Definition

distributor agreement (distribution agreement)

Contributor(s): John Moore and Ivy Wigmore

A distributor agreement, also known as a distribution agreement, is a contract between channel partners that stipulates the responsibilities of both parties. The agreement is usually between a manufacturer or vendor and a distributor but, in some cases, may involve two distributors or a distributor and some other channel entity.

Typical elements of a distributor 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 (regions within the U.S. and/or international markets).

The manufacturer or vendor 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 vendor may supply other distributors, sometimes competing in the same market.

Additionally, the manufacturer or vendor must decide on a distribution strategy when considering what type of agreements to enter. A selective strategy calls for a small group of distribution outlets to cover the channel partner's target markets. An intensive strategy aims to place the product in front of as many potential buyers as possible through widespread distribution. The latter is typically more applicable to consumer-oriented products as opposed to those designed for commercial markets.

chart showing difference between exclusive and nonexclusive distributor agreements
Vendors must decide to have either an exclusive or nonexclusive distributor agreement.

A distribution deal may be international in scope. The largest electronics and IT distributors, including Arrow Electronics, Avnet, Ingram Micro and Tech Data, operate subsidiaries in a number of countries for wide geographical coverage.

The following is a checklist of factors to be considered when drafting a distribution contract:

  • terms and conditions of sale;
  • term for which the contract is in effect;
  • marketing rights;
  • trademark licensing;
  • geographical territory covered by the agreement;
  • performance;
  • reporting; and
  • circumstances under which the contract may be terminated.

Distributor agreement vs. dealer agreement

Dealers, such as retailers or value-added resellers (VARs), purchase goods from distributors that they then sell to their end customers. In the distributor-dealer relationship, the distributor acts as a middleman between a vendor supplier and dealers. This relationship thereby requires a different contractual agreement than what has been described above.

A dealer agreement typically lays out the terms of sales of the products purchased from the distributor, the expected duties and responsibilities of the dealer, and the circumstances under which the contract may be terminated. A dealer agreement may also stipulate the means of payment, delivery date and scope of the dealer's territorial rights.

Vendors that use channel partners as part of their distribution network may use a one- or two-tier distribution channel. In a one-tier distribution system, the vendor develops relationships with channel companies -- such as VARs, system integrators (SIs) and managed services providers (MSPs)-- that sell to end customers. In a two-tier system, the vendor sells products to an independent distributor, which, in turn, provides products to channel partners that then package solutions for end customers. The two-tier model makes dealer agreements necessary to facilitate the relationships between distributors and channel partners.

This was last updated in July 2018

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Most mistakes made with distribution agreements are almost invisible, and they grow into glaring errors at the termination of the partnership. These mistakes include, the insertion of unsound and ambiguous clauses and limitation of particular phrases.  An agreement that allows for termination by only one partner is prejudiced and often ends in legal dispute. Moreover, an agreement that won't allow frequent amendments may compel parties to endure undue pressure until the agreement can accommodate change.
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What are some common mistakes that vendors/distributors can make with distributor agreements?
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