Contract Drafting For Vendors For Manufacturing Company

After a company manufactures products, it would have to sell them to its customers. In such a situation the company would sometimes engage a distributor, who shall have the necessary experience and foothold in the target market where the company wishes to sell its products. The company for this purpose, would need to get into a legal agreement with the distributor, clearly defining the terms of their arrangement in such agreement and thus allowing the distributor to sell and market the products.

Thus, in simple terms, a distribution agreement could be referred to as a legally binding agreement between an entity supplying the goods and the other which distributes goods.

Purpose of the Distribution agreement

A business may use these distribution agreements for a number of purposes. Some producers appoint distributors as means of getting their products in the market, on the other hand some may wish to benefit from their expertise, or even share the customer lists and market contacts. Therefore, the intent and scope of the deal would have to be made clear in the agreement. It may  sound simple but could pose problems if purpose and products are not clearly mentioned in the agreement. 

Terms of the Agreement

Based on the fact as to how long you wish to enter into the agreement, the terms must be mentioned clearly. These distribution agreements could be:

• for some limited period of time;
• an ongoing arrangement; or
• renewable for another period after the initial term ends (which will also be subject to certain criteria).

Some of the terms in a distributor’s agreement have been mentioned here under-

Exclusive or Non-Exclusive Appointment

The term “exclusive” could imply that the manufacturer would not appoint another distributor for a certain locality and that the distributor would be solely responsible for that exclusive territory.

Generally, the manufacturer would choose a distributor who has market presence as well as familiarity with such a market to sell products easily. It shall also enable the distributor to respond to all the enquiries as well as satisfy the orders in such areas.

Minimum Standards of Performance

The manufacturer must have certain benchmarks as well performance standards or criteria which it would want its distributor to maintain. The performance would be required to be monitored, either by revenue targets or by minimum purchase orders. This would ensure justification of such  exclusive arrangements. Having such a clear set of standards would assist the parties be aware of the obligations as well as the requirements they shall fulfill.

Marketing and Promotion

Another field where both parties must be clear is, as to who would be responsible for marketing and promotion, which in some cases both parties will do. In case it is the distributor’s duty, then it should be made clear as to how and what specific assets shall be used to market or the products to be sold for distribution.

Whether a distribution agreement is exclusive or not, would play an important role in determining the obligations of the parties to the agreement. In case of an exclusive arrangement,  the distributor would most likely carry out more obligations about the marketing and promotion.

Training and Support

In case of technical products, training is one of the key terms of such distribution agreement. The manufacturer would have to explain the level of training and support they would provide to the distributor and if they would be available to train the end-customers as to how to use the product. 

Competition

Another important clause in some of the distribution agreements is the competition clause. It  places restrictions on the distributor from distributing similar products from other manufacturers. In case of a dispute between the parties over the competition clause, the court would look at:

• duration of the restriction;
• territory of the restriction in geographical terms;
• specific activity being prohibited;
• amount of hardship for the distributor; and
• public interest issues which may be involved.

Trademark Licensing

The manufacturer must clearly state rights of the distributor about the use of the intellectual property, such as the brand names and trademarks. For instance, if the distributor could:

• just put the sign in his window displaying the trademark ? 
• use a trademark on the letterhead or any other related written documents? 
• use the trademark in the name?

Duties and Obligations of the parties

It is the most important clause in an agreement as it explains both parties what they would have  to do as per the agreement. 

Some of the duties of the manufacturer would be:

• Supplying the agreed products.
• Provide all necessary information, education or technical support as required about the product.
• Adhere to the timelines or schedules of the deliveries.
• Provide the required allowance for advertising or promotion.
• Provide other necessary data and information as required by the distributor.
• Ensure timely payments

Duties of Distributor would be:

• Maintain adequate inventory.
• Confirm the sales, accountability and customer service expectations.
• Duties of other distributors about the sales quotas, sales promotions, documentation and after-sales customer support.

Dispute Resolution and Contract Termination Clauses

A lengthy and tedious lawsuit could be avoided by following a proper mechanism in case some dispute occurs. The parties may include the dispute resolution in steps, starting with negotiation, then mediation and finally the process of arbitration. Arbitration will be much faster, cheaper as well as efficient than a lawsuit. Also, it is private. For further information on this clause, it is advised that the parties contact an experienced advocate for drafting the agreement.

Orders, Delivery and Payment

The order, delivery as well as the  payment process shall be dictated by the manufacturer. Say for example, there could be a requirement to make orders via:

• online software platform; or
• send an order form to the manufacturer

It shall be specifically mentioned as to how both parties would accept and pay for an order.

Conclusion

Main points of a distributor’s agreement have already been mentioned. A distributor’s agreement may vary from a briefly stated agreement, merely expressing a company to sell its products, to a detailed multi-page, complex agreement even covering the international arrangements.

In order to ensure that the agreement is in your best interests, it is important that you are aware of and understand its key terms. Hence, it is advised that you consult a lawyer who could work with you and draft the best possible agreement for you.

Lead India offers you a team of experienced corporate advocates, who could help you with the same. If you wish to ask a legal question related to the distributor’s agreement, or seek free legal advice for any matter related to the dispute over an agreement clause, you may contact us.