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Negotiating a Distributorship Agreement: Five Critical Steps to Success

By December 13, 2022No Comments

A distributorship agreement can be an important tool for manufacturers looking to penetrate new markets and tap into unexplored business opportunities. A distributorship agreement can also offer distributors opportunities to create durable relationships with manufacturers. Clarifying the provisions and obligations of the parties while avoiding certain pitfalls is critical to a successful relationship. At Dunnington, Bartholow & Miller LLP we are ready to assist our clients with sound and reliable legal advice on recommendations for negotiation of distributorship agreements. Here are five critical areas to focus on:

  1. Execute a master agreement. Distributorship agreements should contemplate multiple transactions. The parties can enhance their relationship remarkably if they clearly understand the main terms and conditions governing their dealings. Execution of a master agreement including the general terms and conditions governing every transaction will leave only a few additional terms necessary within the purchase orders issued for each individual transaction.
  2. Define the relevant goods subject to the agreement. To prevent disputes over the type and quality of the goods supplied to the distributor by a manufacturer, the parties may want to include classifications identifying the products the manufacturer will supply, the expected quality specifics for each type of product, when a product shall be considered nonconforming or defective and the consequences of delivering such products.
  3. Address all relevant intellectual property issues. The parties share a mutual interest in regulating the distributor’s use of the manufacturer’s intellectual property. For example, the manufacturer risks disclosing its trade secrets and proprietary information embedded in the products it fabricates. Any distributor’s unregulated use of trademarks on the manufacturer’s products may result in the distributor being sanctioned for counterfeiting. To avoid these issues, manufacturers and distributors should execute a confidentiality agreement before entering into any distribution agreement. This will protect the manufacturer’s intellectual property and ensure that any necessary and appropriate licenses are in place.
  4. Make sure renewal options and termination clauses allow the parties to adjust to changing market conditions. In time, the economics of the contract may become inefficient for the parties. Well-drafted termination clauses and renewal options may help parties adjust their agreements to the changes in the market context and resolve any disputes more rapidly and effectively.
  5. Be mindful of anti-trust, franchise, and business-opportunity laws. Under certain circumstances, the conduct of the parties to a distribution agreement may violate anti-trust laws. Moreover, if the distribution agreement entered into by the parties presents certain characteristics, courts will apply to the parties’ relationship under that contract the federal and state laws on franchising or business opportunity contracts. By drafting a distribution agreement wisely, parties may avoid any unwanted consequences arising from executing a distributorship agreement, and they should take this course of action to avoid any issues related to the application of the laws mentioned above.

As a full-service firm holding sound expertise and longstanding experience in helping businesses, Dunnington, Bartholow & Miller LLP is ready to provide reliable legal advice on how to draft accurate and effective distributorship agreements to enhance the business relationships that manufacturers and their distributors entertain.

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