regions. If the arrangement is nonexclusive, the manufacturer or Supplier may supply other distributors, sometimes competing in the same market.

In particular, a well-drafted product distribution agreement should include the following details and clauses:

  1. The details of the product that is to be sold
  2. The area or Territory covered by the Distributor and the exclusivity
  3. Price fixing of the product
  4. Promotional discounts and responsibilities
  5. New products policy
  6. Distributor’s income out of the sales
  7. Details of any Sales target to be achieved by the Distributor
  8. Payment options as to how and when payment shall be done
  9. Advertising and promotion
  10. Terms and conditions when there is a breach
  11. Defective goods and liability
  12. Confidentiality and protection of trade secrets by the     Distributor
  13. Period of agreement with a right of renewal
  14. How to terminate the agreement
  15. If the target has not been achieved, then the rights of either party
  16. Modification of the agreement and product change
  17. Dispute resolution and Arbitration

Laws governing Product Distribution Agreements:

The nodal legislation that governs product distribution agreements is the Indian Contract Act of 1872,. The Indian Contract Act is an exhaustive law that lays down the basic legal principles governing a contract between parties. In addition to this, the Sale of Goods Act of 1930 is a specialized legislation that covers all aspects of sale and delivery of products. Hence knowledge of these two statutes is of primary importance to anyone seeking to prepare a product distribution agreement for his business.

“Time of the Essence” Clauses and their Importance in Product Distribution Agreements:

Time is indeed the essence of a Product Distribution Agreement. In an era of growing global competition, time-to-market needs to be extremely short. This implies quick procurement of goods by the Distributor and their transportation to retailers in the minimum possible time. Therefore a “Time of the Essence” clause is a part-and-parcel of every distribution contract.

Thus time is of the maximum essence in the distribution of perishable items such as foodstuffs, dairy and poultry products, vegetables and fruits. It is also critical for season-and event-specific goods such as fashion clothing, jewellery (Akshay Tritiya) and festival-shopping (Dassera, Diwali etc.). Therefore any distribution agreement for such goods must incorporate a “Time is of the Essence” clause which would deter the parties from delaying the performance of their contractual obligations.

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Advocate Aditya Pratap
About Advocate Aditya Pratap 64 Articles
Aditya Pratap is a lawyer practising in Mumbai. He argues cases in the Bombay High Court, Sessions and Magistrate Courts, along with appearances before RERA, NCLT and the Family Court. For further information one may visit his website adityapratap.in or view his YouTube Channel to see his interviews. Questions can be emailed to him at aditya@adityapratap.com.