Distribution agreement essentials

A distribution agreement needs to explain how the distributor buys and resells products, the market it may serve and the support the supplier provides. Distinguish distribution from agency, and identify who contracts with the end customer and carries stock or credit risk.

Assess minimum purchases, returns, obsolete stock, product information, warranties and the end of the relationship. Territorial, online sales and resale pricing restrictions require competition law analysis rather than a purely commercial negotiation. ^[1]

Define who carries stock and customer risk

Identify when the distributor buys products, when risk and title pass and who contracts with the end customer. Distribution commonly involves buying and reselling, which differs from an agent acting for a principal. The operational documents should match the intended structure rather than using agency and distribution interchangeably in different schedules.

Check responsibility for storage, transport, damaged goods and customer credit. A distributor can face substantial working-capital exposure before receiving sales income. Ask finance to model stock holding, payment dates and realistic returns. A sales target alone does not show whether the arrangement can be funded through a slow trading period.

Connect targets with supply commitments

Distinguish forecasts from binding orders and minimum purchases. Explain how products are allocated during shortages and what happens if a line is discontinued. A distributor should not be assessed against a target that ignores the supplier's actual availability, while the supplier needs reliable information to plan production.

Agree treatment of obsolete or unsold stock, including any return, repurchase or sell-off arrangement. Check condition, packaging and time requirements. Do not assume that a right to end the agreement includes a right to return everything at the original price. The stock outcome can materially affect the cost of exit.

Review territory, channels and competition restrictions

Define the permitted territory, customer groups and online channels, then obtain competition-law assessment of relevant restrictions. The CMA's VABEO guidance provides the applicable framework for vertical agreements; it is not a blanket approval of every exclusivity or resale-pricing condition. ^[1] The commercial team should understand the reviewed limits in practice.

Ask whether the supplier sells directly or through other distributors and how those activities interact with the promised protection. A territory described as exclusive may contain important exceptions. Identify them before investing in local sales staff or premises. Avoid treating a commercial expectation of protection as a right the final agreement does not actually provide.

Define brand use and product support

List the trade marks, images and marketing materials the distributor may use. State permitted channels, approval requirements and what happens when the agreement ends. Permission to use another party's IP should cover the intended activity and remain within the rights actually granted. ^[3] A product purchase does not automatically give unrestricted permission to alter branding or create new promotional assets.

Allocate training, technical support, warranty handling and product-safety communications. The distributor needs a process for escalating defects and customer complaints. Identify who provides replacement products, advice and records, and how urgent issues are communicated. These responsibilities should be workable across the relevant markets and customer channels, with specialist regulatory advice where the products require it.

Make payment and exit provisions operational

Check credit limits, invoice dates, currency, VAT and any security. Review the applicable late-commercial-payment framework for qualifying debts. ^[2] Align payment obligations with the stock and delivery process, and distinguish a disputed shipment from a general right to withhold all amounts. Keep the evidence needed to resolve quantity or quality disagreements.

At termination, address open orders, customer support, stock, brand use and confidential information. Consider whether a limited sell-off period is intended and what conditions apply. Do not leave the distributor advertising products under an expired licence because nobody planned the transition.

Read Exclusivity clauses in supply agreements for exclusivity questions. Supply agreement drafting support can help review the agreement as a complete operating relationship, including stock exposure, supply commitments, brand permissions and the competition issues requiring focused advice before launch or expansion.

Test a product recall communication

Ask who would identify affected stock, notify customers and provide replacement instructions if a serious product issue arose. The distributor may hold customer information the manufacturer needs, while the manufacturer controls technical guidance. Agree the interface and obtain specialist advice on applicable product obligations. A general warranty clause does not explain how the two teams will coordinate a time-sensitive incident. Keep relevant contacts and product traceability records current, including after staff changes, so the agreed responsibilities can be performed without first reconstructing the distribution chain during the problem itself.

Illustrative scenario

A distributor commits to an annual purchase target, but the supplier controls product availability and can discontinue popular lines. The parties review forecasting, allocation and treatment of discontinued stock. The target should be assessed alongside the supplier's delivery commitments, not as an isolated sales obligation.

Preparation checklist

• Define territory, customer groups and permitted channels.
• Check stock ownership, returns and product discontinuation.
• Review trade mark permissions and marketing approvals.
• Escalate competition restrictions and post-termination stock arrangements.