In layman terms, a distribution agreement is a type of contract or agreement which is signed into between the supplier and the seller who shall market and subsequently sell the product. For instance, Samsung is a company that manufactures smart phones, and Amazon is a company that is into the business of e-commerce. So, Samsung and Amazon shall sign a contract called the Distribution Agreement which shall specify certain rules and regulations which are to be followed by both, the supplier (Samsung) and the seller (Amazon). This agreement can be considered as a win-win situation for both the supplier and the seller because, the supplier is not required to worry about marketing the product and the supplier gets his fees or commission for marketing and subsequently, selling the product. Also, every Distribution Agreement has a basic structure, which shall be the same, whatsoever be the product. However, apart from the basic structure, certain specifications might be different, such as terms and conditions of the sale, prices, sale, geographical locations, etc. The Indian Contract Act, 1872 governs the principles of a contract in India.
Now, there are certain key considerations which are to be taken into account while drafting a Distribution Agreement, which are:
1. The Agreement should start by mentioning the name of both, the Supplier company and the Seller company, between which, the agreement has been entered into, and their places of incorporation.
2. Secondly, there should be a clause of “Preamble” wherein the duties of both the supplier and the seller are mentioned.
3. A specific clause of “Definitions” must be present wherein terms such as ‘product’, ‘commencement date’, ‘territory’, ‘working day’, etc. must be defined.
4. Subsequently, a clause of “Territory” must be specifically defined, wherein a particular geographical area should be mentioned, where the sale and marketing will take place.
5. A clause of “Technical Improvement” is also important. Under this clause, the Supplier shall be duty-bound to furnish all technological advancements in the product to the Seller at the earliest.
6. Another important aspect is the clause of “Minimum Purchase”, wherein it shall be specified that the Seller shall purchase the product worth a minimum amount.
7. Subsequently, the mode of payment has to be specified in the Agreement under the heading of “Payment”.
8. A clause of “Intellectual Property Rights” is also important, wherein it shall be specified that the Seller can use the trademark of the Supplier for the period mentioned in the Agreement and not after the expiry of the same.
9. Lastly, there can also be an addition of many subsequent clauses in the Agreement such as, “Prohibition of the sale in any other jurisdiction”, “Governing Law of the Agreement”, “Dispute Resolution through Arbitration”, and a clause that sums up the whole Agreement wherein it shall be mentioned that this Distribution Agreement shall be the sole agreement between both the parties and all the regulations specified herein shall be carried out in that manner only.
The Clause of IPR in Distribution Agreements:
The Distributors work very hard to increase the goodwill of their product. They expect that in the near future, they shall reap benefits from this Distribution Agreement, via increased sales. To be precise, they build the brand itself. Hence, the Distribution Agreements must be carefully drawn and here, the clause of Intellectual Property Rights plays a crucial role.
A clause of “Technical Improvement and Patent Application” is also very important. Further, if the Distribution Agreement is of a product that involves heavy and high-end machinery, this clause becomes further more important. Also, this clause is generally for ensuring the rights of the seller and duties of the supplier. As per this clause, the supplier shall strive to provide all the technical advancements and inventions related to the main product without 3 any impediment and free of cost (if feasible). Further, the Distributor has a right to publication of patents; the Seller has to agree to acquire the said protection within the territorial boundaries of India only.
Furthermore, the period specified in the Distribution Agreement, for the usage of trademark of the Distributor is very important. And it has to be specifically mentioned in the Agreement that the said trademark shall not be used by the Seller after the lapse of the said period of time.
Now, the fact that the Seller shall inform as soon as possible to the Distributor about any actual, threatened or suspected infringement of, or any actions, demands or claims regarding any of its Brands or Intellectual Property. The Seller shall also make sure that they render to the Distributor all types of assistance that he might need, as soon as possible, in connection with the same, which also includes taking and resisting or joining the legal action as a party to the same, either at the expense of himself or at the Distributor, which further depends on the drafted Distribution Agreement.
The Seller shall strive to furnish the Distributor with Infringement notices and defend the infringement suit alongside the Distributor.
Lastly, it is advised that the Distribution Agreement must secure an assignment in place of a license, of all the trademarks, patents, copyrights and trading secrets. This has to comply with the applicable laws in that particular territory only, since all the territorial jurisdictions might not have same laws applicable within them. Whether that assignment or license will be sufficient to prevent others from infringing on the exclusive rights will depend on specific issues.
